Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

Advantages And Disadvantages Of Debt Financing

Accounting , Business

What Is Debt Financing ?


Debt financing is just opposite of equity financing.(in which capital is raised by selling equity instruments to the investors). It is a process of raising fund by selling debt instruments such as bond, credit cards, debentures etc. It is a borrowing of money and should be paid back with interest. In this post we are going to discuss some major pros and cons of debt financing.


Advantages Of Debt Financing


The main advantages of debt financing can be pointed out as follows:


1. Ownership And Control


One of the main advantages of debt financing is that it does not dilute ownership and control like in equity financing. Ownership, management control remains with the company because lenders have no right to manage the company.


2. Decreased Tax Obligation


Debt is considered as expenses in business. So, interest on loan is tax deductible. So, it minimizes the tax obligation.


3. No Share Of Profit


Another benefit of debt financing is that company can enjoy entire profit because lenders cannot claim on the profit of the firm.


4. Improves Credit Rating


If a firm pays loan and interest on time, it improves the credit rating of the business, It increases the reputation and image of the company.

advantages-disadvantages-debt-financing


5. Flexibility


It is more flexible than equity funding. There are several debt instruments such as loan, debenture, bills, credit card etc. Companies can choose best debt financing option as per the nature of the business.


Disadvantages Of Debt Financing


The main drawbacks or disadvantages of debt financing are as follows:


1. Impact On Cash Flow


As we know that certain amount of loan and interest should be paid in each month until the last installment, it may negatively impact cash flow. It may hamper daily operational activities because of lack of adequate working capital.


2. Complex Process


It is difficult to raise capital with debt financing. It requires strong credit history to attract lenders. So, it is not suitable for small and new business firms.


3. Need Of Collateral


Another disadvantage of debt financing is that company may need to provide collateral (fixed assets such as land, building, machinery) etc. to secure loan. If the company fails to repay the loan lenders can acquire the assets.


4. Strict Discipline


It requires strict discipline to repay the loan. If a firm fails to repay the loan on time it negativels affects the credit rating and image of the firm.


Also Read

Advantages and disadvantages of equity financing


5. Not Suitable


Debt financing is not suitable for the business having inconsistent cash flow because it make difficult to pay the loan and interest regularly.


Pros And Cons Of Debt Financing In Short


Pros

- Firms retain ownership and control

- It increases the credit rating of the firm 

- Firm can enjoy 100% profit

- It decreases the tax liability

- Liability is over after paying the loan


Cons

- It is risky and complicated than equity financing

- It may impact cash flow of the firm

- Firms may have to pay high rate of interest

- It is not suitable for small business

- It requires collateral to get loan

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Advantages And Disadvantages Of Equity Financing

Accounting , Business

What Is Equity Financing ?


Equity financing (also called equity funding) is a process of raising capital by selling equity instruments like ordinary shares, preference shares etc. Companies issue share to investors to raise money for business. It is effective tool that helps to meet short-term or long-term obligation of the firm.


Advantages Of Equity Financing


The main advantages of equity funding can be pointed out as follows:


1. Less Risky


Equity financing is less risky method of financing than debt because firms do not require to repay loan and interest on the raised capital.


2. No Additional Burden


Another benefit of equity financing is that it does not suffer the company with financial burden like monthly repayment of loan and interest.


3. Opportunity To Grow


As we know that firms do not have to repay loan, so firms can invest more money to expand business. Therefore, it provides the opportunity to grow.


4. Raising More Fund


Equity financing can raise more capital than borrowing. So, it is more favorable option than debt financing.

advantages-disadvantages-equity-financing


5. Attract Investors


It can increase credibility and image of the company if the raised fund is invested properly. It helps to attract more investors and partners in the future.


Disadvantages Of Equity Financing


The main disadvantages of equity financing can be highlighted as follows:


1. Sharing Profit


One of the major drawbacks of equity finance is that company founders cannot enjoy 100 % profit because it should be share with the shareholders.


2. Costly Method


Equity financing is costlier than borrowing because of higher risk and no tax shield.


3. Sharing Ownership And Control


Another disadvantage of equity financing is that company should share ownership with the shareholders. So, it limits the power and control of founders.


