WELCOME TO THE FINANCE WORLD
1.Definition of accounting: “The
art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are, in part at least of a
financial character and interpreting the results there of”.
2.Book keeping: It is mainly concerned with
recording of financial data relating to the business operations in a
significant and orderly manner.
3. Concepts of
accounting:
A.
separate entity concept
B.
going concernconcept
C.
money measurement concept
D.
cost concept
E.
dual aspect concept
F.
accounting period concept
G.
periodic matching of costs and revenue concept
H.
realization concept.
4 Conventions of
accounting
A.
conservatism
B.
full disclosure
C.
consistency
D
materiality.
5. Systems of
book keeping:
A.
single entry system
B.
double entry system
6. Systems of
accounting
A.
cash system accounting
B.
mercantile system of accounting.
7. Principles of
accounting
a.
personal a/c : Debit is the receiver
and Credit is the giver
b.
real a/c : Debit what comes in credit what goes out
c.
nominal a/c : Debit all expenses and
losses credit all gains and incomes
8. Meaning of
journal: Journal
means chronological record of transactions.
9.
Meaning of ledger:
Ledger is a set of accounts. It contains all accounts of the business enterprise whether real, nominal,
personal.
10.
Posting:
It means transferring the debit and credit items from the journal to their
respective accounts in the ledger.
11.
Trial balance:
Trial balance is a statement containing the various ledger balances on a
particular date.
12.
Credit note:
The customer when returns the goods get credit for the value of the goods returned. A credit note is sent to him
intimating that his a/c has been credited with the value of the goods returned.
13. Debit note: When the goods are returned
to the supplier, a debit note is sent to him indicating that his a/c has been
debited with the amount mentioned in the debit note.
14.
Contra entry:
Which accounting entry is recorded on both the debit and credit side of the cashbook is known as the contra
entry.
15.
Petty cash book:
Petty cash is maintained by business to record petty cash expenses of the
business, such as postage, cartage, stationery, etc.
16.Promisory note: It is an
instrument in writing containing an unconditional undertaking igned by the
maker, to pay certain sum of money only to or to the order of a certain person
or to the barer of the instrument.
17. Cheque: A bill of exchange drawn on a
specified banker and payable on demand.
18. Steale cheque: A stale cheque means not
valid of cheque that means more than six months the cheque is not valid.
20.
Bank reconciliation statement:
It is a statement reconciling the balance as shown by the bank passbook
and the balance as shown by the Cash Book. Obj: to know the difference &
pass necessary correcting, adjusting entries in the books.
21.
Matching concept:
Matching means requires proper matching of expense with the revenue.
22.
Capital income:
The term capital income means an income which does not grow out of or pertain to the running of the business
proper.
23.
Revenue income:
The income, which arises out of and in the course of the regular business
transactions of a concern.
24. Capital expenditure: It means an
expenditure which has been incurred for the purpose of obtaining a long term
advantage for the business.
25.
Revenue expenditure:
An expenditure that incurred in the course of regular business transactions of
a concern.
26.
Differed revenue expenditure: An expenditure, which is incurred
during an accounting period but is applicable further periods also. Eg: heavy
advertisement.
27.
Bad debts:
Bad debts denote the amount lost from debtors to whom the goods were sold on
credit.
28.
Depreciation:
depreciation denotes gradually and permanent decrease in the value of asset due
to wear and tear, technology changes, laps of time and accident.
29. Fictitious
assets: These
are assets not represented by tangible possession or property.
Examples of preliminary
expenses, discount on issue of shares, debit balance in the profit and loss account when shown on the
assets side in the balance sheet.
30.Intanglbe
Assets:
Intangible assets mean the assets which is not having the physical appearance.
And its have the real value, it shown on the assets side of the balance sheet.
31.
Accrued Income
: Accrued income means income which has
been earned by the business during the accounting year but which has not yet
been due and, therefore, has not been received.
32.
Out standing Income
: Outstanding Income means income which has become due during the accounting year but which has
not so far been received by the firm.
33.
Suspense account:
The suspense account is an account to which the difference in the trial balance has been put temporarily.
34.
Depletion:
It implies removal of an available but not replaceable source, Such as extracting coal from a coal mine.
35. Amortization: The process of writing of intangible assets
is term as amortization.
36.
Dilapidations:
The term dilapidations to damage done to a building or other property during
tenancy.
37. Capital employed: The term
capital employed means sum of total long term funds employed in the business.
i.e.
(share
capital+ reserves & surplus +long term loans –(non business assets +
fictitious assets)
38. Equity shares: those shares which are not
having pref. rights are called equity shares.
39. Pref.shares: Those shares which are carrying the
pref.rights is called pref. shares
Pref.rights in
respect of fixed dividend. Pref.right to repayment of capital in the even of
company
winding up.
40. Leverage: It is a force applied at a
particular work to get the desired
result.
41. Operating leverage: The
operating leverage takes place when a changes
in revenue greater changes in
EBIT.
42.
Financial leverage
: It is nothing but a process of using debt capital to increase the rate of
return on equity
43. Combine
leverage: it
is used to measure of the total risk of the firm = operating risk +
financial
risk.
44.
Joint venture:
A joint venture is an association of two or more the persons who combined for the execution of a
specific transaction and divide the profit or loss their of an agreed ratio.
45.
Partnership:
partnership is the relation b/w the persons who have agreed to share the profits of business carried on by all or
any of them acting for all.
46.
Factoring:
It is an arrangement under which a firm (called borrower) receives advances against its receivables, from a
financial institutions (called factor)
47.
Capital reserve:
The reserve which transferred from the capital gains is called capital reserve.
48.General
reserve:
the reserve which is transferred from normal profits of the firm is called general reserve
49.
Free Cash:
The cash not for any specific purpose free from any encumbrance like surplus cash.
50.
Minority Interest:
Minority interest refers to the equity of the minority shareholders in a subsidiary company.
51.
Capital receipts:
Capital receipts may be defined as “non-recurring receipts from the owner of
the business or lender of the money crating a liability to either of them.
52.
Revenue receipts:
Revenue receipts may defined as “A recurring receipts against sale of goods in the normal course of business and
which generally the result of the trading activities”.
53.
Meaning of Company:
A company is an association of many persons who contribute money or money’s
worth to common stock and employs it for a common purpose. The
common
stock so contributed is denoted in money and is the capital of the company.
54. Types of a
company:
1.Statutory companies
2.government company
3.foreign company
4.Registered companies:
a. Companies limited by shares
b.
Companies limited by guarantee
c. Unlimited companies
d.
private company
e public company
55. Private
company: A
private co. is which by its
AOA: Restricts the right of the
members to transfer of shares Limits the no. Of members 50. Prohibits any Invitation to the
public to subscribe for its shares or debentures.
56. Public
company: A
company, the articles of association of which does not contain the requisite
restrictions to make it a private limited company, is called a public company.
57.
Characteristics of a company:
Voluntary
association
Separate
legal entity
Free
transfer of shares
Limited
liability
Common
seal
Perpetual
existence.
58. Formation of
company:
A) Promotion
B )Incorporation
C) Commencement of business
59. Equity share
capital: The
total sum of equity shares is called equity share capital.
60.
Authorized share capital: It is the maximum amount of the share capital,
which a company can raise for the time being.
61.
Issued capital:
It is that part of the authorized capital, which has been allotted to the public for subscriptions.
62.
Subscribed capital:
It is the part of the issued capital, which has been allotted to the public
63.
Called up capital:
It has been portion of the subscribed capital which has been called up by the
company.
64.
Paid up capital:
It is the portion of the called up capital against which payment has been
received.
65.
Debentures:
Debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its
holder.
66. Cash profit: cash profit is the profit it
is occurred from the cash sales.
67.
Deemed public Ltd. Company: A private company is a subsidiary company to
public company it satisfies the following terms/conditions Sec 3(1)3:
1.Having minimum share capital 5 lakh’s
2.Accepting
investments from the public
3.No
restriction of the transferable of shares
4.No
restriction of no. of members.
5.Accepting
deposits from the investors
68.
Secret reserves:
secret reserves are reserves the existence of which does not appear on the face of balance sheet. In such a
situation, net assets position of the business is stronger than that disclosed
by the balance sheet. These reserves are crated by:
1.Excessive
dep.of an asset, excessive over-valuation of a liability.
2.Complete
elimination of an asset, or under valuation of an asset.
69.
Provision:
provision usually means any amount written off or retained by way of providing
depreciation, renewals or diminutions in the value of assets or retained by way
of providing for any known liability of which the amount can not be
determinedwith substantial accuracy.
70.
Reserve:
The provision in excess of the amount considered necessary for the purpose it
was originally made is also considered as reserve Provision is charge against
profits while reserves is an
appropriation of profits Creation of reserve increase proprietor’s fund while
creation of provisions decreases his funds in the business.
71.
Reserve fund:
The term reserve fund means such reserve against which clear investment etc…
72.
Undisclosed reserves:
Sometimes a reserve is created but its identity is merged with some other a/c
or group of accounts so that the existence of the reserve is not known such
reserve is called an undisclosed reserve.
73.
Finance management: Financial
management deals with procurement of funds and their effective utilization in business.
74.
Objectives of financial Mngt: Financial
management having two objectives that Is:
1. Profit maximization: The finance
manager has to make his decisions in a manner so that the profits of the concern are maximized.
2. Wealth maximization: Wealth maximization
means the objective of a firm should be to
maximize its value or wealth, or value of a firm is represented by the
market price of its common stock.
75. Functions of
financial manager:
a) Investment decision
b) Dividend decision
c) Finance decision
d) Cash management decisions
e) Performance evaluation
f) Market impact analysis
76. Time value of money: The time
value of money means that worth of a rupee received today is different from the worth of a rupee
to be received in future.
77.
Capital structure: It refers to the mix of sources from where the
long-term funds required in a business may be raised; in other words, it refers
to the proportion of debt, preference capital and equity capital.
78.
Optimum capital structure: Capital structure is optimum when the firm has a
combination of equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost
of capital. It is defined as the overall cost of capital computed by reference to the
proportion of each component of capital as weights.
80.
Financial break-even point: It denotes the level at which a firm’s EBIT is
just sufficient to cover interest and
preference dividend.
81.
Capital budgeting:
Capital budgeting involves the process of decision making with regard to
investment in fixed assets. Or decision making with regard to investment of
money in long-term projects.
82.
Pay back period: Period represents the time period required
for complete recovery of the initial investment in the project.
83.
ARR:
Accounting or average rate of return means the average annual yield on the
project.
84.
NPV: The net
present value of an investment proposal is defined as the sum of the present
values of all future cash in flows less the sum of the present values of all
cash out flows associated with the proposal.
85.
Profitability index:
Where different investment proposal each involving different initial
investments and cash inflows are to be compared.
86.
IRR:
Internal rate of return is the rate at which the sum total of discounted cash
inflows equals the discounted cash out flow.
87.
Treasury management: It means it is defined as the efficient
management of liquidity and financial risk in business.
88.
Concentration banking: It means identify locations or places where
customers are placed and open a local bank a/c in each of these locations and
open local collection canter.
89.
Marketable securities: surplus cash can be invested in short term
instruments in order to earn interest.
90.
Ageing schedule:
in a ageing schedule the receivables are classified according to their age.
91. Maximum permissible bank finance (MPBF): it is the
maximum amount that banks can lend a borrower towards his working capital
requirements.
92.
Commercial paper:
a cp is a short term promissory note issued by a company, negotiable by endorsement
and delivery, issued at a discount on face value as may be determined by the
issuing company.
93.
Bridge finance: It refers to the loans taken by the company
normally from a commercial banks for a short period pending disbursement of
loans sanctioned
by the financial
institutions.
94. Venture capital: It refers to the financing of high-risk
ventures promoted by new qualified entrepreneurs who require funds to give
shape to their ideas.
95. Debt securitization: It is a mode of financing, where in
securities are issued on the basis of a package of assets (called asset pool).
96.
Lease financing: Leasing is a contract where one party (owner)
purchases assets and permits its views by another party (lessee) over a
specified period
97.
Trade Credit:
It represents credit granted by suppliers of goods, in the normal course of
business.
98.
Over draft: Under this facility a fixed limit is granted
within which the borrower allowed to overdraw from his account.
99.
Cash credit: It is an arrangement under which a customer
is allowed an advance up to certain limit against credit granted by bank.
100.
Clean overdraft: It refers to an advance by way of overdraft
facility, but not back by any tangible security.
101.
Share capital:
The sum total of the nominal value of the shares of a company is called share
capital.
102. Funds flow statement: It is the statement deals with the financial
resources for running business activities.
It explains how the funds obtained and how they used.
103.Sources
of funds: There are two sources of funds Internal
sources and external sources.
Internal
source: Funds
from operations is the only internal sources of funds and some important points
add to it they do not result in the outflow of funds
(a)
Depreciation
on fixed assets
(b)
Preliminary expenses or goodwill written off, Loss on sale of fixed assets
Deduct the following items, as
they do not increase the funds:
Profit on sale of fixed assets,
profit on revaluation
Of fixed assets
External
sources: (a)
Funds from long-term loans (b) Sale of fixed assets
(c)
Funds from increase in share capital
104.
Application of funds:
(a) Purchase of fixed assets (b) Payment of dividend (c)Payment of tax
liability (d) Payment of fixed liability
105.
