What is Secondary Market? Explain major defects of Secondary Market.

 Q. What is Secondary Market? Explain the major problems or defects of Secondary Market.

Ans. MEANING OF SECONDARY MARKET: The market where the outstanding securities are traded is known as secondary market. This market is popularly known as stock market or stock exchange. In this market, the investors can sell and buy shares or debentures of companies. Stock markets deal in equity shares primarily, but the debt instruments like bonds and debentures are also traded in stock market. The growth of primary market depends on the secondary market. It also promotes capital formation. 

Definition: The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as “an established association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.” 

MAJOR PROBLEMS OR DEFECTS OF SECONDARY MARKET: The Indian Secondary Market is suffering from certain defects. These are:

1. Weak Management of Stock Exchanges: The management of stock exchanges is weak and deficient in India. The Indian stock exchanges are governed by the member brokers for their own benefit. The Executive Director has also failed to perform his regulatory functions freely as he is also responsible to the governing body. 

2. Lack of Integration: There are 23 stock exchanges in India which are scattered throughout the country. But these exchanges lack in integration. Due to lack of integration among the stock exchanges, the prices of securities vary considerably between different markets at the same time.

3. Arbitrary Classification of Specified and Non-specified Shares: The Indian stock exchanges have been following an arbitrary practice of classifying listed shares into specified and unspecified groups. This type of arbitrary categorisation favours artificial encouragement to a few large companies and promotes speculation in it. 

4. Ignoring Investors’ Interest: The Indian stock exchanges are ignoring the genuine interests of investors. Complaints made by investors remain uncared and unattended.

5. Domination of Financial Institution: Indian capital market is dominated by financial institutions and big operators. UTI, LIC, GIC, ICICI and 3-4 big operators are the main players in the Indian stock markets. Transactions done by these institutions set the trend in the market. If these institutions buy the stocks, the market gets bullish and on the reverse side, the market becomes bearish because of selling by them. Individual investor has no say in the stock market. 

6. Poor Liquidity: The Indian stock exchanges suffer from poor liquidity. A small number of stocks are traded everyday and most of the times, thin volumes can be seen at the stock exchanges. 

7. Less Floating Stocks: Scarcity of floating stocks in the Indian stock exchanges is another reason for their weaknesses. The shares and debentures offered for sale are a small portion of total stock. Financial institutions do not offer the scrips they have purchased for sale. It creates shortage of floating stocks.

What is Secondary Market? Explain the major defects of Secondary Market.

What do you understand by Auditing ? Briefly explain the advantages and limitations of Auditing.

Q. What do you understand by Auditing ? Briefly explain the advantages and limitations of Auditing. 

Ans. MEANING OF AUDITING: The English word ‘Auditing’ is derived from the Latin word ‘Audire’, which literally mean ‘to hear’. Auditing implies the examination of books of accounts and related documents of an organisation in order to correctly estimate their accuracy, completeness and regularity. Such an examination is carried out by a competent and unbiased person with the help of evidences, documents, information and explanations given to him. For example, if a person goes to a doctor to have himself examined, the doctor, only after a thorough examination of his body, gives his report as to whether he is healthy or not, and if not, what is the ailment he is suffering from. In the same manner, a businessman gets his books of accounts examined by a doctor of books of accounts (i.e the auditor) who, after a thorough examination of the books, gives his report as to whether or not they give a true and fair view of the statement of affairs of the business, and if not then what are the errors, deficiencies and faults in them. 

According to Montgomery, “Auditing is a systematic examination of the books and records of a business or other organisation in order to ascertain or verify and to report upon, the facts regarding its financial operation and the result thereof.” 

Thus, Auditing is a special and critical examination of the books of accounts of a business organisation, conducted by a competent and unbiased person with the help of vouchers, documents, information and explanations provided by the organisation, on the basis of which he can report on the books of accounts for a specific period as to:

(a) Whether the accounts are complete and drawn up according to conventions or not,

(b) Whether the Balance Sheet gives a true and fair view of the financial position of the organisation, and

(c) Whether the Profit and Loss Account depicts the true profits or losses of the organisation or not.

ADVANTAGES OF AUDITING: The various advantages of audit are as follows: 

(I) General Advantages: The general advantages of audit are as follows: 

(1) Knowledge of the Actual Position of the Business: Through an audit the actual position of the business comes to light. The owners of the business are assumed that the results being shown by the Profit and Loss Account and Balance Sheet are correct. 

(2) Detection of Frauds and Errors: During the examination of accounts in the course of the audit, the frauds and errors contained therein, also come to light. This also reduces the chances of frauds and errors being committed in the future. 

