1.

Explain in detail the various accounting concepts and discuss the application of these concepts in the preparation of financial statements. Answer: Accounting is the language used by businesses to communicate their financial information and performance to interested parties. Like every language accounting too has a set of concepts that it is based on. Accounting has a set of twelve fundamental concepts that form the basis of all accounting; these concepts are called the General Accepted Accounting Principles (GAAP). These concepts explain the meaning of all the figures that are found in the financial statements of a company. The following are the important accounting concepts: 1. Going Concern 2. Accrual concept 3. Matching concept 4. Consistency concept 5. Materiality 6. Business entity concept 7. Realization concept 8. Timeliness of accounting information 9. Prudence concept 10. Money measurement concept 11. Cost concept 12. Dual aspect concept 13. Accounting period concept 1. Going Concern Concept: According to going concern concept it is assumed that the business will exist for a long time to come. Transactions are recorded in the books keeping in view the going concern aspect of the business unit. A firm is said to be going concern when there is neither the intention nor necessary to wind up its affairs. In other words, it should continue to operate at its present scale in the future. On account of this concept the fixed assets are shown in the balance sheet at a diminishing balance method i.e., going concern value. There is no need to show assets at market value because these have been purchased for use in future and earn revenues and for sale purpose. If the business is not to continue then market value will have significance. Since business is to continue, fixed assets will be shown at cost less depreciation basis. It is due to the concept that the fixed assets are depreciated on the basis of their expected life than on the basis of market value. The concept also necessitates distinction between expenditure that will render benefit over a long period and that whose benefit will be exhausted quickly, say within one year. The going concern concept also implies that existing liabilities will be paid at maturity 2. Accrual concept: Financial statements are prepared under the Accrual concept of accounting which requires that income and expense must be recognize in the accounting periods to which it relate rather than cash basis. In this concept every income and expense needs to be record in which period it

incurred not the subsequent year when cash realize. Its major effect arises in the income statement of financial statement of an organization. 3. Matching Concept: Matching Principle requires that expenses incurred by an organization must be charged to the income statement in the accounting period in which the revenue, to which those expenses relate, is earned. A major development from the application of matching principle is the use of depreciation in the accounting for non-current assets. Depreciation results in a systematic charge of the cost of a fixed asset to the income statement over several accounting periods to the life of fixed assets. It is alike accrual concept due to accrual concept also deal with matching of income and expense.

4. Consistency concept: Financial statements of one accounting period must be consistent to another in order for the users to derive meaningful conclusions about the trends in an entity's financial performance and position over time. Comparability of financial statements over different accounting periods can be ensured by the application of similar accountancy policies over a period of time. Its application is useful to compare with in the same business entity, organization and industry as a whole. 5. Materiality Concept: Materiality related to the significance of transactions, balances and errors contained in the financial statements. Materiality defines the cutoff point after which financial information becomes relevant to the decision making needs of the users. Information contained in the financial statements must therefore be complete in all material respects in order for them to present a true and fair view of the affairs of the entity. 6. Business entity concept: Financial accounting is based on the fact that the transactions and balances of a business entity are to be accounted for separately from its owners. The business entity is therefore considered to be distinct from its owners for the purpose of accounting. Therefore, any personal expenses incurred by owners of a business will not appear in the income statement of the entity. 7. Realization Concept: Realization concept in accounting, also known as revenue recognition principle, refers to the application of accruals concept towards the recognition of revenue. Under this principle, revenue is recognized by the seller when it is earned irrespective of whether cash from the transaction has been received or not. In case of sale of goods, revenue must be recognized when the seller transfers the risks and rewards associated with the ownership of the goods to the buyer. 8. Timeliness of information: Timeliness principle in accounting refers to the need for accounting information to be presented to the users in time to fulfill their decision making needs. Delay in financial information is irrelevant to the decision maker. Decision maker always seeks information