ICD (Inter corporate deposits): Companies can borrow funds for a short
period. For example 6 months or less from another company which have surplus
liquidity. Such eposits made by one
company in another company are called ICD.
106.
Certificate of deposits:
The CD is a document of title similar to a fixed deposit receipt issued by
banks there is no prescribed interest rate on such CDs it is based on the
prevailing market conditions.
107.
Public deposits: It is very important source of short term and
medium term finance. The company can
accept PD from members of the public and shareholders. It has the maturity period of 6 months to 3
years.
108.Euro
issues: The euro issues means that the issue is
listed on a European stock Exchange. The
subscription can come from any part of the world except India.
109.GDR
(Global depository receipts):
A depository receipt is basically a negotiable certificate , dominated
in us dollars that represents a non-US company publicly traded in local
currency equity shares.
110.
ADR (American depository receipts):
Depository receipt issued by a company in the USA are known as
ADRs. Such receipts are to be issued in
accordance with the provisions stipulated by the securities Exchange commission
(SEC) of USA like SEBI in India.
111.Commercial banks: Commercial banks extend foreign currency loans
for international operations, just
like rupee loans. The banks also
provided overdraft.
112.Development banks: It offers long-term and medium term loans
including foreign currency loans
113.International
agencies: International
agencies like the IFC,IBRD,ADB,IMF etc. provide indirect assistance for
obtaining foreign currency.
114.
Seed capital assistance: The seed capital assistance scheme is desired
by the IDBI for professionally or technically qualified entrepreneurs and
persons possessing relevant experience and skills and entrepreneur traits.
115.
Unsecured loans:It
constitutes a significant part of L/T finance available to an enterprise.
116.
Cash flow statement:
It is a statement depicting change in cash position from one period to another.
117.Sources of
cash: Internal
sources-
(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
( e) Creation of reserves External
sources-
(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets,
investments
118. Application
of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment
liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans
and deposits
119.
Budget: It is a detailed plan of operations for some
specific future period. It is an
estimate prepared in advance of the period to which it applies.
120.
Budgetary control: It is the system of management control and
accounting in which all operations are forecasted and so for as possible
planned ahead, and the actual results compared with the forecasted and planned
ones.
121. Cash budget: It is a summary statement of firm’s expected
cash inflow and outflow over a specified time period.
122.
Master budget: A summary of budget schedules in capsule form
made for the purpose of presenting in one report the highlights of the budget
forecast.
123.
Fixed budget: It is a budget, which is designed to remain
unchanged irrespective of the level of activity actually attained.
124.Zero-
base- budgeting: It is a management tool which provides a
systematic method for evaluating all operations and programmes, current of new
allows for budget reductions and expansions in a rational manner and allows
reallocation of source from low to high priority programs.
125. Goodwill: The present value of firm’s anticipated
excess earnings.
126.
BRS: It is a statement reconciling the balance as
shown by the bank pass book and balance shown by the cash book.
127.
Objective of BRS: The objective of preparing such a statement
is to know the causes of difference between the two balances and pass necessary
correcting or adjusting entries in the
books of the firm.
128.Responsibilities
of accounting: It is a system of control by delegating and
locating the
Responsibilities
for costs.
129.
Profit centre: A centre whose performance is measured in
terms of both the expense incurs and revenue it earns.
130.Cost
centre: A location, person or item of equipment for
which cost may be ascertained and used for the purpose of cost control.
131. Cost: The amount of expenditure
incurred on to a given thing.
132.
Cost accounting: It is thus concerned with recording,
classifying, and summarizing costs for determination of costs of products or
services planning, controlling and reducing such costs and furnishing of
information management for decision making.
133. Elements of
cost:
(A)
Material
(B)
Labour
(C)
Expenses
(D)
Overheads
134. Components
of total costs: (A) Prime cost (B) Factory cost (C)Total cost
of production (D) Total cost
135.
Prime cost: It consists of direct material direct labour
and direct expenses. It is also known as basic or first or flat cost.
136.
Factory cost: It comprises prime cost, in addition factory
overheads which include cost of indirect material indirect labour and indirect
expenses incurred in factory. This cost is also known as works cost or
production cost or manufacturing cost.
137.
Cost of production:
in office and administration overheads are added to factory cost, office cost
is arrived at.
138.
Total cost: Selling and distribution overheads are added
to total cost of production to get the total cost or cost of sales.
139.
Cost unit: A unit of quantity of a product, service or
time in relation to which costs may be
ascertained or expressed.
140.Methods
of costing: (A)Job costing (B)Contract costing (C)Process
costing (D)Operation costing (E)Operating costing (F)Unit costing (G)Batch
costing.
141.
Techniques of costing: (a) marginal costing (b) direct costing
(c)absorption costing (d) uniform costing.
142.
Standard costing:
Standard costing is a system under which the cost of the product is determined
in advance on certain predetermined standards.
143.
Marginal costing:
It is a technique of costing in which allocation of expenditure to production
is restricted to those expenses which arise as a result of production, i.e.,
materials, labour, direct expenses and variable overheads.
144.
Derivative:
Derivative is product whose value is derived from the value of one or more basic variables of underlying
asset.
145.
Forwards:
A forward contract is customized contracts between two entities were settlement
takes place on a specific date in the future at today’s pre agreed price.
146.
Futures:
A future contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Future contracts are standardized exchange
traded contracts.
147.
Options:
An option gives the holder of the option the right to do some thing. The option
holder option may exercise or not.
148.
Call option: A
call option gives the holder the right but not the obligation to buy an asset
by a certain date for a certain price.
149.
Put option: A
put option gives the holder the right but not obligation to sell an asset by a
certain date for a certain price.
150.
Option price:
Option price is the price which the option buyer pays to the option seller. It
is also referred to as the option premium.
151.
Expiration date:
The date which is specified in the option contract is called expiration date.
152.
European option:
Tt is the option at exercised only on expiration date it self.
153.
Basis: Basis
means future price minus spot price.
154.
Cost of carry:
The relation between future prices and spot prices can be summarized in terms
of what is known as cost of carry.
155.
Initial margin:
The amount that must be deposited in the margin a/c at the time of first
entered into future contract is known as initial margin.
156
Maintenance margin:
This is some what lower than initial margin.
157.
Mark to market:
In future market, at the end of the each trading day, the margin a/c is
adjusted to reflect the investors’ gains or loss depending upon the futures
selling price. This is called mark to market.
158.
Baskets : Basket
options are options on portfolio of underlying asset.
159.
Swaps: Swaps
are private agreements between two parties to exchange cash flows in the future
according to a pre agreed formula.
160.
Impact cost: Impact
cost is cost it is measure of liquidity of the market. It reflects the costs
faced when actually trading in index.
161.
Hedging: Hedging
means minimize the risk.
162.
Capital market:
Capital market is the market it deals with the long term investment funds. It
consists of two markets 1.primary market 2.secondary market.
163.
Primary market:
those companies which are issuing new shares in this market. It is also called
new issue market.
164.
Secondary market:
secondary market is the market where shares buying and selling. In India
secondary market is called stock exchange.
165.
Arbitrage: it
means purchase and sale of securities in different markets in order to profit
from price
discrepancies. In other words arbitrage is a way of reducing risk of loss
caused by price fluctuations of securities held in a portfolio.
166.
Meaning of ratio:
Ratios are relationships expressed in mathematical terms between figures which
are connected with each other in same manner.
167.
Activity ratio:
it is a measure of the level of activity attained over a period.
168.
mutual fund :
a mutual fund is a pool of money, collected from investors, and is invested
according to certain investment objectives.
169.
characteristics of mutual fund : Ownership of the MF is in the hands of the of
the
investors MF
managed by investment professionals The value of portfolio is updated every day
170.Advantage
of MF to investors
: Portfolio diversification Professional management Reduction in risk Reduction of transaction casts Liquidity
Convenience and flexibility
171.net
asset value :
The value of one unit of investment is called as the Net Asset Value
172.open-ended
fund : Open
ended funds means investors can buy and sell units of fund, at NAV related
prices at any time, directly from the
fund this is called open ended fund. For ex; unit 64
173.close
ended funds :
Close ended funds means it is open for sale to investors for a specific period,
after which further sales are closed. Any further transaction for buying the
units or repurchasing them, happen, in the secondary markets.
174.
Dividend option
: Investors who choose a dividend on their investments, will receive dividends
from the MF, as when such dividends are declared.
175.Growth
option : Investors
who do not require periodic income distributions can be choose the growth
option.
176.Equity
funds : Equity
funds are those that invest pre-dominantly in equity shares of company.
177.Types
of equity funds
: Simple equity funds Primary market
funds Sectoral funds Index funds
178.
Sectoral funds : Sectoral funds choose to
invest in one or more chosen sectors of the equity markets.
179.Index
funds :The
fund manager takes a view on companies that are expected to perform well, and
invests in these companies
180.Debt
funds : The
debt funds are those that are pre-dominantly invest in debt securities.
181.Liquid
funds : The
debt funds invest only in instruments with maturities less than one year.
182.
gilt funds : Gilt
funds invests only in securities that are issued by the GOVT. and therefore
does not carry
any credit risk.
183.balanced
funds :Funds
that invest both in debt and equity markets are called balanced funds.
184.
sponsor : Sponsor
is the promoter of the MF and appoints trustees, custodians and the AMC with prior approval of SEBI .
185.
trustee : Trustee
is responsible to the investors in the MF and appoint the AMC
for managing the investment portfolio.
186.
AMC : The AMC
describes Asset Management Company, it is the business face of the MF, as it manages all the affairs of the MF.
187.
R & T Agents
: The R&T agents are responsible for the investor servicing functions, as
they maintain the records of investors in MF.
188.
Custodians : Custodians
are responsible for the securities held in the mutual fund’s portfolio.
189.
Scheme take over
: If an existing MF scheme is taken over by the another AMC, it is called as
scheme take over.
190.Meaning
of load: Load
is the factor that is applied to the NAV of a scheme to arrive at the price.
192.
Market capitalization
: Market capitalization means number of shares issued multiplied with market
price per share.
193.Price
earning ratio
: The ratio between the share price and the post tax earnings of company is
called as price earning ratio.
194.
Dividend yield
: The dividend paid out by the company, is usually a percentage of the face value of a share.
195.
Darket risk :
It refers to the risk which the investor is exposed to as a result of adverse
movements in the
interest rates. It also referred to as the interest rate risk.
196.
Re-investment risk
: It the risk which an investor has to face as a result of a fall in the
interest rates at
the time of reinvesting the interest income flows from the fixed income
security.
197.
Call risk : Call
risk is associated with bonds have an embedded call option in them. This option
hives the issuer the right to call back the bonds prior to maturity.
198.
Credit risk :
Credit risk refers to the probability that a borrower could default on a
commitment to
repay debt or band loans
199.Inflation
risk :Inflation
risk reflects the changes in the purchasing power of the cash flows
resulting from the fixed income
security.
200
Liquid risk :
It is also called market risk, it refers to the ease with which bonds could be
traded in the market.
201.Drawings : Drawings denotes the money
withdrawn by the proprietor from the business for his personal use.
202.Outstanding
Income :
Outstanding Income means income which has become due during the accounting year
but which has not so far been received by the firm.
203.Outstanding
Expenses :
Outstanding Expenses refer to those expenses which have become due during the
accounting period for which the Final Accounts have been prepared but have not
yet been paid.
204.Closing
stock : The
term closing stock means goods lying unsold with the businessman at the end of
the accounting year.
205.
Methods of depreciation
:
1.Unirorm charge methods :
a. Fixed installment
method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods :
a. Diminishing balance
method
b.Sum of years digits
method
c. Double declining
method
3. Other methods :
a. Group depreciation
method
b. Inventory system of
depreciation
c. Annuity method
d. Depreciation fund
method
206.Accrued
Income :
Accrued Income means income which has been earned by the business during the
accounting year but which has not yet become due and, therefore, has not been received.
207.Gross
profit ratio :
It indicates the efficiency of the production/trading operations.
Formula : Gross
profit
-------------------X100
Net sales
208.Net
profit ratio
: it indicates net margin on sales
Formula: Net profit
--------------- X 100
Net sales
209.
Return on share holders funds
: It indicates measures earning power of equity capital.
Formula :
profits available for Equity shareholders
--------------------------------------------------- X 100
Average Equity
Shareholders Funds
210.
Earning per Equity share (EPS):
It shows the amount of earnings attributable to each equity share.
Formula : profits
available for Equity shareholders
---------------------------------------------------
Number of Equity shares
211.Dividend
yield ratio :
It shows the rate of return to shareholders in the form of dividends based in
the market price of the share
Formula
: Dividend per share
-------------------------- X 100
Market price per share
212.
Price earning ratio
: It a measure for determining the value
of a share. May also be used to
measure the rate of return
expected by investors.
Formula : Market price of share(MPS)
---- -----------------------------------
X 100
Earning per
share (EPS)
213.Current
ratio : It
measures short-term debt paying ability.
Formula : Current Assets
------------------------
Current Liabilities
214.
Debt-Equity Ratio
: It indicates the percentage of funds being financed through borrowings;
a measure of the extent of trading on
equity.
Formula : Total Long-term Debt
---------------------------
Shareholders
funds
215.Fixed
Assets ratio :
This ratio explains whether the firm has raised adepuate long-term funds to
meet its fixed assets requirements.