(3) Moral Pressure on Employees: When the employees are aware of the fact that their work is going to be examined by an independent person, there is an indirect fear among them, and they do their work with much greater regularly, competency and caution. They do not have to do anything wrong or be negligent. As a result of this the possibilities of frauds and errors being are also reduced. 

(4) Alertness among Employees and Management: Audit makes the employees and the management more alert as it results in healthy criticism of their work. The employees become more disciplined and adopt better policies and procedures. Work gets completed as per schedule. The control exercised through the audit also helps in reducing corruption and judging the honesty and capability of employees.

(5) Proper Valuation of Business: If any business is to be sold or in case a firm is to be converted into a company, then audited accounts are helpful in proper valuation of the business and the valuation of goodwill. In fact, audited accounts are considered more dependable than unaudited ones. 

(6) Increase in Goodwill: Public puts greater faith in accounts of organisations who get their accounts audited, which enhances the goodwill of the business. The increase in goodwill makes it very easy for the organisation to obtain loans from banks and other financial institutions.

(7) Helpful in Receiving Compensation: In case of accidents such as fire, theft, etc., audited accounts are more helpful in receiving compensation from insurance companies.

(8) Helpful in Assessment of Tax: Assessment of tax is much easier on the basis of audited accounts otherwise officers usually define tax liability arbitrarily. Hence, audited accounts are helpful in preventing arbitrary assessment of tax.

(9) Helpful in Getting Declared as Insolvent: When the state of the business becomes so bad, that its liabilities exceed its assets, then the businessmen often wants to be declared as insolvent so that he may be relieved of his liabilities. In such cases, the description provided by audited accounts serves as a better evidence in courts.

(10) Helpful in Formulating Dividend and Bonus Plan: The audit of accounts certifies the truthfulness of the Profit and Loss Account, and as a result, it becomes easier to declare and distribute dividends as well as proper disbursement of bonus is facilitated. This is because the shareholders and the workers consider the audited accounts as correct and have faith in them.

(11) Availability of Valuable Suggestions: The auditor from fime to time keeps on giving

suggestions to his client regarding book-keeping and accountancy, so.as to prevent frauds and errors. Apart from this, the suggestions of the auditor are also useful in other business matters.

(II) Advantages to Various Organisations:

(A) To Sole Proprietorship Concerns: Apart from the above benefits, audit has the following advantages in case of a sole proprietorship concern:

(1) Proof in Court: If in any business dispute any fact is to be established through the books of accounts, then audited accounts can be produced as evidence in courts.

(2) Helpful in Conversion of Business into Partnership: In case a sole proprietor wants to convert his business into a partnership firm, i.e. wants to take in another person as a partner in his business, or himself wants to become a partner in another firm, then audited accounts prove very helpful.

(3) Comparative Study Possible: In case the accounts for a number of years need to be compared, on the basis of the audit reports of the said years the accounts of one year can be compared with those of another. This makes a comparative study of profits and losses or income and expenditure possible.

(4) Helpful in Assessment of Wealth Tax: If the sole proprietor has a lot of assets, and upon his death taxes are to be paid upon his wealth, audited accounts prove very helpful.

(5) Helpful in Assessment of Income Tax and Sales Tax: While determining the liability for income tax and sales tax the concerned officers lay much greater reliance upon audited accounts.

(B) To Partnership Firms: Audit has the following advantages in case of a Partnership firm:

(1) Mutual Confidence among Parties: Normally, all the partners do not participate in the day-to-day running of the business of the firm. If the accounts of the partnership firm have been audited, it helps in building mutual confidence among the partners. In case the firm also has sleeping partners, the audit of the accounts of the firm becomes even more necessary since the sleeping partners do not have complete information about the business of the firm. Hence, audited accounts reduce the chances of disputes at the time of division of profits among the partners, and the work of the firm can proceed without any hindrance.

(2) Helpful in Valuation of Business and Goodwill: In case of admitting a new partner into the business of the firm, or at the time of retirement or death of a partner, the valuation of the business, and the valuation of its assets and liabilities and the goodwill of the firm, is greatly facilitated if the accounts have been audited.

(3) Peaceful Settlement of Accounts: At the time of dissolution of the firm, the assets and liabilities of the firm can be divided among the partners in a peaceful manner on the basis of audited accounts. 

(C) To a Joint Stock Company: The advantages of audit to a joint stock company, apart from the general advantages mentioned above, are as follows:

(1) Confidence among Shareholders in Management: A company has a system of representative management. The management of the company is in the hands of a few selected shareholders (the directors). The remaining shareholders do not participate in the management of the company. Hence, the managers of the company with the help of getting the accounts audited assure the shareholders that they have been working properly and that they have not misused their position in the company in any manner.