for to get existing financial performance and make future plan. Its largely affect the budgeting of the organization. 9. Prudence concept: Under the prudence, we should not overestimate the amount of revenues that we record, nor underestimate the amount of expenses. We should also be conservative in recording the amount of assets, and not underestimate liabilities. If an organization overestimates the profit of organization and market for big tax payer and get the goodwill of best taxpayer inversely it may exemption the tax by showing loss on financial statement. So, it is very important of prudence concept in financial statement. At last, being a professional manger he/she need to consider up given concept while preparing the financial statement. Further, an individual should have enough knowledge about accounting concept while preparing financial statement. 10. Money Measurement Concept: Accounting to records only those transactions which can be expressed in terms of money. Transactions or events which cannot be expressed in money do not find place in the books of accounts though they may be very useful for the business. For example, if a business has got a team of dedicated and trusted employees, it is definitely an asset to the business, but since their monetary measurement is not possible, they are not shown in the books of business. It should be remembered that money enables various things of diverse nature to be added up together and dealt with. The use of a building and the use of clerical service can be aggregated only through money values and not otherwise. 11. Cost Concept: This concept is closely related to the going concern concept. According to this concept, an asset in ordinarily recorded in the books at the price at which it was acquired i.e., at its cost price. This cost serves the basis for the accounting of this asset during the subsequent period. The 'cost' should not be confused with 'value'. It must be remembered that as the real worth of the assets changes from time to time, it does not mean that the value of such an asset is wrongly recorded in the books. The book values of the assets as recorded do not reflect their real value. They do not signify that values noted therein are the values for which they can be sold. Though the assets are recorded in the books at cost, in course of time, they are reduced in value on account of depreciation charges. The idea that the transactions should be recorded at cost rather than at a subjective or arbitrary value is known as cost concept. With the passage of time, the market value of fixed assets like land and buildings vary greatly from their cost. These changes in the value are generally ignored by the accountants and they continue to value them in the balance sheet at historical cost. The principle of valuing the fixed assets at cost and not at market value is the underlying principle in cost concept. According to them the current values alone will fairly represent the cost to the entity. The cost principle is based on the principle of objectivity. There is no room for personal assessment in showing the figures in accounting records. If subjectivity is flowed in records the same assets will be valued at different figures by different individual. Every body will have his own views about

various assets. The cost concept is helpful in making truthful records. The records becomes more reliable and comparable. 12. Dual Aspect Concept: This is the basic concept of accounting. Modern accounting system is based on dual aspect concept. Dual concept may be stated as "for every debit, there is a credit". Every transaction should have two sided effect to the extent of same amount. For example, if A starts a business with a capital of $10,000. There are two aspects of the transaction. On the one hand the business has assets of $10,000 while on the other hand the business has to pay to the proprietor a sum of $10,000 which is taken as proprietor's capital. This expression can be shown in the form of following equation: Capital (Equities) = Costs (Assets) 10,000 = 10,000 The term 'assets' denotes the resources owned by a business while the term 'equities' denotes the claims of various parties against the assets. Equities are of two types. They are owners equity and outsiders equity. Owner's equity (or capital) is the claim of the owner's against the assets of the business while outsiders equity (liabilities) is the claim of outside parties against the assets of the business. Since all assets of the business are claimed by someone (either owners or outsiders), the total of assets will be equal to total of liabilities. Thus: Equities = Assets OR Liabilities + Capital = Assets Suppose if the business borrows $5000 from a bank, dual aspect of this transaction will be Capital + Liabilities = Assets A Loan 10,000 = 15,000 Thus the accounting Equation states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner's equity and outsider's liabilities. As a mater of fact the entire system of double entry accounting is based on this concept. 13. Accounting period concept: According to this concept, the life of the business is divided into appropriate segments for studying the results shown by the business after each segment. Since the life of the business is considered to be indefinite (according to going concern concept) the measurement of income and studying financial position of the business according to the above concept, after a very long period would not be helpful in taking proper corrective steps at the appropriate time. It is, therefore, absolutely necessary that after each segment or time interval the businessman must stop and see, how things are going on.

In accounting such a segment or time interval is called accounting period. It is usually of a year. At the end of each accounting period and income statement/profit & loss Account and a Balance Sheet are prepared. The income statement discloses the profit or loss made by the business during the accounting period while Balance Sheet discloses the financial position of the business as on the last day of the accounting period. While preparing these statements a proper distinction has to be made between capital and revenue expenditure.