Formula : Fixed Assets
-------------------
Long-term
Funds
216
. Quick Ratio
: The ratio termed as ‘ liquidity ratio’. The ratio is ascertained y comparing
the
liquid assets to
current liabilities.
Formula : Liquid Assets
------------------------
Current Liabilities
217.
Stock turnover Ratio
: The ratio indicates whether investment in inventory in efficiently used or
not. It, therefore explains whether investment in inventory within proper
limits or not.
Formula:
cost of goods
sold
------------------------
Average
stock
218.
Debtors Turnover Ratio
: The ratio the better it is, since it would indicate that debts are being
collected more promptly. The
ration helps in cash budgeting since the flow of cash from customers can be worked out on the basis
of sales.
Formula: Credit sales
-----------------------------------
Average Accounts
Receivable
219.Creditors
Turnover Ratio
: It indicates the speed with which the payments for credit purchases are made
to the creditors.
Formula: Credit Purchases
-----------------------
Average
Accounts Payable
220.
Working capital turnover ratio
: It is also known as Working Capital Leverage Ratio. This ratio
Indicates whether
or not working capital has been effectively utilized in making sales.
Formula: Net
Sales
------------------------
Working
Capital
221.Fixed Assets
Turnover ratio
: This ratio indicates the extent to which the investments in fixed assets
contributes towards sales.
Formula: Net Sales
---------------------
Fixed
Assets
222 .Pay-out
Ratio : This
ratio indicates what proportion of earning per share has been used for
paying dividend.
Formula: Dividend per Equity Share
--------------------------------------
X 100
Earning per Equity
share
223.Overall
Profitability Ratio
: It is also called as “ Return on Investment” (ROI) or Return on Capital
Employed (ROCE) . It indicates the
percentage of return on the total capital employed in the business.
Formula :
Operating profit
----------------------- X 100
Capital employed
The term capital
employed has been given different meanings
a) Sum total of all assets whether fixed or
current
b) Sum total of fixed assets,
c) Sum total of long-term funds employed in
the business, i.e., share capital +reserves &surplus +long term loans –(non
business assets + fictitious assets).
Operating profit means ‘profit before
interest and tax’
224 . Fixed
Interest Cover ratio
: The ratio is very important from the lender’s point of view. It indicates whether the business would earn
sufficient profits to pay periodically the interest charges.
Formula : Income
before interest and Tax
-
--------------------------------------
Interest
Charges
225.
Fixed Dividend Cover ratio
: This ratio is important for preference
shareholders entitled to get dividend
at a fixed rate in priority to other shareholders.
Formula : Net Profit after Interest
and Tax
------------------------------------------
Preference
Dividend
226.
Debt Service Coverage ratio
: This ratio is explained ability of a company to make payment of principal
amounts also on time.
Formula : Net profit before interest and tax
-
-------------------------------------------------- 1-Tax rate
Interest + Principal payment
installment
227.
Proprietary ratio :
It is a variant of debt-equity ratio . It establishes relationship between the
proprietor’s funds and the total tangible assets.
Formula : Shareholders funds
----------------------------
Total tangible
assets
228.Difference
between joint venture and partner ship
: In joint venture the business is carried on without using a firm name, In the
partnership, the business is carried on
under a firm name.
In the joint venture, the
business transactions are recorded under cash system In the partnership, the
business transactions are recorded under mercantile system. In the joint
venture, profit and loss is ascertained on completion of the venture In the partner
ship , profit and loss is ascertained at the end of each year. In the joint
venture, it is confined to a particular operation and it is temporary. In the
partnership, it is confined to a particular operation and it is permanent.
229.Meaning
of Working capital
: The funds available for conducting day to day operations of an enterprise.
Also represented by the excess of
current assets over current liabilities.
230.Concepts
of accounting
:
1.Business entity concepts :- According to this concept,
the business is treated as a separate entity distinct from its owners and
others.
2.Going concern concept :- According to this concept, it is assumed that
a business has a reasonable expectation of continuing business at a profit for
an indefinite period of time.
3.Money measurement concept :- This concept says that the
accounting records only those transactions which can be expressed in terms of
money only.
4.Cost
concept :- According to this
concept, an asset is recorded in the books at the price paid to acquire it and
that this cost is the basis for all subsequent accounting for the asset.
5.Dual
aspect concept :- In every transaction, there will be two aspects – the
receiving aspect and the giving aspect; both are recorded by debiting one
accounts and crediting another account. This is called double entry.
6.Accounting period concept :- It means the final accounts
must be prepared on a periodic basis.
Normally
accounting period adopted is one year, more than this period reduces the
utility of accounting data.
7.Realization concept :- According to this concepts, revenue is
considered as being earned on the data which it is realized, i.e., the date
when the property in goods passes the buyer and he become legally liable to pay.
8.Materiality
concepts :- It is a one of the
accounting principle, as per only important information will be taken, and un
important information will be ignored in the preparation of the financial
statement.
9.Matching concepts :- The cost or expenses of a business of a
particular period are compared with the revenue of the period in order to
ascertain the net profit and loss.
10.Accrual concept :- The profit arises only when there is an
increase in owners capital, which is a result of excess of revenue over
expenses and loss.
231.
Financial analysis
: The process of interpreting the past, present, and future financial condition
of a company.
232.
Income statement
: An accounting statement which shows the level of revenues, expenses and
profit occurring for a given accounting period.
233.Annual
report : The
report issued annually by a company, to its share holders. it containing
financial statement like, trading and profit & lose account and balance
sheet.
234.
Bankrupt : A
statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration
235
. Lease : Lease is a contract between to parties under
the contract, the owner of the asset gives the right to use the asset to the
user over an agreed period of the time for a consideration
236.Opportunity
cost : The
cost associated with not doing something.
237.
Budgeting :
The term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and
control of business enterprise.
238.Capital : The
term capital refers to the total investment of company in money, tangible and
intangible
assets. It is the total wealth of a company.
239.Capitalization : It is the sum of the par
value of stocks and bonds out standings.
240.
Over capitalization
: When a business is unable to earn fair rate on its outstanding securities.
241.
Under capitalization
: When a business is able to earn fair rate or over rate on it is outstanding
securities.
242.
Capital gearing
: The term capital gearing refers to the relationship between equity and long
term debt.
243.Cost
of capital :
It means the minimum rate of return expected by its investment.
244.Cash
dividend : The
payment of dividend in cash
245.Define
the term accrual
: Recognition of revenues and costs as they are earned or incurred . it
includes recognition of transaction relating to assets and liabilities as they
occur irrespective of the actual receipts or payments.
245.
accrued expenses
: An expense which has been incurred in an accounting period but for which no
enforceable claim has become due in what period against the enterprises.
246.Accrued
revenue :
Revenue which has been earned is an earned is an accounting period but in
respect of which no enforceable claim has become due to in that period by the
enterprise.
247.Accrued
liability : A
developing but not yet enforceable claim by an another person which
accumulates with
the passage of time or the receipt of service or otherwise. it may rise from
the purchase of services which at the date of accounting have been only partly
performed and are not yet billable.
248.Convention
of Full disclosure
: According to this convention, all accounting statements should be honestly
prepared and to that end full disclosure of all significant information will be
made.
249.Convention
of consistency
: According to this convention it is essential that accounting practices and
methods remain unchanged from one year to another.
250.Define
the term preliminary expenses
: Expenditure relating to the formation of an enterprise. There include legal
accounting and share issue expenses incurred for formation of the enterprise.
251.Meaning
of Charge :
charge means it is a obligation to secure an indebt ness. It may be fixed
charge and
floating charge.
252.Appropriation : It is application of profit
towards Reserves and Dividends.
253.Absorption
costing : A
method where by the cost is determine so as to include the appropriate share of
both variable and fixed costs.
254.Marginal
Cost :
Marginal cost is the additional cost to produce an additional unit of a
product. It is also called variable cost.
255.
What are the ex-ordinary items in the P&L a/c : The transaction which are
not related to the business is termed as ex-ordinary transactions or
ex-ordinary items. Egg:- profit or losses on the sale of fixed assets, interest
received from other company investments, profit or loss on foreign exchange,
unexpected dividend received.
256
. Share premium
: The excess of issue of price of shares over their face value. It will be showed with the allotment entry in the
journal, it will be adjusted in the balance sheet on the liabilities side under
the head of “reserves & surplus”.
257.Accumulated
Depreciation :
The total to date of the periodic depreciation charges on depreciable assets.
258.Investment : Expenditure on assets held
to earn interest, income, profit or other benefits.
259.Capital : Generally refers to the
amount invested in an enterprise by its owner. Ex; paid up share capital in
corporate enterprise.
260.
Capital Work In Progress
: Expenditure on capital assets which are in the process of construction as
completion.
261.
Convertible Debenture
: A debenture which gives the holder a right to conversion wholly or partly in
shares in accordance with term of issues.
262.Redeemable
Preference Share
: The preference share that is repayable either after a fixed (or) determinable
period (or) at any time dividend by the management.
263.
Cumulative preference shares
: A class of preference shares entitled to payment of umulates
dividends.
Preference shares are always deemed to be cumulative unless they are expressly
made non-cumulative preference shares.
264.Debenture
redemption reserve
: A reserve created for the redemption of debentures at a future date.
265.
Cumulative dividend
: A dividend payable as cumulative preference shares which it unpaid cumulates
as a claim against the earnings of a corporate before any distribution is made
to the other shareholders.
266.
Dividend Equalization reserve
: A reserve created to maintain the rate of dividend in future years.
267.
Opening Stock
: The term ‘opening stock’ means goods lying unsold with the businessman in the
beginning of the accounting year. This is shown on the debit side of the
trading account.
268.Closing
Stock : The
term ‘Closing Stock’ includes goods lying unsold with the businessman at the
end of the accounting year. The amount of closing stock is shown on the credit
side of the trading account and as an asset in the balance sheet.
269.Valuation
of closing stock
: The closing stock is valued on the basis of “Cost or Market price whichever
is less” principle.
272.
Contingency :
A condition (or) situation the ultimate out come of which gain or loss will be
known as determined only as the occurrence or non occurrence of one or more
uncertain future events.
273.Contingent
Asset : An
asset the existence ownership or value of which may be known or determined only
on the occurrence or non occurrence of one more uncertain future events.
274.
Contingent liability
: An obligation to an existing condition or situation which may arise in
future depending
on the occurrence of one or more uncertain future events.
275.
Deficiency :
the excess of liabilities over assets of an enterprise at a given date is
called
deficiency.
276.Deficit : The debit balance in the
profit and loss a/c is called deficit.
277.Surplus : Credit balance in the profit
& loss statement after providing for proposed appropriation & dividend
, reserves.
278.Appropriation
Assets : An
account sometimes included as a separate section of the profit and loss
statement showing application of profits towards dividends, reserves.
279.
Capital redemption reserve
: A reserve created on redemption of the average cost:- the cost of an item at
a point of time as determined by applying an average of the cost of all items
of the same nature over a period. When weights are also applied in the
computation it is termed as weight average cost.
280.Floating
Change :
Assume change on some or all assets of an enterprise which are not attached to
specific assets and are given as security against debt.
281.Difference
between Funds flow and Cash flow statement : A Cash flow statement is concerned only with
the change in cash position while a funds flow analysis is concerned with
change in working capital position between two balance sheet dates.
A cash flow
statement is merely a record of cash receipts and disbursements. While studying
the short-term solvency of a business one is interested not only in cash
balance but also in the assets which are easily convertible into cash.
282.
Difference Between the Funds flow and Income statement :
A funds flow
statement deals with the financial resource required for running the business
activities. It explains how were the funds obtained and how were they used,
Whereas an income
statement
discloses the results of the business activities, i.e., how much has been earned and how it
has been spent.
A funds flow
statement matches the “funds raised” and “funds applied” during a particular
period. The source and application of funds may be of capital as well as of
revenue nature. An income statement matches the incomes of a period with the
expenditure of that period, which are both of a revenue nature.
1)
American Depository Receipt – ADR: A
negotiable certificate issued by a U.S. bank representing a specified number of
shares (or one share) in a foreign stock that is traded on a U.S. exchange.
ADRs are denominated in U.S. dollars, with the underlying security held by a
U.S. financial institution overseas, and help to reduce administration and duty
costs on each transaction that would otherwise be levied.
2)
Global Depository Receipt – GDR: 1. A bank certificate issued in more than one
country for shares in a foreign company. The shares are held by a foreign
branch of an international bank. The shares trade as domestic shares, but are
offered for sale globally through the various bank branches.
3) Working
Capital Cycle: The Cycle of working capital rotates from
cash, raw materials, overheads, work-in-progress, debtors and ends with again
cash.
4) Negative
effects of working capital: The total current liabilities are in excess
of total current assets gives the negative effect of working capital.
5) Depreciation: It is a measure of wearing out, consumption
or other loss of value of a depreciable assets arising from its usage or
passage of time.
6) Depletion : It is a method of providing
depreciation on wasting assets like mineral ores e.t.c.
7) Amortization: It is a method to witting off of the asset
over a period of time similar to depreciation. This method is generally used
for Intangible assets.
8) Profit &
Loss (appropriation) account
: The provisions contained in part II of schedule VI of the companies act
require that the appropriation made out of profit like proposed dividend,
transfer to and from reserves and other appropriations should be disclosed in
profit & loss (appropriation) a/c.