Also Read

Advantages and disadvantages of debt financing


4. Possibility Of Conflict


Because of shared ownership, control and power there exists a possibility of conflict between investors and owners of the company.


Pros And Cons Of Equity Financing In Short


Pros

- It is less riskier than debt financing

- It avoids the financial burden of the firm

- It provides expansion and growth opportunity

- It can raise more capital than borrowing

- It lowers the credit problems


Cons

- It splits the ownership and profit

- It is complex and costly method of raising capital

- It may create conflict between shareholders and owners

- It lacks tax shield

- It is time consuming process

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Advantages And Disadvantages Of Cost Audit

Accounting , Business
What Is Cost Audit ?

Cost audit is conducted to ensure the correctness of the cost records maintained by the firm. It is a critical examination of costing system which helps to verify the arithmetical accuracy of cost accounts.  It provides correct cost data which helps the management to detect errors and loopholes in the accounting system. It helps to regulate manufacturing process, minimize wastage of materials and unnecessary expenses, provides suggestions to fix the price of the product etc. It provides useful data and information to the management, investors, government and to the public.

Benefits Or Advantages Of Cost Audit

The main advantages of cost audit can be described as follows:

1. Ensures Correctness Of  Cost Records


Cost audit is the examination of cost records and accounts maintained by the company. It ensures correctness or arithmetical accuracy and gives clarity about the cost accounting record. It provides valuable data and information to the management, government, investors and to the public.

2. Identifies Loopholes And Frauds

It helps to detect frauds, errors and irregularities in cost accounting books. It also identifies loopholes in the system and helps the management to discover wrong practice. So, appropriate actions can be taken to eliminate errors and irregularities.

3. Fixation Of Price

It determines the cost of production which helps the company to fix the selling price of the product.

4. Cost Control And Reduction

Cost audit provides accurate cost data which helps the management to take appropriate steps to control unnecessary costs and wastage in the production process. It helps to lower the cost of production which leads to increase in the profit.

5. Helpful To Make Decisions

It provides correct and reliable data and information about the cost of production, sales, inventory, operational efficiency etc. It helps the management to make proper decision to improve the performance.
advantages and disadvantages of cost audit
6. Beneficial For The Government

Government authorities use cost data and information to set reasonable price of essential products and services. Cost audit also helps to determine the tax rate.

7. Beneficial For The Investors


Shareholders get up-to-date date that helps them to understand the progress of the company. It ensures them that their money is utilized properly and generating good return.

Drawbacks Or Disadvantages Of Cost Audit

The main disadvantages of cost audit can be highlighted as follows:

1. Lengthy Process

It requires sufficient time, effort and resources to conduct cost audit. It may affect the daily routine work of the employees and organizational activities. 

        Also Read: 

2. Expensive Process

Conducting cost audit may become very expensive because professional auditor charges higher price for his work.

3. Not Applicable For Small Business


Because of the consumption of more cost, time, effort and resources, it is not suitable for small firms having limited resources.

4. Chance Of Inaccuracy

Some portion of cost audit is based on the estimation which may give inaccurate data and information in the audit report.

Pros And Cons Of Cost Audit In Short

Pros:

- It verifies correctness and arithmetical accuracy of the cost of production, inventory etc.
- Helps the management to make pricing decision
- It is helpful in cost reduction and to eliminate wastage
- Provides suggestions to take suitable steps to eliminate wrong practice in the system
- It provides correct cost data to the shareholders
- Government can fix the tax rate with the help of data obtained from it.
- It is very suitable for big manufacturing companies

Cons:

- It is not suited to small manufacturers
- It is lengthy process that requires more time, cost and effort
- There is a possibility of inaccurate data because of the dependency on estimation
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Advantages And Disadvantages Of Hire Purchase

Accounting , Business

What Is Hire Purchase System ?


It is a method of acquiring expensive assets under which buyer get the right to use products without making the whole payment. He/she obtains the asset by making the partial payment and the remaining amount is paid periodically in installments (interest is added in installment amount). The ownership of the asset remains with the seller and it will be transferred to the buyer after the payment of final installment. Hire purchase is beneficial for both sellers and buyers but it has some drawbacks also. In this post we discuss about the pros and cons of hire purchase system.