2. Fair deals Ltd. Presents the balance sheets as at 31.12.2009 and 31.12.2010 as follows: 31.12.2009 Assets Fixed assets at cost Less: Depreciation Rs. 31,30,000 6,80,000 24,50,000 Investment Marketable securities Inventories Book Debts Cash and bank Preliminary Expenses 12,50,000 60,000 4,10,000 5,30,000 1,20,000 1,00,000 49,20,000 31.12.2009 Liabilities Share capital Reserve and surplus Profit and loss account 13.5% debenture(Convertible) Mortgage Loan Current Liabilities You are informed that during 2010: (i) (ii) (iii) (iv) Rs. 2,00,000 of debentures were converted shares at par; Rs. 1,00,000 shares were issued to a vendor of fixed assets; A machine costing Rs. 50,000 book value Rs. 30,000 as at 31st December,2009 was disposed off for Rs. 20,000; Rs. 30,000 of marketable securities (cost) was disposed off for Rs. 36,000. You are required to prepare a schedule of Working Capital changes and Funds Flow Statement of the company for 2010. Rs. 20,00,000 4,20,000 3,80,000 10,00,000 3,00,000 8,20,000 31.12.2010 Rs. 36,05,000 8,20,000 27,85,000 13,50,000 30,000 5,20,000 5,05,000 1,40,000 50,000 53,80,000 31.12.2010 Rs. 25,00,000 4,70,000 4,00,000 8,00,000 2,50,000 9,60,000

Schedule of changes in Working Capital Particulars (A) Current Assets Marketable Securities Inventories Book Debts Cash and Bank Total (B) Current Liabilities Working Capital (A-B) Decrease in working capital 3,00,000 31.12.2009 60,000 4,10,00 5,30,000 1,20,000 11,20,000 8,20,000 3,00,000 31.12.2010 30,000 5,20,00 5,05,000 1,40,000 11,95,000 9,40,000 2,35,000 65,000 3,00,000

Working Notes: Funds from operation

3. An analysis of S Ltd. Cost records given the following information. Variable Cost (%of sales) 32.8% 28.4 12.6 4.1 1.1 Fixed Cost Rs. 1,89,000 58,000 66,700

Direct Material Direct Labour Factory overhead Distribution Overhead Administration Overhead

Budgeted sales for the next year is Rs. 18, 00,000. You are required to determine: (a) Break Even Sales value (b) Profit at the budgeted sales volume (c) Profit if actual sales: (i) drop by 10% (ii) increase by 5% from the sale. Answer: Working Notes: Cost sheet Particulars (a) Total Variable Cost Direct Material Direct Labour Factory Overhead Distribution Overhead Administrative Overhead (b) Total Fixed Cost Factory Overhead Distribution Overhead Administrative Overhead Rs. 6,06,800 5,25,400 2,33,100 75,850 20,350 14,61,500 1,89,000 58,400 66,700 3,14,100

Direct material 32.8 % of Rs. 18,50,000 =32.8/100*18,50,000=6,06,800 Direct Labour 28.4% of Rs. 18,50,000 =28.4/100*18,50,000=5,25,000 Factory Overhead 12.6% of Rs. 18,50,000 =12.6/100*18,50,000=2,33,000 Distribution Overhead 4.1% of Rs. 18,50,000 =4.1/100*18,50,000=75,850 Administration Overhead 1.1% of Rs. 18,50,000

=1.1/100*18,50,000=20,350 (a) For Break Even Sales Value P/V Ratio=1-VC/Sales =1-14,61,500/18,50,000 =0.21 BEP in Rs. = FC/PV Ratio =3,14,100/0.21=Rs. 14,95,714 (b) For profit at the budgeted sales volume Given, Budgeted sales volume=18,50,000 Fixed cost = 3,14,000 Variable Cost = 14,61,500 Formula, Profit=sales-Fixed Cost-Variable Cost =18,50,000-3,14,000-14,61,500=Rs. 74,400