9)NPV: Net
Present Value:
The difference between the present value of cash inflows and the present value
of cash outflows. NPV is used in capital budgeting to analyze the profitability
of an investment or project
10) Internal Rate
of Return: It is the rate at which the sum totals of
cash inflows after discounting equals to the discounted cash outflows. The IRR
of a project is the discount rate which makes net present value of the project
equal to zero.
11) Treatment of
dividends in cash flow statements: When we pay dividend for the investments made
by the outsiders, it is called as financing activity and taken into
consideration of cash flow from financing activity where as the receipt of
dividend in respect of investment that we made considered in cash flow from
investing activity.
12) Treatment of
interest in cash flow statements: When we pay interest on the borrowed amount,
it is called as financing activity and taken into consideration of cash flow
from financing activity where as the receipt of interest in respect of advances
that we made considered in cash flow from investing activity.
13)Profit &
loss account Vs Cash flow statement: P & L a/c is a period end account which
gives the details of revenue earned with that of the expenses charged shows the
net profit or loss for the period.
Cash
flow statement is as on date statement which gives the details of flow of cash
through receipts and expenses irrespective of revenues and expenditure.
14) Operating
income Vs Net income: Income generated from the regular operating
activities of the business is called operating income.
Income
that is left after taking into consideration of operating income, expenses,
non-operating income and non-operating expenses and income taxes is called net
income.
15) Gross working
capital Vs Net working capital: The total of investments in all current
assets is known as gross working capital.
Excess
of total current assets over total current liabilities is called net working
capital.
16) Prospectus : It is defined as a public document described
or issued as a prospectus and includes any notice, circular, advertisement or
other document, inviting the public to subscribe or purchase of any shares or
debentures of a body corporate.
17) Interim
dividend Vs Final dividend: Dividend which is paid in the middle of the
fiscal year or before the due date in accordance with the provisions of the
companies act is called as Interim dividend.
Dividend
paid as on due date as per the provisions of the companies act is called final
dividend. If the interim dividend is paid then the final dividend will be paid
after excluding the interim dividend.
18)Net worth.: The total of share holders
funds and reserves and surplus after deducting fictitious assets is called as
net worth.
19)
Capitalization of reserves: The process of conversion of accumulated
profits and reserves into equity shares is called as capitalization of
reserves. This is used while issue of bonus shares.
20) P/E Ratio: It is the relationship between
the contribution and sales values. It is expressed as a percentage.
Contribution/sales
* 100 = (Sales-Variable costs)/Sales * 100.
21) Premium on
shares: When
the shares are issued at a value more than the nominal value then it is called
shares issued at premium.
22) Discount on
shares: When
the shares are issued at less than the nominal value then it is called shares
issued at discount.
23) Bull
market/Bear market:
When stock prices are rising for an extended period, it is called bull market
which is an opposite to that of bear market.
24) Retained
Earnings:
Which is nothing but the balance carried forward in the profit and loss account
to the next year shown under reserves and surplus.
OR
The
percentage of net earnings not paid out as dividends, but retained by the
company to be reinvested in its core business or to pay debt. It is recorded
under reserves and surplus on the balance sheet.
25) Fixed
asset/Financial Asset:
The property of the company which aids the production includes machinery, land,
equipment and others.
The
assets of the company which earns the revenue to the company in terms of
interest or dividend is called financial asset.
26) Sunk costs: Historical costs incurred in
the past are known as sunk costs.
27) SEBI Vs
SEC: SEBI: It is called as the stock
exchange board of India which is regulatory authority in India established
under the act to safeguard the interests of the shareholders.
SEC:
It is called as the Securities exchange and commission act which is a
regulatory authority in USA established under the act similar to that of SEBI
in India.
28) Intangible
Assets Vs Fictious Assets
Intangible Assets: These are the assets which
are useful for the appreciation of the business and helps for the growth of the
business but they are not tangible. Exp: Good will, patents, trademarks e.t.c.
Fictitious
Assets: These are the debit balances of expenditure which are treated assets to
be written off over a period of time like preliminary expenditure written off,
miscellaneous expenditure written off e.t.c.
29) Gross Profit
Vs Net Profit:
The surplus balances in the trading account which is carried forward to the
P&L a/c is called as the Gross profit which is arrived from trading or
production activities.
The
surplus balance in the P&L account which is reflected in the balance sheet
is called as Net profit arrived after taking into account of operating and
non-operating revenues, operating and non-operating expenses.
30) Equity Vs
Preferred:
Equity holders are those who are the real owners of the company and are
entitled to ownership rights, preferred holders are those who are entitled to
preferential rights upon the equity holders in terms of dividends and the
distribution of assets at the time of liquidation.
31) Preliminary
Expenditure:
Expenditure incurred before the incorporation of the company is called as
preliminary expenses.
32) Cash flow: It is a statement which gives
the details about the cash generated from various activities like operating,
investing and financing and the cash expended on such activities during the
period
33) Minority
interest:
**Paid up equity capital held by outsider plus share of reserves and surplus on
the date of balance sheet
A
significant but non-controlling ownership of less than 50% of a company's
voting shares by either an investor or another company
34)
Private vs. public:
Private ltd is registered company which is limited by shares and limited by its
no. of members and prohibits to publish the prospectus
Public
is a registered company which is opposite to that as private company
35)
Goodwill: It is treated to be intangible
assets which is purchased for the appreciation as the business that is acquired
and it is amortized over a period of time
36)
GAAP: These
are generally accepted accounting principles called as accounting standards
which are to be followed while prepares the financial statements like profit
and loss a\c and balance sheet
37)
Market capitalization:
It is total value as all the outstanding shares with that as the current market
price as the share
38)
Annual report: It is the report which is to be field with
the register and companies details the financial results as the company for the
year and the preceding year, the report consists as company’s projects and
other year end statistics
38)
IPO: When a company initial listing with the stock
exchanges board of India. Then it is called as Initial public offering.
39)
SM\AGM\EGM: SM: Every company limited by
share and every company limited by guarantee and having a share capital shall
with in a period of not less that one month or more than six months from the
date of which the company is entitled to commence business , hold a general
meeting of the members of the company. This is called as Statuatory meeting.
AGM:
Every company shall in each year hold in addition to any other meeting a
general meeting as its annual general meeting and shall specify the meeting as
such in the notice calling it.
EGM:
any meeting other than the two above is called E.G.M. It is conducted for
special and urgent business.
40)
QUORUM: The minimum no of members who must be present
in order to constitute a valid meeting and transact business there off.
5
members in the case of a public company.
2
in the case of public company.
Subsidiary
Company: It is a registered company whose maximum
share is held by holding company.
Prepaid
Vs O/s Exp: Any expenditure which is paid in advance is
called as prepaid expense. It is treated as an asset and deducted from the
current expenditure.
Any
Expenditure which is payable shall be treated as o/s expenses and it is treated
as current liability in the balance sheet.
Operating
Vs Non-Operating:
Operating Exp are those which are incurred in the regular course of business
for generating revenues.
Non-Operating
Exp are one time Expenditure which are expended not for regular course of
business.
NAV-Net
Assets Value: The value of assets applicable to one unit.
This is calculated as total assets minus all prior charges and divided by the
number of the total outstanding units.
AOA
Vs MOA: MOA is
the most important document which is called as charter of the company and
regulates the external affairs of the company.
AOA
specifies the rules regulations and bye-laws for the internal management of the
affairs of the company.
Minority
Interest: The
portion of net assets of subsidiary onthe date of consolidation not controlled
by the parent itself or through its subsidiary.
Paid
up share capital held by the outsider (outside group) + share of reserves.
A
significant but non-controlling ownership of less than 50% of a company's
voting shares by either an investor or another company
Capital
Employed: It
is defined as the amount which is invested in the business to generate
production and revenue with the aid of such capital employed capital. It is calculated
as
Share
capital + Reserves & Surplus + Debenture & long term debt – fictituous
assets
Or
Fixed
Assets + intangible assets + Net working capital.
Deferred
tax asset/ liability: Difference between the tax expense which is
calculated on accrual basis and current tax liability to be paid for particular
period as per income tax act is called deferred tax asset/liability.
Call
Option:
A contract giving the holders a right to buy an underlying security at a
specified price with in a specified time period.
Diversification: An investment strategy to
reduce risks by investing in securities, common stock, debenture or bonds of
several companies.
Share
Warrant: A
Share warrant is a bearer document issued only by a public company to the holder on the approval of central
govt. it is negotiable without any instrument of transfer.
Rights
issue: Where a
company proceeds to issue any further shares after the expiry of
Two
years from the date of incorporation of the company
One
year after the first allotment of shares. Which ever is earlier.
Such
an allotment should be made to the shareholders of the company in proportion to
the capital paid.
Reserves
Vs Provisions:
Reserves are amounts appropriated out of profit which are not intended to meet
any liability contingency, commitement or diminuition in the value of assets
known to exit at the date of balance sheet.Amounts calculated or transferred
form profits to make food the diminuition in asset values due to the fact that
that some of them have been lost or destroyed as a result of some natural
calamities or debts have proved to be irrecoverable are also described as
provisions.
Revenue
Reserves:
Represents profits that are available for distribution to shareholders held for
the time being or any on or more purpose.
Capital
Reserve: A
capital reserve represents surplus of profit earned in respect of certain types
of transactions like sale of fixed assets at a price in excess of cost
realization of profits on issue of forfeited shares or balances. It generally
used for writing down fictituous assets or losses for issuing bonus shares.
Capital
redemption reserve: When there is redemption of redeemable
preference shares out of accumulated profit. It will be necessary to transfer
to the CRR account an amount equal to the amount repaid on the redemption of
preference shares on a/c of face value less proceeds of a fresh issue of
capital made for the purpose of redemption.
NPL
Vs NPA: An asset shall be treated as non performing
when income on it is not received for certain period.
A
loan amount is said to be non performing when the interest and the principle
amount is not received for certain period.
Share
is one of a finite number of equal portions in the capital of a company,
entitling the owner to a proportion of distributed, non-reinvested profits
known as dividends and to a portion of the value of the company in case of
liquidation
Bank
reconciliation allows companies or individuals to compare their account records
to the bank's records of their account balance in order to uncover any possible
discrepancies
Retained
earnings refer to the portion of net income which is retained by the
corporation rather than distributed to its owners. Similarly, if the corporation
makes a loss, then that loss is retained. Retained earnings are cumulative from
year to year.
American
Depositary Receipt (or ADR) represents ownership in the shares of a foreign
company trading on US financial markets
ROCE It basically can be used to
show how much a business is gaining for its assets, or how much it is losing
for its liabilities
Finance
means the study of different ways in which individuals, businesses and
organizations raise and allocate monetary resources and use the same for
business purposes keeping the risks involved in mind
Accounts Related
Questions:
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1)
What are the models of valuation of the company?
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2)
Explain about APP in SAP fico module?
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3) WHAT IS SECONDARY TRACKING FLEX
FIELD QUALIFIER AND HOW IT IS USED?
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4) WHAT IS SECONDARY TRACKING FLEX
FIELD QUALIFIER AND HOW IT IS USED?
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5) WHAT IS SECONDARY TRACKING FLEX
FIELD QUALIFIER AND HOW IT IS USED?
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6)
What is exact difference b/w Accounts
and finance?
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7)
IPO?
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8)
What is net worth?
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9)
What is quick asset?
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10)
What are different types of invoice?
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11)
How to joine accountancy?
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12
What do you mean by Investment
Banking?
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13)
What is General Ledger
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14)
What is business entity concept?
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15)
How to prepare Profit and los
accounts?
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Futures
contract :
It’s a standardized contract traded on a futures exchange, to buy or sell a
certain underlying instrument at a certain date in the future, at a specified
price. The future date is called the delivery
date or final settlement date
Options: are financial instruments
that convey the right, but not the obligation, to engage in a future
transaction on some underlying security.
The
primary Market
: It is that
part of the capital markets that deals with the issuance of new securities.
The
secondary market: is the financial market for
trading of securities that have already been issued in an initial private or
public offering.
Stock
exchange, share market or bourse is a corporation or mutual
organization which provides facilities for stock brokers and traders, to trade
company stocks and other securities. Stock exchanges also provide facilities
for the issue and redemption of securities as well as other financial
instruments and capital events including the payment of income and dividends
Stock split increases the number of shares in a
public company. The price of adjusted such that the before and after market
capitalization of the company remains the same and dilution does not occur.
Options and warrants are included. Also known as a Stock Divide.
Initial Public Offering (IPO): Its is the first sale of
stock by a private company to the public. IPO’s are often issued by smaller,
younger companies seeking capital to expand, but can also be done by large
privately-owned companies looking to become publicly traded
The
BSE Sensex or Bombay Stock Exchange Sensitive Index
is a value-weighted index composed of 30 stocks with the base April 1979 = 100.
It consists of the 30 largest and most actively traded stocks, representative
of various sectors, on the Bombay Stock Exchange
Portfolio
management :Involves
deciding what assets to include in the portfolio, given the goals of the
portfolio owner and changing economic conditions. Selection involves deciding
what assets to purchase, how many to purchase, when to purchase them, and what
assets to divest. These decisions always involve some sort of performance
measurement, most typically expected return on the portfolio, and the risk
associated with this return (i.e. the standard deviation of the return).
Typically the expected return from portfolios comprised of different asset
bundles are compared.
Income
Statement, also called a Profit and Loss Statement (P&L), is a financial statement for
companies that indicates how Revenue
(money received from the sale of products and services before expenses are
taken out, also known as the "top line") is transformed into net income (the result after all
revenues and expenses have been accounted for, also known as the "bottom
line"). The purpose of the income statement is to show managers and
investors whether the company made or lost money during the period being
reported.