(2) Easy Availability of Investment: A company accumulates capital by issuing shares and debentures to the public. The public has faith on audited accounts and it is on the basis of the same that it invests capital in the company.

(3) Helpful in Declaration of Dividends: Since audit certifies the profits of the company, hence at the time of declaration and distribution of dividends no suspicious are aroused. The auditor certifies in his report that the dividend has been declared and distributed at an appropriate rate.

(4) Facilitates Amalgamation, Absorption and Reconstruction of Companies: Whenever, companies are amalgamated, absorbed or reconstructed, then deciding the purchase consideration is greatly facilitated by audited accounts. In such situations, audited accounts are considered to be more reliable.

(D) To other Parties: Audit has the following advantages for other parties:

(1) When any property is placed in a trust for the benefit of a particular person then the trustee, in order to present in front of others that he has done the work of the trust honestly, gets the accounts of the trust audited.

(2) Audited accounts of a business are helpful for an insurance company when the amount of loss is to be estimated in case of a fire. The insurance companies on the basis of the audited accounts of the organisation can find out whether the claim filed by the organisation is correct or not. This becomes very difficult in case the accounts have not been audited.

(3) Banks and other money lending institutions can take decisions as to whether or not to lend money to a particular organisation on the basis of audited accounts.

(4) If any external person wants to purchase an organisation, then audited accounts a very helpful in deciding the purchase consideration. In case the accounts have bee audited and certified they serve as a basis for the purchasers to decide upon t purchase consideration.

(5) Audited accounts are very helpful for government employees. While levying sales tax, income tax, wealth tax and expenditure tax. 

(6) The court, in any case, can also rely upon audited accounts as evidence. One can present one’s case better in front of courts by providing audited accounts as evidence.

LIMITATIONS OF AUDITING: Despite the exercise of utmost diligence, caution and competence on the part of the auditor some frauds and errors in the books of accounts may escape getting detected. Hence, before reaching any conclusions on the basis of the auditor’s report, the following limitations of audit must be kept in mind:

(1) Auditing is not a Conclusive Proof of the Honesty of Employees: If the organisation has a system of internal check and the auditor is satisfied with the working of the same, then he may certify the accuracy of the accounts by resorting to test checking. In a system of internal check also, two or more people can team up and commit fraud, and such frauds may not come to light during the audit. Hence, getting the accounts audited doesn’t certify that the employees of the organisation have worked honestly throughout the period under review. 

(2) Auditing doesn’t Guarantee cent-per-cent Accuracy: Normally, large organisations have a very large number of transactions during the financial year. Hence, it is not possible for the auditor to examine each and every transaction in detail, nor it is viable in terms of wastage of time, effort and money. In such cases the auditor resorts to test checking and hence it is only natural that some frauds and errors may remain undetected.

(3) Minor things are not paid attention: The auditor, during the course of his examination,  gives full attention only to matters related to Profit and Loss Account and Balance Sheet. He does not pay much attention to small transactions or transactions entered into by the lower staff of the organisation. Hence, it is possible that a few irregularities may remain undetected at the lower levels, despite the audit. 

(4) Certain Frauds may Remain Undetected: Despite the exercise of due diligence, competency and efficiency on the part of the auditor, intentional and pre-planned frauds committed by the top managers or other responsible employees of the organisation may escape getting detected.

(5) Auditor does not understand the Nature of all Business Transactions: Even though the auditor examines the accounts of organisation in a variety of fields, it is not necessary for him to understand the nature of each and every transaction. Hence, it is not possible for the auditor to certify as to whether a particular transaction makes business sense or not. During the course of audit, transactions are examined from the legal point of view and not from the point of view of appropriateness.

(6) Auditor merely expresses his Opinion: The auditor merely expresses his opinion on the accounts of the organisation. By expressing his opinion that the Profit and Loss Account and Balance Sheet are correct does not mean that there can be no irregularity in the books of accounts. Even though he gives his opinion after due examination, he is also human, and human beings make mistakes.

(7) Auditor does not Enjoy Practical Freedom: Even though an auditor is considered to be an independent person, since his rights, duties and responsibilities have been specified by the Companies Act, 2013, in practice, the managers of the company appoint their own persons as auditors of the company. The auditor is influenced by the management of the company, and hence is not able to conduct a completely independent examination of the books of accounts and give his report on the same. 

What do you understand by Auditing? Briefly explain the advantages and disadvantages of Auditing. 

