Market Matching Principle and Concept †Free Samples to Students

Question: Discuss about the Market Matching Principle and Concept. Answer: Introduction: Sources of funds means the areas from which we can arrange funds or can raise funds. There are many sources like market sources of shares or institutions like Banks, NBFCs etc. Application of funds means where we have applied that funds. In financial terms, Sources are also known as Liabilities side of the balance sheet and application of funds denotes asset side of the balance sheet. Now below we have a look at the Sources and application of funds of Tata Motors Limited. SOURCES OF FUNDS: In the balance sheet of Tata Motors limited, there are sources of which they have raised funds i.e. Equity Liabilities. Following are more details of Equity Liabilities: Equity: It is also known as shareholders funds. In other words, these are the funds of shareholders which have been invested in the business. The amount of equity is Rs. 679.18 Cr as at 31-3-16. Shareholders include outside public and also the shares held by promoters. Shareholders invest in the business in the form of shares just to earn investment income in the form of the dividend. As the company has issued 3395680306 ordinary shares So, Issuing of shares to raise funds is a market instrument through any company can issue shares but that has to be listed on stock exchange. Shareholders only invest in the company if the companys financials are strong. Generally, people look for EPS etc. Reserve Surplus: This is the balance of profit cumulative from previous years. This also belong to the shareholder as ultimately the money which is being used in the business belongs to shareholders and they have right on Reserve Surplus. As at 31-3-16 it is Rs 21688.90 Cr. The Company usually declares the dividend from current year profits, and if current year profits are not sufficient, then I can use Reserve and surplus. Liabilities: There are two types of liabilities, one is current Liabilities and other is Non-Current liabilities. Current liabilities are those liabilities who are to be paid with in time span of 1 year and non- current liabilities are those which are to be paid after one year. These are also part of sources of funds as we have to pay to the parties from whom we have bought some material for the business or hired services for the smooth running of business. Short- term borrowings include short term loans etc; trade payables include creditors for materials or for services. These are generally to be paid within 1 year. It also includes provisions and other current liabilities. As at 31-3-16 Current liabilities are 17751.06 Cr and non-current liabilities are 12307.11 Cr. The company should raise long- term debt considering its financials so that its debt-equity ratio does not get affected because it gets affected by raising of debt or equity. Higher the debt higher will be the ratio and bad it is for the company. This shows that company has lower amount of its owned funds than borrowed funds which are not good for liquidity of the company as higher the debt higher will be the interest cost. Interest cost is fixed. It has to be paid and it gets priority over the shareholders. APPLICATION OF FUNDS: The application of funds are known as assets of the company. In simple words where they have applied the money invested in the business is the application of funds. They can be in the form of Fixed Assets, Current Assets etc. Following are more non- current and current assets: Non- current assets: These are those assets which are not going to be realized within 1 year. It includes Fixed Assets of Rs 22244.86 Cr as at 31-3-16 and other than that there is long term investment of Rs 16975.46 Cr. and some long term loans advances. Fixed Assets include Plant machinery, Motor vehicles, land building, etc. There are under fixed assets because they are not going to be realized within the year though we claim the depreciation because those assets which are being used for business purpose and we are earning income from it gets depreciated. Non- current assets should be a productive one. It should not be only for claiming depreciation as if affects return on total assets. More will be the productivity of non-current assets higher will be the return on assets and higher will be the financial strength of the company. Current Assets: These are those assets which are to be realized with in time span of one year. It includes Inventories, Trade receivables, cash bank balances, current investments etc. Current assets should be higher than current liabilities and that will improve current ratio and current ratio defines the liquidity position of the company. Tata Motors figures of current assets are as follows: As it can also be seen that under current assets, trade receivables has been booked because of matching principle though, company has not received payment for it. As we have booked sales and earned income for it so simultaneous expense like of sales commission etc though not paid has to be debited to profit loss account. Conclusion: There are many methods of raising funds like of share capital, short term borrowings etc. We can use either market sources like share capital, options Futures etc and non-market like of banks other financial institutions. Recommendation: Every company should borrow funds either from the market or from the non-market sources but there should not be excess borrowings because that will increase the debt-equity ratio of the company and that will have a bad impact on the investors. References: Reference for Business, Money Market Instrument, viewed 28 April 2017. https://www.referenceforbusiness.com/encyclopedia/Mor-Off/Money-Market-Instruments.html. Accounting- Simplified.com, Matching Principle Concept, viewed 28 April 2017. https://accounting-simplified.com/financial/concepts-and-principles/matching.html. Tata Motors Ltd, Annual Report, viewed 28 April 2017, https://www.tatamotors.com/investors/financials/71-ar-html/pdf/Funds-Flow-Last-Five-Years.pdf.