Capital budgeting (or investment appraisal) is the planning process used
to determine a firm's long term investments
such as new machinery, replacement machinery, new plants, new products, and
research and development projects
Global Depository Receipt or (GDR) is a certificate issued by a
depository
bank, which purchases shares of foreign companies and deposits it on the account.
Zero-based processing one can forget
about last year, pretend that the program is brand-new, and see if one can
provide a detail of expenses for what one would need to fully accomplish the
program
Accounting
on the other hand is the measurement, disclosure or provision of assurance
about financial information that helps managers, investors, tax authorities and
other decision makers make resource allocation decisions. Financial accounting
is one branch of accounting and historically has involved processes by which
financial information about a business is recorded, classified, summarized,
interpreted, and communicated. There are different categories in which
accounting can be distributed, like cost accounting, financial accounting,
internal and external accounting, etc.
Tax
Related Questions
- What are the exemptions
from salary?
- What is Excise &
Service Tax? What's Diffarance Excise & Service Tax?
- Why are component values
not adding up to total values in some tables?
- Why are component values
not adding up to total values in some tables?
- What is the difference
between income year, financial year and FBT year?
- What is the present rate
of T.D.S and what is the tax for person salary at present
- What is business?
- What is the meaning of
dealer?
- What is the meaning of
dealer?
- How a dealer shall be
registered under O.S.T. & C.S.T. Act?
- What is Profession Tax?
- What is the mode of
payment of Entry Tax?
- At is the mode of payment
of Entry Tax?
- What is Entry Tax as
enforceable from 1.12.1999?
- What is Entry Tax as enforceable
from 1.12.1999?
- What is luxury tax?
- What is Entertainment Tax?
- How the dealer is paying
Admitted Tax?
- What do you mean by
Commercial Tax?
Audit
Related Questions
- What
type of questions will be asked in the interviews?
- Corporate
frauds?
- Secretarial
audit?
- Duties
of auditor?
- Investigation
vs. audit?
- Cost
audit system?
- Investigation
vs. audit?
- Cost
audit system?
- Comptroller
auditor general of India functions?
- Audit
papers?
- Audit
programme?
- Internal
check system?
- Internal
audit?
- What
duty to auditors and independent examiner have to report problems to the
Commission?
- When
is income from rented accommodation to be treated as investment income and
when as trading income?
- Is
materiality by fund balance or transactions?
- A
company charity (gross income <? 250k) wishes to take advantage of the
audit exemption regime. However, there is an audit provision in the
company's Articles. Should they be required to change the Articles?
- Unearned income
refers to income
that is not a wage.?
It
includes interest,
dividends or
realized capital gains from investments, rent from land or
property ownership, and any other income that does not derive from work.
Unearned income has often
been treated differently for tax purposes than earned income, in order to redistribute
income. Such a tax structure is most often seen implemented by a socialist
government.
A consortium is an association
of two or more individuals, companies, organizations or governments (or any combination
of these entities) with the objective of participating in a common activity or
pooling their resources for achieving a common goal
A prospectus is a legal document that
institutions and businesses use to describe the securities they are offering for
participants and buyers. A prospectus commonly provides investors with material
information about mutual funds, stocks, bonds
and other investments,
such as a description of the company's business, financial statements,
biographies of officers and directors, detailed information about their
compensation, any litigation that is taking place, a list of material
properties and any other material information. In the context of an individual
securities offering such as an initial public offering, a prospectus is
distributed by underwriters or brokerages
to potential investors.
The main
stock exchanges in the world include:
A bull market :Tends to be associated with
increasing investor confidence, motivating investors to buy in anticipation of
further capital
gains
A bear market: It is described as being accompanied by
widespread pessimism. Investors anticipating further losses are motivated to
sell, with negative sentiment feeding on itself in a vicious circle
The movements of the prices
in a market or section of a market are captured in price indices called stock market indices, of which there are many,
e.g., the S&P, the FTSE and the Euronext
indices.
The
existence of stock market bubbles is at odds with the assumptions of efficient market theory which assumes
rational investor behaviour. Behavioral finance theory attribute stock market
bubbles to cognitive biases that lead to groupthink
and herd
behavior. Bubbles occur not only in real-world markets, with their inherent
uncertainty and noise, but also in highly predictable experimental markets [1].
In the laboratory, uncertainty is eliminated and calculating the expected
returns should be a simple mathematical exercise, because participants are
endowed with assets that are defined to have a finite lifespan and a known
probability distribution of dividends. Other theoretical explanations of stock
market bubbles have suggested that they are rational [2],
intrinsic [3],
and contagious [4].
Deferred
revenue expenditure:
Is that where the benefit the expenditure can be had for more than ONE
accounting period and less than FIVE accounting periods.
A bonus share:
Is a free share of
stock given to current shareholders in a company,
based upon the number of shares that the shareholder already owns. An issue of
bonus shares is referred to as a bonus
issue.
Securities
and Exchange Board of India (SEBI) it
is chaired by Mr. M. Damodaran,
SEBI has three functions rolled into one body:
quasi-legislative, quasi-judicial and quasi-executive. It drafts rules in its
legislative capacity, it conducts enquiries and enforcement action in its
executive function and it passes rulings and orders in its judicial capacity.
Though this makes it very powerful, there is an appeals process to create
accountability.
CRR :
One major
area of criticism focuses on the failure of the Federal Reserve System to stop
inflation; this is seen as a failure of the Fed's legislatively mandated duty [52]
to maintain stable prices.
The
Federal Reserve System tries to control the size of the money supply by
conducting open market operations, in which the Federal Reserve lends or
purchases specific types of securities with authorized participants, known as primary
dealers, such as the United States Treasury.
The Indian stock market mainly consists of
the Bombay Stock Exchange and the National Stock Exchange. The market is one
of the fast growing emerging markets in the world, and the BSE is the oldest
stock exchange in Asia. More than 6500 scripts are traded at the BSE and more
than 2500 scripts are traded at the NSE. It contains different kind of markets:
1 metal market 2 oil market 3 banking stock market and lots more
Debentures:
A type
of debt instrument that is not secured by physical asset or
collateral. Debentures are backed only by the
general creditworthiness and reputation of the issuer. Both
corporations and governments frequently issue this type of bond in order to
secure capital. Like other types of bonds, debentures are documented in an
indenture.
Debentures
have no collateral. Bond buyers generally purchase debentures based
on the belief that the bond issuer is unlikely to default on the
repayment. An example of a government debenture would be any
government-issued Treasury bond (T-bond) or Treasury bill (T-bill).
T-bonds and T-bills are generally considered risk free because
governments, at worst, can print off more money or raise taxes to
pay these type of debts.
Any type of debenture that can be converted into some other security.
For
example, a convertible bond can be converted into stock.
PVT. Co:
A
company whose ownership is private. As a result, it does not need to meet the
strict Securities and Exchange Commission filing requirements of public
companies.
Private
companies may issue stock and have shareholders. However, their shares do not
trade on public exchanges and are not issued through an initial public
offering. In general, the shares of these businesses are less liquid and the
values are difficult to determine.
Public Co:
A
company that has issued securities through an initial public offering and which
are traded on at least one stock exchange or over-the-counter market. These
companies must file documents and meet stringent reporting requirements set out
by the Securities and Exchange Commission, including the public disclosure of
financial statements. Any company whose shares are available to the public is a
public company.
Director:
In relation to a company,
a director is an officer of the
company charged with the conduct and management of its affairs. A director may
be an inside director (a director who is also an officer) or an outside, or
independent, director. The directors collectively are referred to as a board of directors. Sometimes the
board will appoint one of its members to be the chair of the board of
directors.
Theoretically,
the control of a company is divided between two bodies: the board of directors,
and the shareholders
in general meeting. In practice, the amount of power
exercised by the board varies with the type of company. In small private
companies, the directors and the shareholders will normally be the same people,
and thus there is no real division of power. In large public
companies, the board tends to exercise more of a supervisory role, and
individual responsibility and management tends to be delegated downward to
individual professional executive directors (such as a finance director or a
marketing director) who deal with particular areas of the company's affairs.
Margin of safety:
A
principle of investing in which an investor only purchases securities
when the market price is significantly below its intrinsic
value. In other words, when market price is significantly below your estimation
of the intrinsic value, the difference is the margin of safety. This
difference allows an investment to be made with minimal downside
risk. The term was popularized by Benjamin Graham (known as "the
father of value investing") and his followers, most notably Warren
Buffett. Margin of safety doesn't guarantee a successful investment, but
it does provide room for error in an analyst's judgment. Determining
a company's "true" worth (its intrinsic value) is highly
subjective. Each investor has a different way of calculating intrinsic
value which may or may not be correct. Plus, it's notoriously difficult to predict
a company's earnings. Margin of safety provides a cushion against errors in
calculation.
Margin of safety: Is a concept used in
many areas of life, not just finance. For example, consider engineers building
a bridge that must support 100 tons of traffic. Would the bridge be built to
handle exactly 100 tons? Probably not. It would be much more prudent to build
the bridge to handle, say, 130 tons, to ensure that the bridge will
not collapse under a heavy load. The same can be done with securities. If
you feel that a stock is worth $10, buying it at $7.50 will give you
a margin of safety in case your analysis turns out to be incorrect
and the stock is really only worth $9.
There is no universal standard to determine how wide the "margin" in
margin of safety should be. Each investor must come up with his or her own
methodology.
BEP:
- In
general, the point at which gains equal losses.
- In
options, the market price that a stock must reach for option buyers to
avoid a loss if they exercise. For a call, it is the strike price plus the
premium paid. For a put, it is the strike price minus the premium paid
Also
referred to as a "breakeven".
For
businesses, reaching the break-even point is the first major step towards
profitability.
Put Option:
An
option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying security at a specified price within a
specified time. This is the opposite of a call option, which gives the holder
the right to buy shares.
A
put becomes more valuable as the price of the underlying stock
depreciates relative to the strike price. For example, if you have
one Mar 07 Taser 10 put, you have the right to sell 100 shares
of Taser at $10 until March 2007 (usually the third Friday of the
month). If shares of Taser fall to $5 and you exercise the option, you can
purchase 100 shares of Taser for $5 in the market and sell the shares to the
option's writer for $10 each, which means you make $500 (100
x $10-$5) on the put option.
Call Option:
An
agreement that gives an investor the right (but not the obligation) to buy a
stock, bond, commodity, or other instrument at a specified price within a
specific time period.
It
may help you to remember that a call option gives you the right to "call
in" (buy) an asset. You profit on a call when the underlying asset
increases in price.
Intanigible Asset:
An
asset that is not physical in nature. Corporate intellectual property (items
such as patents, trademarks, copyrights, business methodologies), goodwill and
brand recognition are all common intangible assets in today's
marketplace. An intangible asset can be classified as either indefinite or
definite depending on the specifics of that asset. A company brand name is
considered to be an indefinite asset, as it stays with the company as
long as the company continues operations. However, if a company
enters a legal agreement to operate under another company's patent,
with no plans of extending the agreement, it would have a limited life and
would be classified as a definite asset.
Tanigible Asset:
An
asset that has a physical form such as machinery, buildings and land. This
is the opposite of an intangible asset such as a patent or trademark. Whether
an asset is tangible or intangible isn't inherently good or bad. For example, a
well-known brand name can be very valuable to a company. On the other hand, if
you produce a product solely for a trademark, at some point you need to
have "real" physical assets to produce it.
Rights issue:
Issuing
rights to a company's existing shareholders to buy a proportional number of
additional securities at a given price (usually at a discount) within a fixed
period.
Rights
are often transferable, allowing the holder to sell them on the open market.
Rights:
A
security giving stockholders entitlement to purchase new shares issued by the
corporation at a predetermined price (normally less than the current market
price) in proportion to the number of shares already owned. Rights are issued
only for a short period of time, after which they expire.
This
also known as "subscription rights" or "share purchase
rights".
Employee
Stock Option:
The
payment of stock in lieu of cash for services provided .This is a common method
used by corporations to compensate executives. The theory is that executives
will work harder since they want their own stock to rise in value and,
therefore, have the best interests of shareholders in mind.
Insider Trading:
Insider trading is the trading of a corporation's
stock or other securities (e.g. bonds
or stock
options) by corporate insiders such as officers, directors, or holders of
more than ten percent of the firm's shares. Insider trading may be perfectly
legal, but the term is frequently used to refer to a practice, illegal in many
jurisdictions, in which an insider or a related party trades based on material
non-public information obtained during the performance of the insider's duties
at the corporation, or otherwise misappropriated.[1]
All
insider trades must be reported in the United
States. Many investors follow the summaries of insider trades, published by
the United States
Securities and Exchange Commission (SEC), in the hope that mimicking these
trades will be profitable. Legal "insider trading" may not be based
on material non-public information. Illegal insider trading in the US requires
the participation (perhaps indirectly) of a corporate insider or other person
who is violating his fiduciary duty or misappropriating private information, and
trading on it or secretly relaying it. Insider
trading is believed to raise the cost of capital for securities issuers, thus
decreasing overall economic growth.[2]
Venture Capital:
Financing
for new businesses. In other words, money provided by investors to startup
firms and small businesses with perceived, long-term growth potential.