(C) For (i) Actual sales drop by 10% New Sales=18,50,000-10% of 18,50,000 =18,50,000-10/100*18,50,000 =18,50,000-1,85,000 =Rs.16,65,000 New Variable Cost: Direct Material=32.8 % of Sales =32.8 % of 16,65,000 =32.8/100*16,65,000 =Rs.5,46,120 Direct Labour = 28.4 of 16,65,000 =28.4/100*16,65,000 =Rs.4,72,860 Factory Overhead=12.6% of 16,65,000 =12.6%/100*16,65,000 =Rs.2,09,790 Distribution Overhead=4.1% of 16,65,000 =4.1/100*16,65,000 =Rs.68,265 Administrative Overhead=1.1% of 16,65,000

=1.1/100*16,65,000 =Rs.18,315 Total Variable cost=5,46,120+4,72,860+2,09,790+68,265+18,315 =Rs.13,15,350 Total Fixed Cost Remain same so, total fixed cost=3,14,100 New Proft=sales-fixed cost-variable cost =16,65,000-3,14,100-13,15,350=Rs. 35,350

(ii) Profit if actual sales increase by 5% sales =18,50,000+ 5% of 18,50,000 =18,50,000+5/100*18,50,000 =18,50,000+92,500 =Rs.19,42,500 New Variable Cost: Direct Material=32.8 % of Sales =32.8 % of 19,42,500 =32.8/100*19,42,500 =Rs.6,37,140 Direct Labour = 28.4 of 19,42,000 =28.4/100*19,42,500 =Rs.5,51,670 Factory Overhead=12.6% of 19,42,500 =12.6/100*19,42,500 =Rs.2,44,755 Distribution Overhead=4.1% of 19,42,500 =4.1/100*19,42,500 =Rs.79,642.5 Administrative Overhead=1.1% of 19,42,500 =1.1/100*19,42,500 =Rs.21367.5 Total Variable cost=6,37,140+5,51,670+2,44,755+79642.5+21367.5 =Rs. 15,34,575 Total Fixed Cost Remain same so, total fixed cost=3,14,100 New Proft=sales-fixed cost-variable cost =19,42,500-3,14,100-15,34,575= Rs. 93,825

Q.N. 4. Briefly explain the following A) Rolling Budget B) Performance Budget C) Zero base budgeting D) Measures of financial Leverage (A) Rolling Budget A Rolling Budget is a budget that is continually updated to add a new budget period as the recent budget period is completed. A rolling budget takes considerable management attention than traditional method. In other words rolling Budget also called Continuous Budgeting. Rolling budget need to be linear. It means participation of employee needs to be minimum; otherwise it will be time and cost consuming. In this budgeting after the one prescribed time period is completed next planning will start and extend the equal period of the budgeting. For example, XYZ Company has planned for one year started from January to December. Once is has finishes working tenure of one month i.e. for January; budget team add the next budgeting tenure to next year January for making budgeting tenure equals to twelve months. Main benefit of this budgeting is someone is giving time to plan budget for preceding period. This enables to stay focus to employees whereas its main drawback is time and cost consuming. Advantages and Disadvantages of the Rolling Budget This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.

(B) Performance Budgeting Performance budgets use statements of missions, goals and objectives to explain why the money is being spent. It is a way to allocate resources to achieve specific objectives based on program, goals and measured results. Its main focus remains on the result. In performance budgeting , precise detainment of job to be performed or services to be rendered is done . secondly, the budget is prepared in terms of functional categories and their sub division into jprogrammes, activities, and the financial and physical results are interwoven. In simple language Performance-Based Budgeting is a way to allocate resources for achieving certain objectives. Budgeting as a tool for planning and controlling; it helps managers to focus in performance area and make changes when needed. For example, if ABC Company running numbers of activities to achieve given objective. At that time if a manger seen opportunity to get extra performance from given set of activities he can increase the budget for the given activities and vice-versa. Performance budgeting has been designed to correct the shortcomings of traditional budgeting by emphasizing managements considerations. Performance budgeting involves three levels of management. Policy management identification of needs, analysis of options, selection of programmes and allocation of resources.