What is meant by Management Accounting? Discuss its main tools and techniques.

 Q. What is meant by Management Accounting? Discuss its main tools and techniques.

Ans. MEANING OF MANAGEMENT ACCOUNTING: Management accounting is also known as Management-oriented Accounting, Management Accountancy, and Accounting for Management, etc. The term ‘Management Accounting’ represents a merger of two words ‘Management’ and ‘Accounting’. Management refers to the functions of planning, direction and control, etc. while ‘Accounting’ refers to record, compilation, analysis and presentation of various financial transactions. In this context that form or system of accounting may be called management accounting which provides all such accounting informations as are required by management for planning, direction and control of business activities.

DEFINITION OF MANAGEMENT ACCOUNTING: 

1. “Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operations of an undertaking./ of the business.” 

— Anglo-American Council on Productivity

2. “Management Accounting is concerned with the accounting information that is useful to management.” 

— Robert N. Anthony

3. “Management Accounting is the term used to describe the accounting mehods, systems and techniques which, coupled with special knowledge and ability, assist management in its tasks of maximising profits or minimising losses.” 

—J. Batty

4. “Management Accounting may be defined as the application of accounting techniques to the provisions of information designed to assist all levels of management in planning and controlling the activities of the firm.” 

—John Sizer

5. “Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting.” 

— The Institute of Chartered Accountants of England and Wales 

Thus, when accounting information are collected, presented, analysed, interpreted and reported to help the management in taking various decisions, then it is known as Management Accounting. Management Accounting is the process of identification, measurement, presentation, analysis, interpretation and communication of accounting information that assists the management in planning, decision making and control to achieve the organizational objectives. 

TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING: Some important tools and techniques are as follows;

1) Analysis of Financial Statements: Analysis of financial statements is a systematic process of critical evaluation of the financial information given in financial statements so that these informations may be understood properly. For the purpose of analysis individual items are studied, their relationship with other relevant figures is established, the data is sometimes re-arranged to have better understanding of the informa-tion with the help of various techniques or tools, such as (i) Comparative Financial Statement or Analysis, (ii) Common-size Statement or Analysis, (iii) Trend Analysis, (iv) Ratio Analysis, (v) Funds Flow Analysis and (vi) Cash Flow Analysis.

2) Cost Accounting Technique: Cost accounting and management accounting are closely related to each other. The data of historical costing available from cost records help in determination of costs of products, processes, job and operations and preparation of budgets.

3) Budgetary Control: It is a technique which uses budgets as a tool for planning and control. The budgets of all functional departments are prepared in advance, in which limits of expenditure and targets of functions are determined. The actual performance is recorded and compared with budgetary data and on this basis management can assess the performance of various departments and officers in the organisation.

4) Standard Costing: This costing occupies an unique place among the techniques of management accounting. Under this technique, standard cost of various elements of costs are determined in advance. Such determination is based on a systematic analysis of existing conditions. The actual costs are compared with standard costs. The variances, if any, are analysed, their reasons are ascertained and necessary corrective actions are taken.

5) Marginal Costing: Marginal cost is that cost which results in the form of changes in costs due to change in volume of production. Under marginal cost the total cost is divided into two parts— fixed cost and variable (marginal) cost. The management, on the basis of marginal costing, establishes relationship among cost, volume and profit and takes decisions in respect of various managerial problem, such as change in product mix, determination of optimum product mix, decision of make or buy, evaluation of sales promotion schemes, etc.

6) Decision Accounting: Decision-making is the core function of top management and for this purpose the technique of decision accounting is used in management accounting. Decision-making involves a choice of best possible option from various alternatives, viz., which model out of various models of machine should be purchased? Whether a particular item should be produced or purchased from the market? Whether a specific order received at a lower price should be accepted or not? Decision accounting considers financial implications of each alternative course of action and enables management to select the best course of action. Marginal Costing and Differential Costing are important components of decision accounting.

7) Revaluation Accounting: Revaluation accounting is used to denote the methods employed for overcoming the problems connected with fixed asset replacement in a period of rising prices. It is, therefore, also known as 'Replacement Accounting'. Under this method, fixed assets are shown at current prices also in addition to their historical cost so as financial statements may present true and fair view of the concern. The preservation of capital in the business is the main object of revaluation accounting and for this purpose the profits are calculated in such a way that capital is preserved in real terms.

8) Financial Planning: Financial planning involves management of finance according to objectives of the business concerned. This tool is applied to determine following financial policies— (i) amount of capitalisation, (ii) sources of capital, (iii) ratio of debt and equity, (iv) limits of short-term and long-term borrowings, (v) disposal of profit and retained earnings.