This is a very important source of funding for startups that do not have access
to capital markets. It typically entails high risk for the investor, but
it has the potential for above-average returns.
Venture capital can
also include managerial and technical expertise. Most venture capital comes
from a group of wealthy investors, investment banks and other financial
institutions that pool such investments or partnerships. This form of raising
capital is popular among new companies, or ventures, with limited operating
history, who cannot raise funds through a debt issue. The downside for
entrepreneurs is that venture capitalists usually get a say in company
decisions, in addition to a portion of the equity.
Seed Capital: The initial equity capital used
to start a new venture or business. This initial amount is usually quite small
because the venture is still in the idea or conceptual stage. Also,
there's a high risk that the venture will fail.
Bridge Financing: A
method of financing, used by companies before their IPO, to obtain necessary
cash for the maintenance of operations. These funds are usually supplied by the
investment bank underwriting the new issue. As payment, the company acquiring
the bridge financing will give a number of shares at a discount of the issue
price to the underwriters that equally offsets the loan. This financing is, in
essence, a forwarded payment for the future sales of the new issue.
Stock Split: A
type of corporate action where a company's existing shares are
divided into multiple shares. Although the amount of shares outstanding
increases by a specific multiple, the total dollar value of the shares remains
the same compared to pre-split amounts, because no real value has been
added as a result of the split.
In the U.K., a stock split is referred to as a "scrip issue",
"bonus issue", "capitalization issue" or "free
issue".
For
example, in a 2-for-1 split, each stockholder receives an additional share for
each share he or she holds.
One reason as to why stock splits are performed is that a company's share
price has grown so high that to many investors the shares are
too expensive to buy in round lots.
For example, if a XYZ Corp's shares were worth $1,000 each, investors would
need to purchase $100,000 in order to own 100 shares. Whereas, if each share
was worth $10 each, investors only need to pay $1,000 to own 100 shares.
Reverse
Takeover – RTO:
A type
of merger used by private companies to become publicly traded without resorting
to an initial public offering. Initially, the private company buys enough
shares to control a publicly traded company. At this point, the
private company's shareholder uses their shares in the private
company to exchange for shares in the public company. At this point, the
private company has effectively become a publicly traded one.A reverse takeover
can also refer to situation where a smaller company acquires a larger company.
With
this type of merger, the private company does not need to pay the expensive
fees associated with arranging an initial public offering. The problem,
however, is the company does not acquired any additional funds through the
merger and it must have enough funds to complete the transaction on its own.
Deep-Discounted
bonds:
- A
bond that sells at a significant discount from par value.
- A
bond that is selling at a discount from par value and has a coupon rate
significantly less than the prevailing rates of fixed-income securities
with a similar risk profile.
- Typically,
a deep-discount bond will have a market price of 20% or more below its
face value. These bonds are perceived to be riskier than similar bonds and
are thus priced accordingly.
- These
low-coupon bonds are typically long term and issued with call provisions.
Investors are attracted to these discounted bonds because of their high
return or minimal chance of being called before maturity.
Merger:
The combining of two or more
companies, generally by offering the stockholders of one company securities in
the acquiring company in exchange for the surrender of their stock.
Basically, when two companies
become one. This decision is usually mutual between both firms.
Factoring:
Factoring is a financial service
designed to help firms to arrange their receivable better. Under a typical
factoring arrangement a factor collects the accounts on due dates, effects
payments to the firm on these dates and also assumes the credit risks
associated with the collection of the accounts.
Sometimes
the factor provides an advance against the values of receivable taken over by
it. In such cases factoring serves as a source of short-term finance for the
firm.
Capital budgeting : The process of determining whether or not
projects such as building a new plant or investing in a long-term venture are
worthwhile. Also known as "investment appraisal". Popular methods of
capital budgeting include net present value (NPV), internal rate of return (IRR),
discounted cash flow (DCF) and payback period.
Bankruptcy: The
state of a person or firm unable to repay debts. If the bankrupt entity is a
firm, the ownership of the firm's assets is transferred from the stockholders
to the bondholders. Shareholders are the last people to get paid if a company
goes bankrupt. Secure creditors always get first grabs at the proceeds from
liquidation.
Diversification: A
risk-management technique that mixes a wide variety of investments within a
portfolio. The rationale behind this technique contends that a portfolio
of different kinds of investments will, on average, yield higher returns
and pose a lower risk than any individual investment found within the
portfolio.
Diversification strives to smooth out unsystematic risk events in a
portfolio so that the positive performance of some investments
will neutralize the negative performance of others. Therefore, the
benefits of diversification will hold only if the securities in the portfolio
are not perfectly correlated.
Annual
report: : A corporation's annual
statement of financial operations. Annual reports include a balance sheet,
income statement, auditor's report, and a description of the company's
operations.
This is usually a sleek,
colorful, high gloss publication. Make sure to look beyond the marketing and
dig into the numbers. This is the best way to discover the direction of the
company. The 10-K is the version of the
annual report which gets submitted to the SEC. It contains more detailed
financial information.
Annual general meeting : A mandatory yearly meeting
of shareholders that allows stakeholders to stay informed and involved with
company decisions and workings. This yearly meeting is the single event whereby
shareholders are able to gather and ask the board of directors questions
pertaining to corporate health and strategy. Proper notice must be given to
shareholders with regards to meeting times and agenda.
Subsidiary company: A
company whose voting stock is more than 50% controlled by another company,
usually referred to as the parent company.
As
long as the parent company has more than 50% of the voting stock in the
subsidiary, it has control. In the case of a foreign subsidiary, the
company under which the subsidiary is incorporated must adhere to the laws
of the country in which the subsidiary operates, although the parent
company still carries the foreign subsidiary's financials on its books
(consolidated financial statements)
Price Earning Ratio:
A
valuation ratio of a company's current share price compared to its per-share
earnings.
Calculated as: 
For example, if a company is currently trading at $43 a share and earnings over
the last 12 months were $1.95 per share, the P/E ratio for the stock would be
22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can
be taken from the estimates of earnings expected in the next four quarters
(projected or forward P/E). A third variation uses the sum of the last two
actual quarters and the estimates of the next two quarters.
Also sometimes known as "price multiple" or "earnings
multiple".
In general, a high
P/E suggests that investors are expecting higher earnings growth in
the future compared to companies with a lower P/E. However, the P/E ratio
doesn't tell us the whole story by itself. It's usually more useful to
compare the P/E ratios of one company to other companies in the same
industry, to the market in general or against the company's own historical
P/E. It would not be useful for investors using the P/E ratio as a
basis for their investment to compare the P/E of a technology company (high
P/E) to a utility company (low P/E) as each industry has much different growth
prospects.
The P/E is sometimes referred to as the "multiple", because it
shows how much investors are willing to pay per dollar of earnings. If a
company were currently trading at a multiple (P/E) of 20, the
interpretation is that an investor is willing to pay $20 for $1 of
current earnings.
It is important that investors note an important problem that arises
with the P/E measure, and to avoid basing a decision on this measure alone. The
denominator (earnings) is based on an accounting measure of
earnings that is susceptible to forms of manipulation, making
the quality of the P/E only as good as the quality of the underlying
earnings number.
Return on Investments: A
performance measure used to evaluate the efficiency of an investment or to
compare the efficiency of a number of different investments. To calculate ROI,
the benefit (return) of an investment is divided by the cost of the investment;
the result is expressed as a percentage or a ratio.
Return
on investment is a very popular metric because of its versatility and
simplicity. That is, if an investment does not have a positive ROI,
or if there are other opportunities with a higher ROI, then the investment
should be not be undertaken.
Keep in mind that the
calculation for return on investment can be modified to suit the situation
-it all depends on what you include as returns and costs. The term in the
broadest sense just attempts to measure the profitability of an investment and,
as such, there is no one "right" calculation. For example, a marketer
may compare two different products by dividing the revenue that each
product has generated by its respective expenses. A financial
analyst, however, may compare the same two products using an entirely different
ROI calculation, perhaps by dividing the net income of an investment
by the total value of all resources that have been employed to make
and sell the product.
This flexibility has a downside, as ROI calculations can be easily manipulated
to suit the user's purposes, and the result can be expressed in many
different ways. When using this metric, make sure you understand what inputs
are being used.
Debt
to Equity Ratio: A measure of a company's
financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of
equity and debt the company is using to finance its assets.
Note:
Sometimes only interest-bearing, long-term debt is used instead of
total liabilities in the calculation.
If a lot of debt
is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have
without this outside financing. If this were to increase earnings by
a greater amount than the debt cost (interest), then the shareholders benefit
as more earnings are being spread among the same amount of
shareholders. However, the cost of this debt financing may outweigh the
return that the company generates on the debt through investment and
business activities and become too much for the company to handle. This can
lead to bankruptcy, which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company
operates. For example, capital-intensive industries such as
auto manufacturing tend to have a debt/equity ratio above 2, while
personal computer companies have a debt/equity of under 0.5.
Market Capitalization:
A measure of a company's
total value. It is estimated by determining the cost of
buying an entire business in its current state. Often referred to as
"market cap", it is the total dollar value of all outstanding
shares. It is calculated by multiplying the number of shares outstanding
by the current market price of one share.
Derivatives: In
finance, a security whose price is dependent upon or derived from one
or more underlying assets. The derivative itself is merely a contract
between two or more parties. Its value is determined by
fluctuations in the underlying asset. The most common underlying
assets include stocks bonds, commodities, currencies,
interest rates and market indexes. Most derivatives are characterized by high
leverage.
Zero based budget: Method of budgeting in which
all expenditures must be justified each new period, as opposed to only
explaining the amounts requested in excess of the previous period's funding.
For example, if an organization
used ZBB, each department would have to justify its funding every year. That
is, funding would have a base at zero. A department would have to show why its
funding efficiently helps the organization toward its goals.
ZBB is especially encouraged for Government budgets because expenditures can
easily run out of control if it is automatically assumed what was spent last
year must be spent this year.
Assets under Management (AUM)
Ø
In
general, the market value of assets an investment company manages on behalf of
investors
Ø
There
are widely differing views on what the term means. Some financial institutions
include bank deposits, mutual funds and institutional money in their
calculations. Others limit it to funds under discretionary management where the
client delegates responsibility to the company.
Profitability Ratios
Ø A class of financial
metrics that are used to assess a business's ability to generate earnings
as compared to its expenses and other relevant costs incurred during a
specific period of time. For most of these ratios, having a higher value
relative to a competitor's ratio or the same ratio from a previous period
is indicative that the company is doing well.
Ø Some examples of profitability
ratios are profit margin, return on assets and return on equity. It is
important to note that a little bit of background knowledge is necessary
in order to make relevant comparisons when analyzing these ratios
Ø For instances,
some industries experience seasonality in their operations. The retail
industry, for example, typically experiences higher revenues
and earnings for the Christmas season. Therefore, it would not
be too useful to compare a retailer's 4th quarter profit margin with
its 1st quarter profit margin. On the other hand, comparing a
retailer's 4th quarter profit margin with the profit margin from the
same period a year before would be far more informative
Return On Assets (ROA)
Ø
An
indicator of how profitable a company is relative to its total assets. ROA
gives an idea as to how efficient management is at using its
assets to generate earnings. Calculated by dividing a company's annual
earnings by its total assets, ROA is displayed as a percentage. Sometimes this
is referred to as "return on investment".
Note:
Some investors add interest expense back into net income when performing
this calculation because they'd like to use operating returns before cost
of borrowing.
Ø
ROA tells
you what earnings were generated from invested capital (assets). ROA for public
companies can vary substantially and will be highly dependent on the industry.
This is why when using ROA as a comparative measure, it is best to compare
it against a company's previous ROA numbers or the ROA of a similar
company
Ø
The
assets of the company are comprised of both debt and equity. Both of these
types of financing are used to fund the operations of the company. The ROA
figure gives investors an idea of how effectively the company is converting
the money it has to invest into net income. The higher the ROA
number, the better, because the company is earning more money on less
investment. For example, if one company has a net income of $1 million and
total assets of $5 million, its ROA is 20%; however, if another company
earns the same amount but has total assets of $10 million, it has an
ROA of 10%. Based on this example, the first company is better at
converting its investment into profit. When you really think about it, management's
most important job is to make wise choices in allocating its
resources. Anybody can make a profit by throwing a ton of money at a problem,
but very few managers excel at making large profits with little
investment.
Return On Capital Employed (ROCE)
Ø A ratio that indicates the
efficiency and profitability of a company's capital investments.
Calculated as:
Ø
ROCE
should always be higher than the rate at which the company borrows,
otherwise any increase in borrowing will reduce shareholders' earnings.
A variation of this ratio is return on average capital employed (ROACE), which
takes the average of opening and closing capital employed for the time period.
Return On Equity (ROE)
Ø
A
measure of a corporation's profitability that reveals how much profit a
company generates with the money shareholders have invested.
Calculated as:
Also
known as “Return on Net worth (RONW).
The
ROE is useful for comparing the profitability of a company to that of
other firms in the same industry.
There
are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the
formula above by subtracting preferred dividends from net income and
subtracting preferred equity from shareholders' equity, giving the
following: return on common equity (ROCE) = net income - preferred
dividends / common equity.
2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity
is calculated by adding the shareholders' equity at the beginning of a period
to the shareholders' equity at period's end and dividing the result by two.
3. Investors may also calculate the change in ROE for a period by
first using the shareholders' equity figure from
the beginning of a period as a denominator to
determine the beginning ROE. Then, the end-of-period shareholders'
equity can be used as the denominator to determine the ending ROE.