Resource management establishment of basic support systems consisting of budgeting structures and financial management practices. Programme budgeting implementation of policies and related operations, accounting, reporting and evaluation. Thus, a performance budget is one that presents the purposes and objectives of which funds are required, the cost of achieving them, and the quantitative data measuring the accomplishment and work performed under each programme. Performance budgeting involves the following steps: Activity classification in terms of functions, programmes and activities. Financial and physical measurement of the activities. Progress reporting of performance at periodic intervals. Needed restructuring of the accounting system. The main objectives of Performance budget are: (a) To coordinate actual output and financial aspects; (b) To improve the budget formulation, review, and decision-making at all levels of management; (c) To facilitate better appreciation and review by controlling authorities; (d) To make more effective performance audit and (e) To measure progress towards long-term objectives

(C)

Zero Base Budgeting

The appraach in which the formulatin and prepatation of budget is based on current level of operation and activities, including current level of expenditure and revenue, is known as traditional budgeting. Mainly traditional budget focuses on the ongoing program is good and do the budgeting by adding and subtracting the given figure but the zero based budget evaluate the cost and appropriateness of the existing program from time to time. It starts every budget with fresh program not with traditional program. Each plan of action has to be justified in terms of total cost involved and total benefit, with no reference to past activities. It includes: -Dealing with particulars all elements of managers budget request -Critical examination of ongoing activities along with the newly proposed activities -Providing each manager a range of choice in setting priorities in respect of different activities and in allocating resources

Application of ZBB It is very useful where 'cost analysis' is taken into consideration. Normally, the ZBB is applicable to those budgets which are not involved with direct costs only, because, direct costs (e.g. Direct Material and Direct Labor) may be controlled by the normal prediction operation since it assumes that each component of direct cost has been monitored and adjusted with production. That is why, ZBB is applicable to those budgets which involve overheads (e.g. Administration, Selling and Distribution Overhead) i.e., it is more applicable to discretionary cost areas. It is implied that ZBB is relevant where a budgeting system which has already been introduced, requires managers at the same time to develop qualitative measures.

Advantages of ZBB 1. efficient allocation of resources, as it is based on needs and benefits. 2. Drives managers to find cost effective ways to improve operations 3. Detects inflated budgets. 4. Municipal planning departments are exempt from this budgeting practice. 5. Useful for serive departments were the outpurt is difficult to identify 6. Increases staff motivation by prodiding greater initaiative and responsibility in decision making. 7. Increases communiction and coordination within the organization. 8. Identifies and eliminates wasteful and obsolete operations. 9. Identifies opprtunities for outsourcing. 10. Forces cost centers to identify their mission and their rlationship to overall goals. Disadvantages of ZBB 1. Difficult ot define decision units and decision packages, as it is time consuming and exhaustive. 2. Forced to justify every detail related to expenditure. The research and development department is threatened whereas the production department benefits. 3. Necessary to train managers. Zero based budgeting must be clearly understood lby managers at various levels to be sucessfully implemented . difficult to administer and communicate the budgeting because more managers are involved in the process. 4. In a large organization, the volume of forms may be so large that no one person could read it all. Compessing the information down to a usabel size might remov e critically important details. 5. Honesty of the managers must be rliable and uniform. Any manager that exaggerates skews the results.

(D) Measures of financial leverage. Solution: Different measures of financial leverage are the total debt to assets, debt to equity, and interest coverage ratios. These ratios are used to determine if the company will be able to meet its long-term financing obligations. Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt. Debt Ratio- The debt ratio is defined as total debt divided by total assets: Debt Ratio=(Total Debt)/(Total Assets) Debt-to-equity Ratio- The debt-to-equity ratio is total debt divided by total equity: Debt-to-Equity Ratio=(Total Debt)/(Total Equity) Debt ratios depend on the classification of long-term leases and on the classification of some items as long-term debt or equity.

Interest Coverage Ratio- The times interest earned ratio indicates how well the firms earnings can cover the interest payments on its debt. This ratio also is known as the interest coverage and is calculated as follows: Interest coverage=EBIT/(Interest charges) Where EBIT = Earnings before Interest and Taxes Measures of financial leverage should be used with benchmarks in order to be the most useful. This can be done by comparing the ratio with the companys historical results, competitors or industry averages. The use of different accounting methods can result in inaccurate comparisons when a company compares its ratio with those of its competitors or industry.