Benefits Or Advantages Of Hire Purchase System


The main advantages of hire purchase can be highlighted as follows:


Benefits Of Hire Purchase To The Sellers


1. Market Expansion


Hire purchase allows the customers to use expensive items or products without making the full payment. So, it attracts more potential customers which helps the seller to expand the market.


2. Increased Sales And Profit


It encourages the customers to buy more goods because the payment can be made in installment. So, it helps to increase sales which leads to increase in the profit of sellers.


3. Extra Income


Another benefit of hire purchase to the seller is that he/she can earn some extra income in the form of interest which is added in the installment amount.


4. Less Riskier


Hire purchase system is less riskier than installment system because ownership of the asset is not transferred to the buyer until the final payment. The seller can acquire the product or asset if the buyer fails to make regular payment.


Benefits Of Hire Purchase To The Buyers


1. Suitable For Small Traders


It reduces the financial burden of small traders because they can acquire expensive items such as plant, machinery, vehicle etc. by making periodic payments. It eliminates the complexities of borrowing fund from other sources to run the business.


2. Easier To Buy


In hire purchase system, buyers make payments in installment. So, Customers having lower income can buy required products easily.


3. Immediate Use


Buyers can use the products immediately after the first installment.


4. Tax Benefit


Interest payable is deducted from taxable income which provides tax benefits to the buyers.


Drawbacks Or Disadvantages Of Hire Purchase


The main disadvantages of hire purchase system can be highlighted as follows:


Disadvantages Of Hire Purchase To The Sellers


1. Huge Capital Required


Sellers require huge amount of investment to acquire expensive assets such as car, plant, machinery etc. to run hire purchase business.


2. It Involves Risk


Although the seller can take back the item in case of default payment, he cannot recover the actual cost of the product because value of second hand product is decreased.


3. Increased Bad Debt


If customers do not pay the installment in time, it may increase the amount of bad debt.

   

      Also Read:

Advantages And Disadvantages Of Leasing

Features Of Hire Purchase System

Difference Between Hire Purchase And Installment


4. Work Load


Hire purchase may increase the workload of the seller because more clerical and paper work is required to maintain sales accounts.


Disadvantages Of Hire Purchase To The Buyers


1. No Ownership Of Assets


Ownership of item is not transferred to the buyer until the final installment. So, seller can repossess the asset in case of default payment.


2. Higher Cost


Sellers add extra cost (interest) in the selling price of the asset. So, buyer has to pay more than the actual price of the item.


3. Larger Duration


It takes very long time to make full payment which may create frustration to the buyer.


4. Risk Of Overspending


It attracts more audience because of the periodical payment system. It may create artificial demand for the product in the market. Buyer may be tempted to buy unnecessary and expensive items. So, higher purchase may encourage overspending.


advantages and disadvantages of hire purchase

Pros And Cons Of Hire Purchase System In Short


Pros:

- Sellers can attract more customers which helps to increase sales and profit

- Seller can earn extra income in the form of interest

- There is less risk for the seller because ownership of the good remains with him until the last installment.

- Buyer can obtain expensive item by making small initial down payment

- It may provide tax benefit to the buyer

- It is very beneficial to the small business firms to acquire valuable fixed assets


Cons:

- Large amount of capital is required to run hire purchase business

- There is a risk of default payment

- There exists a chance of increase in bad debts

- Because of the interest, buyers have to pay more than the actual amount

- It encourages overspending to the buyers

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Advantages And Disadvantages Of Partial Audit

Accounting , Business
What Is Partial Audit ? 

Partial audit refers to the examination of certain suspicious parts of accounting. It does not check the entire books of accounts. It is conducted to clear the doubt of the owner or management. Generally, auditor conducts this audit to ensure the accuracy of cash record, stock level, debtors etc. There are some benefits and limitations of partial audit which we are going to discuss in this post.

Benefits Or Advantages Of Partial Audit

The main advantages if partial audit can be pointed out as follows:

1. Consumes Less Time And Cost

In partial audit, auditor checks only suspicious areas of the books of accounts to clear the doubts of management. So, it can be performed in less time with less cost and effort.