Calculating both beginning and ending ROEs allows an investor to determine
the change in profitability over the period.
Revenue Per Occupied Room (RevPOR
Ø An industry metric used to
evaluate companies in the hotel and lodging industries. RevPOR is used in
conjunction with, or in place of, the more standard revenue per available room
(RevPAR) statistic. RevPAR is calculated by taking the RevPOR value and
multiplying it by the occupancy rate.
RevPOR may also be expressed as "total RevPOR", which includes not
only the room rate itself, but also any extra services such as room
service, laundry services and in-room movie viewing, among others.
Ø For many hotel operators, the
total revenue received per room can be much more than the per-day
"boilerplate" rate, and is a more full expression of how much the
company is receiving per customer. RevPOR is used by analysts to determine
the total revenue and profit potential of a company; occupancy rates will rise
and fall with the general and local economy, but RevPOR is a metric that stands
independent of how full the hotel is at any point in time.
Capital Expenditure (CAPEX)
Ø Funds used by a company to
acquire or upgrade physical assets such as property, industrial buildings or
equipment. This type of outlay is made by companies
to maintain or increase the scope of their operations. These
expenditures can include everything from repairing a roof to building a
brand new factory.
Ø The amount of capital
expenditures a company is likely to have depends on the industry it occupies.
Some of the most capital intensive industries include oil, telecom and
utilities.
In
terms of accounting, an expense is considered to be a capital expenditure
when the asset is a newly purchased capital asset or an investment
that improves the useful life of an existing capital asset. If an expense
is a capital expenditure, it needs to be capitalized; this requires the
company to spread the cost of the expenditure over the useful life of the
asset. If, however, the expense is one that maintains the asset at its current
condition, the cost is deducted fully in the year of the expense.
Capital
Reserve:
Ø A type of account on a
municipality's or company's balance sheet that is reserved for long-term
capital investment projects or any other large and
anticipated expense(s) that will be incurred in
the future. This type of reserve fund is set aside to ensure that the
company or municipality has adequate funding to at least partially finance
the project.
Ø Contributions to the capital
reserve account can be made from government subsidies, donated funds,
or can be set aside from the firm's or municipalities regular
revenue-generating operations. Once recorded on the reporting entity's
balance sheet, these funds are only to be spent on the capital expenditure
projects for which they were initially intended, excluding any
unforeseen circumstances
Reserve
Fund:
Ø An account set aside by an
individual or business to meet any unexpected costs that may arise in the
future as well as the future costs of upkeep. In most cases, the fund is simply
a savings account or another highly liquid asset, as it is impossible to
predict when an unexpected cost may arise. However, if the fund is
set up to meet the costs of scheduled upgrades, less liquid assets may be
used.
Ø An individual, for example, may
put money into a reserve account to save money in case of unexpected
unemployment. A business, such as one dealing with rental properties, will put
some rental income into a fund used to pay for any unexpected repairs to the
properties. Condominiums often will set up reserve funds
in which condo owners pay a set monthly amount to maintain the
quality of the condominium
Enterprise
Value (EV):
A measure of a company's value,
often used as an alternative to straightforward market capitalization. EV is
calculated as market cap plus debt, minority interest and preferred
shares, minus total cash and cash equivalents.
Think of enterprise value as
the theoretical takeover price. In the event of a buyout, an acquirer would
have to take on the company's debt, but would pocket its cash. EV differs
significantly from simple market capitalization in several ways, and many
consider it to be a more accurate representation of a firm's value. The value
of a firm's debt, for example, would need to be paid by the buyer when taking
over a company, and thus EV provides a much more accurate takeover valuation
because it includes debt in its value calculation.
Embedded
Value:
A common valuation measure used
outside North America, particularly in the insurance industry. It is calculated
by adding the adjusted net asset value and the present value of future profits
of a firm. The present value of future profits considers the potential profits
that shareholders will receive in the future, while adjusted net asset value
considers the funds belonging to shareholders that have been accumulated in the
past.
Embedded value is a
conservative valuation method, as it excludes certain aspects of goodwill from
its calculation of a company's worth. Goodwill includes intangible assets that
increase the value of a company beyond its assets minus liabilities, such
as strong management, good location and a happy workforce. Furthermore, to
add to its conservatism, the EV calculation of a firm does not allow for
any increase in future business.
Net Asset Value (NAV)
1
A mutual fund's price per share or
exchange-traded fund's per-share value. In both cases, the per-share dollar
amount of the fund is derived by dividing the total value of all the
securities in its portfolio, less any liabilities, by the number of fund shares
outstanding.
2. In terms of corporate valuations, the value of assets less liabilities
equals net asset value, or "book value".
1.
In the context of mutual funds, net asset value per share is computed once a
day based on the closing market prices of the securities in the fund's
portfolio. All mutual fund buy and sell orders are processed at the NAV of the
trade date; however, investors must wait until the until the following day
to get the trade price.
Mutual funds pay out (distribute) virtually all of their income and capital
gains. As a result, changes NAV are not the best gauge of mutual fund
performance, which is best measured by their annual total return.
Because exchange-traded funds and closed-end funds trade like stocks,
their shares trade at market value, which can be a dollar value above (trading
at a premium) or below (trading at a discount) their net asset values.
Book
Value:
1. The value at which an asset is
carried on a balance sheet. In other words, the cost of an asset minus
accumulated depreciation.
The net asset value of a company,
calculated by total assets minus intangible assets (patents, goodwill) and
liabilities.
The initial outlay for an investment.
This number may be net or gross of expenses such as trading costs, sales taxes,
service charges and so on.
In the U.K., book value is known as "net asset value".
2.
Book
value is the accounting value of a firm. It has two main uses:
1.) It is the total value of the company's assets that shareholders would
theoretically receive if a company were liquidated.
2.) By being compared to the company's market value, the book value can
indicate whether a stock is under- or overpriced.
3.) In personal finance, the book value of an investment is the price paid for
a security or debt investment. When a stock is sold, the selling price less the
book value is the capital gain (or loss) from the investment.
Initial
Public Offering (IPO):
The
first sale of stock by a private company to the public. IPOs are
often issued by smaller, younger companies seeking capital to expand, but
can also be done by large privately-owned companies looking to become publicly
traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which
helps it determine what type of security to issue (common or preferred), best
offering price and time to bring it to market.
Also referred to as a "public offering".
IPOs
can be a risky investment. For the individual investor, it is tough to predict
what the stock will do on its initial day of trading and in the near future
since there is often little historical data with which to analyze the
company. Also, most IPOs are of companies going through a transitory
growth period, and they are therefore subject to additional uncertainty
regarding their future value
Leverage
Ratio:
- Any ratio used to
calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet
financial obligations. There are several different ratios, but the main
factors looked at include debt, equity, assets and interest expenses.
- A ratio used to measure a company's mix
of operating costs, giving an idea of how changes in output will affect
operating income. Fixed and variable costs are the two types of operating
costs; depending on the company and the industry, the mix will
differ.
Debt
Ratio:
A ratio that indicates what
proportion of debt a company has relative to its assets. The measure gives an
idea to the leverage of the company along with the potential risks the company
faces in terms of its debt-load.
A debt ratio of greater
than 1 indicates that a company has more debt than assets, meanwhile, a
debt ratio of less than 1 indicates that a company has more assets than
debt. Used in conjunction with other measures of financial health, the debt
ratio can help investors determine a company's level of risk.
Debt/Equity
Ratio:
A measure of a company's
financial leverage calculated by dividing its total liabilities by stockholders'
equity. It indicates what proportion of equity and debt the company is using to
finance its assets.
Note: Sometimes only interest-bearing,
long-term debt is used instead of total liabilities in the calculation.
A high
debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a
result of the additional interest expense.
.
The debt/equity ratio also depends on the industry in which the company
operates. For example, capital-intensive industries such as
auto manufacturing tend to have a debt/equity ratio above 2, while
personal computer companies have a debt/equity of under 0.5.
Debt-To-Capital Ratio
A
measurement of a company's financial leverage, calculated as the
company's debt divided by its total capital. Debt includes all
short-term and long-term obligations. Total capital includes the company's debt
and shareholders' equity, which includes common stock, preferred stock,
minority interest and net debt.
Calculated as:
Operating Ratio
A
ratio that shows the efficiency of management by comparing operating
expense to net sales:
The
smaller the ratio, the greater the organization's ability to generate profit if
revenues decrease. When using this ratio, however, investors should be
aware that it doesn't take into account debt repayment or expansion.
Net Sales
The
amount of sales generated by a company after the deduction of returns, allowances
for damaged or missing goods and any discounts allowed. The sales
number reported on a company's financial statements is a net sales number,
reflecting these deductions..
Asset Turnover
The
amount of sales generated for every dollar's worth of assets. It is calculated
by dividing sales in dollars by assets in dollars.
Formula: 
Asset
turnover measures a firm's efficiency at using its assets in
generating sales or revenue - the higher the number the better. It also
indicates pricing strategy: companies with low profit margins tend to have high
asset turnover, while those with high profit margins have low asset
turnover.
Fundamental Analysis
A
method of evaluating a security by attempting to measure its
intrinsic value by examining related economic, financial and other qualitative
and quantitative factors. Fundamental analysts attempt to study everything
that can affect the security's value, including macroeconomic factors
(like the overall economy and industry conditions) and individually
specific factors (like the financial condition and management of
companies).
The
end goal of performing fundamental analysis is to produce a value
that an investor can compare with the security's current price in
hopes of figuring out what sort of position to take with that security
(underpriced = buy, overpriced = sell or short).
This
method of security analysis is considered to be the opposite of technical
analysis.
Fundamental
analysis is about using real data to evaluate a security's value. Although
most analysts use fundamental analysis to value stocks, this method of
valuation can be used for just about any type of security.
For example, an investor can perform
fundamental analysis on a bond's value by looking at economic factors,
such as interest rates and the overall state of the economy, and information
about the bond issuer, such as potential changes in credit ratings. For
assessing stocks, this method uses revenues, earnings, future growth, return on
equity, profit margins and other data to determine a company's underlying value
and potential for future growth. In terms of stocks, fundamental analysis focuses
on the financial statements of a the company being evaluated.
One of the most famous and successful users of fundamental analysis is the
Oracle of Omaha, Warren Buffett, who has been well known for successfully
employing fundamental analysis to pick securities. His abilities have
turned him into a billionaire.
Types Of EPS :
Gertrude
Stein said, "A rose is a rose is a rose," but the same cannot be said
about earnings per share (EPS).
While the math may be simple, there are many varieties of EPS being used these
days, and investors must understand what each one represents if they're to make
informed investment decisions. For example, the EPS announced by the company
may differ significantly from what is reported in the financial statements and
in the headlines. As a result, a stock may appear over- or undervalued
depending on the EPS being used. This article will define some of the varieties
of EPS and discuss their pros and cons.
By definition, EPS is net income divided by the number of shares
outstanding; however, both the numerator and denominator can change
depending on how you define "earnings" and "shares outstanding".
Because there are so many ways to define earnings, we will first tackle shares
outstanding.
Shares
Outstanding :
Shares outstanding can be classified as either primary (primary EPS) or fully
diluted (diluted
EPS).
Primary EPS is calculated using the number of shares that have been issued and
held by investors. These are the shares that are currently in the market and
can be traded.
Diluted EPS entails a complex calculation that determines how many shares would
be outstanding if all exercisable warrants, options, etc. were converted into
shares at a point in time, generally the end of a quarter. We prefer diluted
EPS because it is a more conservative number that calculates EPS as if all
possible shares were issued and outstanding. The number of diluted shares can
change as share prices fluctuate (as options fall into/out of the money), but
generally the Street assumes the number is fixed as stated in the 10-Q or 10-K.
Companies report both primary and diluted EPS, and the focus is generally on
diluted EPS, but investors should not assume this is always the case.
Sometimes, diluted and primary EPS are the same because the company does not
have any "in-the-money" options, warrants or convertible bonds
outstanding. Companies can discuss either, so investors need to be sure which
is being used.
Earnings
As has been evident in recent headlines, EPS can be whatever the company
wants it to be, depending on assumptions and accounting policies. Corporate
spin-doctors focus media attention on the number the company wants in the news,
which may or may not be the EPS reported in documents filed with the Securities
& Exchange Commission (SEC). Based on a set of assumptions, a company can
report a high EPS, which reduces the P/E multiple
and makes the stock look undervalued. The EPS reported in the 10Q, however, can
result in a much lower EPS and an overvalued stock on a P/E basis. This is why
it is critical for investors to read carefully and know what type of earnings
is being used in the EPS calculation.
We
will focus on five types of EPS and define them in the context of the type of
"earnings" being used.
Reported EPS (or GAAP EPS) :
We define
reported EPS as the number derived from generally accepted
accounting principles (GAAP), which are reported in SEC filings. The
company derives these earnings according to the accounting guidelines used.
(Note: A discussion of how a company can manipulate EPS under GAAP is beyond
the scope of this article, but investors should remember that it is possible.
Our focus is on how earnings can be distorted even if there is no intent to
manipulate results.)
A company's reported earnings can be distorted by GAAP. For example, a one-time
gain from the sale of machinery or a subsidiary could be considered as
operating income under GAAP and cause EPS to spike. Also, a company could
classify a large lump of normal operating expenses as an "unusual
charge" which can boost EPS because the "unusual charge" is
excluded from calculations. Investors need to read the footnotes in order to
decide what factors should be included in "normal" earnings and make
adjustments in their own calculations.