9) Control Accounting: Control accounting is not a separate accounting system but all those devices of accounting, which are used from the view of control, are collectively called as control accounting. In this context, standard costing and budgetary control both are the parts of control accounting. We can also include internal check, internal audit, statutory audit, responsibility accounting, etc. as a device of control accounting.

10. Managerial Reporting: It is an important tool of management accounting in which reporting is prepared from time to time on the basis of analysis of various informations and thereafter they are communicated to different levels of management. It may be mentioned that timely reporting and effective communication is the essence of management accounting.

11. Management Information System (MIS): With the development of electronic devices for recording, classifying and communicating data MIS has become an important technique in management accounting

12. Quantitative Techniques: Now-a-days many such quantitative techniques are also being used which are based on mathematics and statistics. Some of such techniques are: (i) Operational Research, (ii) Linear Programming, (ii) Games Theory, (iv) Queing Theory, (v) Network Analysis, (vi) Simulation Theory.

What is meant by Management Accounting? Discuss its main tools and techniques.

Management Accounting means accounting designed for the management, i.e. accounting which provides necessary information to the management for discharging its functions. It is basically concerned with presentation of accounting information in a manner which can assist the management in the creation of policy and in the day-to-day operations of an undertaking. Its aim primarily is to assist the management in performing its functions effectively.

Meaning of Sales Organisation. Steps in setting up Sales Organisation.

Q. What do you mean by Sales Organisation? Explain the various steps in setting up Sales Organisation. 

Ans. MEANING OF SALES ORGANISATION: Whenever two or more persons perform activities for the purpose of achieving any objective together, a necessity to distribute the work among them arises and the coordination between the different activities is made. The organising element is required to fulfill this necessity. Thus, organization is a coordinated effort of different individuals working in an enterprise to achieve its goals. Industrial marketing organisation in an enterprise means the integration and coordination of individual marketing efforts to achieve the cherished goals of the business enterprise. Industrial marketing organisation is a time tested mechanism that enables people to live and work together. With the help of industrial marketing, organizing the task is allocated among the employees according to their specialization. Each employee gets the work of his own interest and therefore, they perform their work efficiently. This leads to the expansion and growth of the business enterprise.

DEFINITIONS OF INDUSTRIAL MARKETING ORGANIZATION

According to C.L. Bolling. “An industrial marketing organization is one where functions of marketing department have been carefully planned and coordinated towards the objective of selling the product to the customers, the whole efforts being effectively supervised and managed so that each function is carried out in the desired manner.”

According to H.R. Tosdal, “An industrial marketing organization consists of human beings working together for the marketing of products manufactured by the firm or marketing of commodities which have been purchased for resale.”

STEPS IN SETTING UP SALES ORGANISATION: 

1. Setting the Objectives: The first step in the process of setting industrial marketing organization is to set its objectives. Top management defines the long term objectives for the enterprise like profit maximization, improving reputation, increasing size of enterprise, etc. Marketing department sets specific objectives for achieving the long term objectives set by the top management. These objectives can be: (a) To increase sales, (b) To control selling expenses, (c) To increase market share, (d) To increase profit through customer satisfaction.

2. Defining Necessary Marketing Activities: After having learnt about the objectives of the marketing organization, necessary functions are required to be performed to achieve the determined objectives. The necessary marketing activities can be personal selling. sales promotion, publicity, advertising, marketing research, distribution of goods and services, etc.

3. Grouping Marketing Activities into Jobs, Positions: After identifying various marketing activities to be performed to achieve marketing objectives, the next step is to classify and group the similar and related tasks into various jobs or positions. Some of the marketing activities are crucial in nature; these are classified as high level jobs. Others are of routine nature and are classified as lower level jobs. For proper coordination and control, jobs of similar nature are brought together to form departments.

4. Assignment of Duties: After dividing the various activities into different positions, various persons are assigned the charge of these positions. The jobs are is assigned to the marketing personnel according to their capabilities and specialization. While assignment of job, the principle of 'right man on right job' is followed. The work to be performed by every individual is clearly defined and made known to him. In order to avoid misunderstandings, duplication or overlapping in the work, every one should know what he is required to do.

5. Establishing Reporting Relationship: In this step, every individual is given the authority required to carry out the responsibility assigned to him. A hierarchical structure, i.e., a chain of command is created through successive delegation of authority. Reasonable powers are delegated to heads and supervisory staff to enable them to do their task with ease and efficiency.

What do you mean by Sales Organisation? Explain the various steps in setting up Sales Organisation.