2. Detection Of Errors 


Partial audit detects fraudulent activities and errors of selected area which helps the client to take appropriate measures to prevent such errors in the future.

3. Helpful For The Management


Auditor provides suggestion after conducting the audit of specific area of the books of account. It provides information regarding capital mobilization, inventory level, debtors, creditors etc. 

4. Helps In Final Audit


It makes easier to conduct final audit because some parts of the books of accounts are checked in partial audit. So, final audit can be performed with less cost in less time.

Drawbacks Or Disadvantages Of Partial Audit


The main disadvantages of partial audit can be pointed out as follows:


1. No Legal Evidence


It is conducted to examine specific area of accounting to clear the doubt of the management. It is not a legal document and cannot be presented as evidence.


2. No True Picture


Partial audit is performed for specific area only. It does not show the actual financial position of the firm.

3. For Internal Use Only


It is not statutory and conducted to help the management only. So, it is suitable for internal purpose only and not useful for external users such as investors, trading partners, tax authority etc. 

4. Waste Of Time And Cost

Final audit is mandatory and should be performed by all companies to show the true financial picture at the end of the accounting period. But partial audit is not statutory, so it is waste of time, cost and effort.
advantages disadvantages partial audit
    Also Read:

Pros And Cons Of Partial Audit In Short

Pros:

- It is a simple process and can be conducted by using less time and cost
- It helps the management to detect errors and loopholes 
- It provides information about the capital mobilization in the organization
- It saves time and effort to conduct final audit

Cons:

- It is not statutory, so it is waste of time and cost
- Its report cannot be presented as legal evidence
- It is for internal use only, therefore it is not useful for external users
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Advantages And Disadvantages Of ABC Analysis

Accounting , Business

What Is ABC Analysis Method Of Inventory ? 


ABC analysis of a technique of categorizing the inventory or materials according to their value and importance. Highly valued items are categorized in  class 'A' , least valued materials in class 'C' and less profitable items than 'A' and more profitable than 'C' fall in class 'B'. A strict control is required for highly important and profitable items (group A materials). Average control is exercised for group B and least control is exercised for group C inventory.       


Benefits Or Advantages Of ABC Analysis


The main advantages of ABC inventory analysis can be highlighted as follows:


1. Better Control Over Inventory


ABC analysis system of inventory management gives focus on the control of high priority products (inventory categorized in group A). Strict control over such materials helps to minimize wastage and misuse of most valuable items.


2. Provides Views 


It provides up-to-date information about the quantity and value of stock. It helps the management for decision making and forecasting.


3. Saves Cost


Because of strict control and minimization of wastage, it helps to reduce inventory cost. Materials that falls in group A or high valued products are purchase in less volume which helps to decrease material purchase, handling and storage costs.


4. Better Stock Turnover


Better control, cost reduction and waste minimization leads to increase in stock turnover ratio of the firm.


5. Effective Cycle Counting


ABC analysis provides accurate data about the inventory fluctuations which helps the manager in cycle counting.


6. Economical System Of Inventory


It is more economical than others techniques of inventory management because it does not spend more cost and effort for those materials which are grouped in B and C category. 


7. More Profit


Proper classification of inventory, better handling and cost reduction helps to increase the profitability of the firm.


8. Suitable For Big Firms


ABC analysis system is suitable for big business companies which consumes different types of materials in larger volume.


advantages disadvantages ABC analysis

Drawbacks Or Disadvantages Of ABC Analysis


The main disadvantages of ABC analysis system of inventory management can be highlighted as follows:


1.  It Ignores GAAP


This method does not follow the rules of GAAP (generally accepted accounting principles). Therefore, it is suitable for internal use only.


2. Complex And Time Consuming


It is very complicated task to categorize materials in different groups. It consumes more resources such as time, labor and cost to group materials in case of large group of inventory.


3. Static In Nature


Value of materials may change according to the market trend. It means category A product may move to B and C may move to A with the change in dollar value of product in the market. In such situation, ABC inventory system may become outdated because of the lack of dynamism. 


4. Based On Financial Value


This analysis is based completely on the dollar value of materials and does not consider other important factors.