Debt-assets ratio (D/A) and debt-equity ratio(D/E) are used to measure the amount of finanacial leverage. Both ratio are inter related to each other and can be derived as Debt-assets ratio (D/A)=D/E ratio/(1+D/E ratio).....1 debt-equity ratio(D/E)= D/A ratio/(1-D/A ratio)....2

debt-equity ratio(D/E) The basic properties of two ratio and their relationship: a) The Debt assets ratio rises at a constant rate and reaches a maimum of 100%. The debt equity ratio grows exponentially and reaches infinity. b) The two ratios are mathematically related and can be derived from each other.

The D/E ratio overstates the amount of financial leverage for all levels of debts and becomes indeterminate when debt employed is one hundred percent. It may, therefore be technically more feasible to employ the D/A ratio as indicator of the use of financial leverage.

Q.N.5: What is capital structure? Explain the features and determinants of an appropriate capital structure. A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Capital Structure refers to firms debt-toequity ratio, which provides company financial position and its risky position. Higher debt ratio means higher risk in the Company. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. The decision regarding form of the financing their requirement and their relative proportions in total capitalization are known as capital structure decision. Finance manager should choose an appropriate capital structure to minimize the cost of capital and maximize the owners equity. The capital structure involves two decisionsa. Type of securities to be issued are equity shares, preference shares and long term borrowings (Debentures). b. Relative ratio of securities can be determined by process of capital gearing. On this basis, the companies are divided into twoi. Highly geared companies - Those companies whose proportion of equity capitalization is small. ii. Low geared companies - Those companies whose equity capital dominates total capitalization. For instance - There are two companies A and B. Total capitalization amounts to be USD 200,000 in each case. The ratio of equity capital to total capitalization in company A is USD 50,000, while in company B, ratio of equity capital is USD 150,000 to total capitalization, i.e, in Company A, proportion is 25% and in company B, proportion is 75%. In such cases, company A is considered to be a highly geared company and company B is low geared company. A proper capital structure should have the following features : 1. The capital structure should be such that it gives maximum gain to a company. Since interest rate on debt is a tax deductible expense company should make use of leverage or debt in order to gain tax advantage. 2. Company should not use excessive debt in the capital structure, because in times of higher interest rates it can even threaten the solvency of the company. 3. The capital structure should be flexible enough that is company can alter the debt equity ratio whenever there is need to alter it. For example banks do not give loans to

companies if they higher debt equity ratio, in that case it is important to have flexible capital structure. 4. Capital structure should be in congruence with the goals of the company, which implies that if the policy of the company is that company will not take more debt, than capital structure should be framed accordingly and it should have include more equity and less debt.

Factors Determining Capital Structure 1. Trading on Equity- The word equity denotes the ownership of the company. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares. It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of companys earnings, equity shareholders are at advantage which means a company should go for a judicious blend of preference shares, equity shares as well as debentures. Trading on equity becomes more important when expectations of shareholders are high. 2. Degree of control- In a company, it is the directors who are so called elected representatives of equity shareholders. These members have got maximum voting rights in a concern as compared to the preference shareholders and debenture holders. Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. If the companys management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares. 3. Flexibility of financial plan- In an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Debentures and loans can be refunded back as the time requires. While equity capital cannot be refunded at any point which provides rigidity to plans. Therefore, in order to make the capital structure possible, the company should go for issue of debentures and other loans. 4. Choice of investors- The companys policy generally is to have different categories of investors for securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Bold and adventurous investors generally go for equity shares and loans and debentures are generally raised keeping into mind conscious investors. 5. Capital market condition- In the lifetime of the company, the market price of the shares has got an important influence. During the depression period, the companys capital structure generally consists of debentures and loans. While in period of boons and inflation, the companys capital should consist of share capital generally equity shares.

6. Period of financing- When company wants to raise finance for short period, it goes for loans from banks and other institutions; while for long period it goes for issue of shares and debentures. 7. Cost of financing- In a capital structure, the company has to look to the factor of cost when securities are raised. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits. 8. Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares. If company is having unstable sales, then the company is not in position to meet fixed obligations. So, equity capital proves to be safe in such cases. 9. Sizes of a company- Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand, big companies having goodwill, stability and an established profit can easily go for issuance of shares and debentures as well as loans and borrowings from financial institutions. The bigger the size, the wider is total capitalization.