5. Not Suitable For


ABC analysis is not suitable for small business houses which does not require large volume of inventories. It is also not applicable for materials which cannot be standardized.


6. Possibility Of Loss


It gives less attention to B and C grouped materials. Therefore, there is a chance of loss because of over stock, damage and wastage of these items.


Pros And Cons Of ABC Analysis In Short:


Pros:

- It ensures better control of inventory by minimizing wastage and improper use of materials

- It is suitable for big manufacturing companies

- It improves stock turnover ratio

- It saves time and cost to store materials

- Because of effective control and proper utilization of materials, reduction in time and cost, it helps to improve the profitability of the business.


Cons:

- It is complex than other techniques of inventory control

- It lacks dynamism and flexibility

- It is not suitable for small firms because it consumes high resources

- It ignores GAAP

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Advantages And Disadvantages Of Leasing

Accounting , Business

Benefits Or Advantages Of Leasing

The main advantages of leasing can be described as follows:

1. It Promotes Entrepreneurship

While commencing a business it requires huge capital to purchase fixed assets such as land, building, machinery, plant etc. Leasing resolves this requirement by providing the right to use asset in exchange for periodic rental payment. So, leasing promotes entrepreneurship by minimizing initial cash outlay.


2. It Enhances Liquidity


Leasing saves huge amount of fund which increases liquidity of the firm. Saved fund can be used to fulfill working capital requirement or can be invested in other profitable activities.


3. It Provides Tax Benefit


A company can enjoy tax benefit because lease rental payments are operating expenses and deducted from taxable income. So, leasing saves costs.


4. Convenience Method Of Financing


Leasing is cheaper and convenience than other sources of financing. It does not require various steps and formalities like borrowing loan from banks and financial companies.


5. Suitable For Small And New Business


Leasing is beneficial for small and newly established business firms because it helps to acquire assets without huge capital expenditure and formalities.


6. Provides Protection Against Obsolescence


Another advantage of leasing is that it avoids the risk of obsolescence. Lease agreement is beneficial for lessee (user of asset) because he does not need to bear the risk of obsolescence during the leasing period.


7. Flexible Source Of Financing


Lease rentals and period can be structured, changed or terminated with the mutual understanding between lessor and lessee. So, it is flexible than other sources of long term financing.


8. Not Affected By Inflation


Another notable advantage of leasing is that lease rental is not affected by inflation. Lessee pays same amount of rental payments till the end of the agreement.


Drawbacks Or Disadvantages Of Leasing


Some of the major disadvantages of leasing can be described as follows:


1. Decreases The Return On Equity


Lease rental is deducted from the net income of the company. So, it reduces return on the equity shares.

    
       Also Read: 


2. No Ownership


Leasing does not provide ownership of asset to the user (lessee). Such assets cannot be pledge to obtain loan from banks and financial institutions.

advantages-disadvantages-leasing

3. It May Increase Cost


Although lessee is not a owner of the asset, he is responsible for repairing and maintenance . So, it increases the cost for the company.


4. No Alteration


Another disadvantages of leasing is, user cannot alter the asset in any situation. If the asset is bought, a company can modify it or make changes to improve its efficiency. But in case of , assets should not be altered by user.


Pros And Cons Of Leasing In Short


Pros:

- It helps to improve the liquidity of the firm

- It is a convenience, flexible and cheaper method of long term financing

- It saves costs because lease rentals are tax deductible

-  It saves the lesser from the risk of obsolescence


Cons:

- It reduces the return of equity shareholders

- It is costlier than debt financing

- Ownership of the asset remains with lessor
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Advantages And Disadvantages Of Test Check

Accounting , Business
Merits Or Advantages Of Test Check

The main advantages of test check can be highlighted as follows:

1. Reduce Work Load

It is a checking of partial records from books of accounts. It examines only certain financial transactions because it is difficult to check all financial transactions included in the books of accounts. So, it reduces work load and task of auditing can be performed quickly.

2. Saving Of Time And Labor

Checking of large volume of transactions takes more time and energy. In test checking, only selected transactions are examined which saves time and labor.

3. Cost Saving

Test check reduces the work load, time and energy. It means audit task can be completed in less time with less effort. So, it lowers the cost of audit.

4. Suitable For Big Firms

It is suitable for big business houses with large volume of financial transactions because it is very difficult to test each and every transactions.

     Also Read: 

5. Accuracy And Reliability

Sample transactions are selected very carefully and intelligently with special attention. So, it ensures accuracy and reliability of checking of records.

Demerits Or Disadvantages Of Test Check

The main disadvantages of test check can be highlighted as follows:

1. Chance Of Errors

In test checking, financial transactions are examined on random basis. So, there exists a high chance of frauds and errors undetected in the books of accounts.
advantages and disadvantages of test check
2. Not Suitable For Small Companies

Test check is not suitable for small business firms with less numbers of financial transactions.

3. Internal Check And Internal Control

If there is no strict internal check and internal control system in the organization, it is not possible to conduct internal check because it may report false data.

4. Doubtful And Suspicious

Audit report is prepared on the basis of few sample transactions examined by internal check. So, it is always doubtful and suspicious for auditor.

Pros And Cons Of Test Checking In Short

Pros:
- It minimizes time, effort and cost of audit
- It is suitable for big business firms having large volume of financial transactions of similar types
- It reduces the workload of both accounting staff of the company and the auditor

Cons:
- It is not applicable for small business firms having less volume of transactions
-  Auditor may fail to detect errors, frauds and loopholes because he/she does not examine all transactions
- Test check cannot be conducted if there is no proper internal check system in the company
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Advantages And Disadvantages Of Routine Checking

Accounting , Business
Benefits Or Advantages Of Routine Checking

The main advantages of routing checking can be described as follows:

1. Detection Of Errors

Routine checking involves the examination of debit and credit totals, ledger postings and account balances. Books of accounts are carefully checked so that errors and frauds can be easily located.

2. Arithmetical Accuracy

As we know that it discovers errors and frauds in the books of accounts, it helps to correct mistakes quickly and maintain records up-to-date. So, routine checking ensures arithmetical accuracy of financial records.

3. Basis For Final Audit

All the records and books of accounts are already examined which saves time and labor of auditor while conducting final audit. So, it is a basis for final audit.

4. Simple And Easy

It is a very simple task that can be carried out by a staff having the knowledge of simple accounting rules. So, it is very easy to conduct routine checking job.

   Also Read: 

5. Internal Control

Routine checking is a regular process that shows recording of transactions and operational efficiency of the firm. So, it helps the management for internal control.

Drawbacks Or Disadvantages Of Routine Checking

The main disadvantages of routine checking can be described as follows:

1. Planned Errors

It discovers only some small and unplanned errors occurred in the books of accounts. Planned errors and frauds cannot be disclosed by routine checking. It is very difficult to locate errors of principle and compensating errors by conducting routine checking. 

2. Not Useful For All Business

It is not useful for those firms which apply self-balancing system. Routine checking is not appropriate for small firms with limited number of transactions.

3. Not Reliable

It is carried out by junior staff. There is a chance of carelessness at work. So, its result may not be reliable.

4. Monotonous

It is time consuming and monotonous process. Accounting staff may get bored and lose interest in his/her job.
advantages disadvantages routine checking
Pros And Cons Of Routine Checking In Short

Pros:
- It ensures arithmetical accuracy of records in original entries
- It helps to discover errors and frauds in the books of account
- It is helpful for conducting final audit
- It requires less cost, time and effort to conduct routine checking

Cons:
- It cannot discover planned errors and frauds
- It is boring and monotonous process
- It is not suitable for small business firms having limited volume of financial activities
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Limitations Of Accounting

Accounting , Finance
The main drawbacks or limitations of accounting can be highlighted as follows:

1. Ignores Non-monetary Items

Accounting records only monetary items (that can be measured in terms of money) and ignores non-monetary items (cannot be measured in terms of money) such as employee morale, loyalty, management efficiency etc. that play important role in success or failure of business.

2. Past Data

Generally, accounting uses past or historical financial data and information. It ignores some key factors like price level change and inflation. So, it may fail to show actual financial strength or weakness of the firm.
disadvantages of accounting
3. Frauds And Manipulation

Several accounting treatments are based on personal judgment and estimates. So, there exists a chance of manipulation of data and commitment of frauds.

4. Several Alternatives

There are different methods of stock valuation, depreciation, capital budgeting decision, amortization of assets etc.. Several alternatives may create complexity and confusion.

   Also Read: 

5. Lack Of Secrecy

It is very difficult to maintain secrecy of accounting data and information because of several users.

6. Difficulty In International Trade

Different accounting standards and methods may create difficulty in international trade.
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Advantages And Disadvantages Of Variable Costing

Accounting , Business
Benefits / Merits Or Advantages Of Variable Costing

The main advantages of variable costing can be highlighted as follows:

1. Simplicity

Variable costing system is simple and easy method of cost accumulation than absorption costing approach.

2. Assists CPV Analysis

It provides essential data and information for cost volume profit (CPV) analysis.

3. Cost Separation

It clearly separates manufacturing costs into fixed costs and variable costs which simplifies production activities.

4. Relation With Standard Costing And Budgetary Control

Cost controlling techniques such as budgetary control and standard costing are related with variable costing.

5. Easy Profit Determination

It is very easy to determine profit under variable costing. Profit is determined on the basis of sales and it is not affected by inventory changes.

6. Planning And Controlling

Variable costing helps the management in cost control and profit planning.

Drawbacks / Limitations Or Disadvantages Of Variable Costing

The main disadvantages of variable costing system can be highlighted as follows:

1. Ignores Accounting Principles

This method of cost accumulation ignores generally accepted accounting principles (GAAP).

       Also Read: 

2. Difficult To Separate Costs

It is very difficult to separate manufacturing overhead into variable costs and fixed costs.

advantages disadvantages variable costing

3. Understate Of Cost

This method understates the product cost by excluding fixed costs. So, fair cost of production cannot be determined.

4. Unsuitable

Variable costing is useful for internal reporting only and not suitable for external reporting.

Pros And Cons Of Variable Costing In Short

Pros:
- It is useful for cost volume profit analysis because it provides data about fixed cost, contribution margin etc.
- It is very helpful for management to make pricing decisions
- Profit can be determined easily in this method
- It simplifies production activities
- It provides cost data and information which is helpful for management control

Cons:
- It does not follow generally accepted accounting principles (GAAP)
- It is not suitable for making long-term pricing policy
- It becomes to separate manufacturing costs into fixed and variable costs
- Accurate cost of production cannot be determined because it excludes fixed costs
- It is not useful for external users such as investors, shareholders, public etc. because it is prepared for internal use only.
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Disadvantages Of Cash Flow Statement

Accounting , Finance
The major limitations or disadvantages of cash flow statement can be described as follows:

1. Limited Scope

Cash flow statement has limited scope because it cannot reveal net income from operation. 

2. No Complete Information

Cash flow statement cannot show the complete and up-to-date financial position of the firm.

3. Chance Of Inaccuracy

It may provide wrong information if there is wrong data in the balance sheet.

4. Ignores Accounting Concept

Cash flow statement ignores accrual concept of accounting.

True net income cannot be obtained because cash flow statement ignores non-cash items.

6. Historical Data

It uses historical financial data from balance sheet and income statement. So, it may not be suitable for future forecasting and financial planning.
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Advantages Of Cash Flow Statement

Accounting , Finance
The main benefits or advantages of cash flow statement can be studied as follows:

1. Cash Inflow And Outflow

Cash flow statement reports about cash inflow and cash outflow and discloses the change in cash balances between two balance sheets.

2. Cash Forecast

Cash flow statement helps to identify future cash need by revealing current cash position. It helps the management to forecast future cash flow.
advantages cash flow statement
3. Liquidity And Profitability

It presents current cash position which helps to ascertain solvency, profitability and liquidity position of the business.

4. Financing Decision

Management can make different financing and investment decisions with the help of cash flow statement.

      Also Read:

5. Financial Planning

It helps the management to formulate financial plans.

6. Capital Budgeting Decisions

Capital budgeting decisions are taken on the basis of projected cash flows.

7. Prevents Mismanagement Of Cash

Cash flow statement prevents mismanagement of cash in the business firm.
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