Ongoing EPS :
This EPS is calculated based upon normalized or ongoing net income and excludes
anything that is an unusual one-time event. The goal is to find the stream of
earnings from core operations which can be used to forecast future EPS. This
can mean excluding a large one-time gain from the sale of equipment as well as
an unusual expense. Attempts to determine an EPS using this methodology is also
called "pro forma" EPS.
Pro Forma EPS :
The words "pro
forma" indicate that assumptions were used to derive whatever number
is being discussed. Different
from reported EPS, pro forma EPS generally excludes some expenses/income that
were used in calculating reported earnings. For example, if a company sold a
large division, it could, in reporting historical results, exclude the expenses
and revenues associated with that unit. This allows for more of an
"apples-to-apples" comparison.
Another example of pro forma is a company choosing to exclude some expenses
because management feels that the expenses are non-recurring and distort the
company's "true" earnings. Non-recurring expenses, however, seem to
appear with increasing regularity these days. This raises questions as to
whether management knows what it is doing or is trying to build a "rainy
day fund" to smooth EPS.
Headline EPS :
The headline
EPS is the EPS number that is highlighted in the company's press release
and picked up in the media. Sometimes it is the pro forma number, but it could
also be an EPS number that has been calculated by the analyst/pundit that is
discussing the company. Generally, soundbites do not provide enough information
to determine which EPS number is being used.
Cash EPS :
Cash EPS is
operating cash flow (not EBITDA) divided by
diluted shares outstanding. We think cash EPS is more important than other EPS
numbers because it is a "purer" number. Cash EPS is better because
operating cash flow cannot be manipulated as easily as net income and
represents real cash earned, calculated by including changes in key asset
categories such as receivables and inventories. For example, a company with
reported EPS of $0.50 and cash EPS of $1.00 is preferable to a firm with
reported EPS of $1.00 and cash EPS of $0.50. Although there are many factors to
consider in evaluating these two hypothetical stocks, the company with cash is
generally in better financial shape.
Other EPS numbers have overshadowed cash EPS, but we expect it to get more
attention because of the new GAAP rule (FAS 142), which allows companies to
stop amortizing goodwill.
Companies may start talking about "cash EPS" in order to
differentiate between pre-FAS 142 and post-FAS 142 results; however, this
version of "cash EPS" is more like EBITDA per share and does not
factor-in changes in receivables and inventory. Consequently, I think it is not
as good as operating-cash-flow EPS, but is better in certain cases than other
forms of EPS.
The Bottom Line :
Caveat investor (investor beware)! There are many types of EPS being used, and
investors need to know what the EPS represents and determine if it is a valid
representation of the company's earnings. A stock may look like a great value
because it has a low P/E, but that ratio may be based on assumptions with which
you may not agree
Net Debt
A
metric that shows a company's overall debt situation
by netting the value of a company's liabilities and
debts with its cash and other similar liquid assets.
Calculated as:
When investing in a company,
one of the most important factors you need to consider is how
much debt the company is carrying. Here are some questions to ask yourself when
analyzing a company's debt: How much debt really exists? What kind of
debt is it (long/short-term maturities)? What is the debt for (repay
or refinance old debts)? Can the company afford the debt if it runs into
financial trouble? And, finally, how does it compare to the debt levels of
competing companies?
Acid-Test Ratio:
A
stringent test that indicates whether a firm has enough short-term assets
to cover its immediate liabilities without selling inventory. The acid-test
ratio is far more strenuous than the working capital ratio, primarily because
the working capital ratio allows for the inclusion of inventory assets.
Calculated by: 
Companies with ratios of
less than 1 cannot pay their current liabilities and should be looked at with
extreme caution. Furthermore, if the acid-test ratio is much lower than the
working capital ratio, it means current assets are highly dependent on
inventory. Retail stores are examples of this type of business.
The term comes from the way gold miners would test whether their
findings were real gold nuggets. Unlike other metals, gold does not
corrode in acid; if the nugget didn't dissolve when submerged in acid, it was
said to have passed the acid test. If a company's financial statements
pass the figurative acid test, this indicates its financial
integrity.
Also
known as "liquidity ratio", "cash asset ratio" and
"cash ratio".
The
ratio is mainly used to give an idea of the company's ability to pay
back its short-term liabilities (debt and payables) with
its short-term assets (cash, inventory, receivables). The higher the current
ratio, the more capable the company is of paying its obligations. A ratio
under 1 suggests that the company would be unable to pay
off its obligations if they came due at that point. While
this shows the company is not in good financial health, it does not
necessarily mean that it will go bankrupt - as there are many ways to access
financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating
cycle or its ability to turn its product into cash. Companies that have
trouble getting paid on their receivables or have long inventory turnover can
run into liquidity problems because they are unable to alleviate their
obligations. Because business operations differ in each industry,
it is always more useful to compare companies within the same
industry.
Discretionary
Cash Flow:
Discretionary
cash flow is any money left over once all possible capital projects
with positive net present values have been financed, and all mandatory payments
have been paid. The capital can be used to pay for other responsibilities such
as giving out cash dividends to stockholders, buying back common stock and
paying off any outstanding debt.
How
discretionary cash flow is distributed is the responsibility
of management. They decide how to use the funds to benefit the
company the most. The way these funds are allocated can have huge affects on
the performance of the company, and as a result the evaluation of the
effectiveness of management.
Operating
Cash Flow Ratio:
A
measure of how well current liabilities are covered by the cash flow generated
from a company's operations.
Formula:
The
operating cash flow ratio can gauge a company's liquidity in the short term.
Using cash flow as opposed to income is sometimes a better indication of
liquidity simply because, as we know, cash is how bills are normally paid
off.
Operating
Cash Flow (OCF)
The
cash generated from the operations of a company, generally defined as revenues
less all operating expenses, but calculated through a series of adjustments to
net income. The OCF can be found on the statement of cash flows.
Also known as "cash flow provided by operations" or "cash flow
from operating activities".
One method of calculated OCF is:
Operating
cash flow is the cash that a company generates through running its
business.
It's arguably a better measure of a business's profits than earnings because a
company can show positive net earnings (on the income statement) and still not
be able to pay its debts. It's cash flow that pays the bills!
You can also use OCF as a check on the quality of a company's earnings. If a
firm reports record earnings but negative cash, it may be using aggressive
accounting techniques.
Operating Income
The
amount of profit realized from a business's own operations, but excluding
operating expenses (such as cost of goods sold) and depreciation from
gross income.
Also referred to as "operating profit" or "recurring
profit".
Calculated as:
Operating income would
not include items such as investments in other firms, taxes or interest
expenses. In addition, nonrecurring items such as cash paid for a lawsuit
settlement are often not included.
Operating income is required to calculate operating margin,
which describes a company's operating efficiency.
Operating Expense
A category
of expenditure that a business incurs as a result of performing its normal business
operations. One of the typical responsibilities that management must
contend with is determining how low operating expenses can be
reduced without significantly affecting the firm's ability to
compete with its competitors.
Also known as "OPEX"
For
example, the payment of employees' wages and funds allocated toward
research and development are operating expenses. In the absence of raising
prices or finding new markets or product channels in order to raise profits,
some businesses attempt to increase the bottom line purely by cutting expenses.
While laying off employees and reducing product quality can initially boost
earnings and may even be necessary in cases where a company has lost
its competitiveness, there are only so many operating expenses that management
can cut before the quality of business operations is damaged.
Operating Profit
The
amount of profit earned from a firm's normal core business operations. This
value does not include any profit earned from the firm's investments (such as
earnings resulting from firms that the company has partial interest in) and the
effects of interest and taxes.
Also known as "earnings before interest and tax (EBIT)".
Calculated
as:
For
example, suppose ABC Printing Company earned $50 million from its core printing
related operations, $10 million from its 40% stake in XYZ Corp and $3.5 million
from interest earned from its money market and bank accounts. Also, the
company spent $10 million in production related costs as well.
Overall the company's operating profit is: $40 million, calculated as the $50
million operating revenues million minus the $10 million in production costs.
The other $10 million and $3.5 million in earnings are not included in
operating income, since they are investment income.
Earnings:
The
amount of profits that a company produces during a specific
period, which is usually defined as a quarter (three calendar months) or a
year. Earnings typically refer to after-tax
net income.Ultimately, a business's earnings are the main determinant
of its share price, because earnings and
the circumstances relating to them can indicate
whether the business will be profitable and successful in the long
run.
Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA)
An
indicator of a company's financial performance which is calculated as follows:
EBITDA
can be used to analyze and compare profitability between companies and
industries because it eliminates the effects of financing and accounting
decisions. However, this is a non-GAAP measure that allows a greater
amount of discretion as to what is (and is not) included in
the calculation. This also means that companies often
change the items included in their EBITDA calculation from one
reporting period to the next.
EBITDA
first came into common use with leveraged buyouts in the 1980s, when it was
used to indicate the ability of a company to service debt. As time passed, it
became popular in industries with expensive assets that had to be written down
over long periods of time. EBITDA is now commonly quoted by many companies,
especially in the tech sector - even when it isn't warranted.
A
common misconception is that EBITDA represents cash earnings. EBITDA is a good
metric to evaluate profitability, but not cash flow. EBITDA also leaves out the
cash required to fund working capital and the replacement of old
equipment, which can be significant. Consequently, EBITDA is often used as
an accounting gimmick to dress up a company's earnings. When using this metric,
it's key that investors also focus on other performance measures to make sure
the company is not trying to hide something with EBITDA.
Amortization
1. The
paying off of debt in regular installments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually
over the asset's life). More specifically, this method measures
the consumption of the value of intangible assets, such as a
patent or a copyright.
Suppose
XYZ Biotech spent $30 million dollars on a piece of medical equipment and
that the patent on the equipment lasts 15 years, this would mean
that $2 million would be recorded each year as an amortization
expense.
While amortization and depreciation are often used interchangeably,
technically this is an incorrect practice because amortization refers to
intangible assets and depreciation refers to tangible assets.
Depreciation
1. In
accounting, an expense recorded to allocate a tangible asset's cost over its
useful life. Because depreciation is a non-cash expense, it increases
free cash flow while decreasing reported earnings.
2. A decrease in the value of a particular currency relative to other
currencies.
1.
Depreciation is used in accounting to try to match the expense of an asset to
the income that the asset helps the company earn. For example, if a
company buys a piece of equipment for $1 million and
expects it to have a useful life of 10 years, it will be
depreciated over 10 years. Every accounting year, the company will expense
$100,000 (assuming straight-line depreciation), which will be matched
with the money that the equipment helps to make each year.
2. Examples of currency depreciation are the infamous Russian ruble crisis in
1998, which saw the ruble lose 25% of its value in one day.
Earnings Before Interest, Taxes, Depreciation,
Depletion, Amortization and Exploration Expenses (EBITDAX)
An
indicator of a company's financial performance calculated as:
= Revenue - Expenses (excluding tax, interest, depreciation, depletion,
amortization and exploration expenses)
EBITDAX
is used when reporting earnings for oil and mineral exploration companies. It
excludes costly exploration expenses and gives the true EBITDA of the firm.
This is especially useful when a company wants to acquire another company. The
EBITDAX would cover any loan payments needed to finance the takeover.
Goodwill
An
account that can be found in the assets portion of a company's balance sheet.
Goodwill can often arise when one company is purchased by another company.
In an acquisition, the amount paid for the company over book value usually
accounts for the target firm's intangible assets.
Goodwill is seen as an intangible asset
on the balance sheet because it is not a physical asset such as buildings and
equipment. Goodwill typically reflects the value of intangible assets such
as a strong brand name, good customer relations, good employee relations and
any patents or proprietary technology
Badwill
The negative
effect felt by a company when shareholders and the investment
community find out that is has done something that is not in accordance with
good business practices. Although typically not expressed in a dollar
amount, badwill can play out in the form of decreased revenue, loss of clients
or suppliers, loss of market share and federal indictments for any crimes
committed.
There
are several cases in which badwill caused a severe downturn in
company stock, such as Tyco, Adelphia, Martha Stewart, Enron and Worldcom.
In each new bull market, we are likely to see the same offenses
committed by new people. This phenomenon has caused a rise in
"socially conscious" investing, where companies promoting badwill are
excluded as a matter of policy.
Nonrecurring Charge
An
expense occurring only once on a company's financial statement.
An
extraordinary item is an example of a nonrecurring charge.
Also known as "nonrecurring item".
Non-Cash Charge
A
charge off, made by a company against earnings, that does not require an
initial outlay of cash.
Non-cash
charges are typically against the depreciation, amortization, and depletion
accounts on a company's balance sheet. Companies take these charges against
earnings due to extraordinary circumstances such as accounting policy changes
or significant depreciation of asset's market value.
Any sort of charge will usually result in lower earnings in the period when the
charge was made.
Sometimes also referred to as a write down.
Write-Down
Reducing
the book value of an asset because it is overvalued compared to the market
value.
This
is usually reflected in the company's income statement as an expense, thereby
reducing net income.
Write-Off
A reduction
in the value of an asset or earnings by the amount of
an expense or loss. Companies are able to write off certain
expenses that are required to run the business, or have been incurred in
the operation of the business and detract from retained revenues.
For
example, if you spend money on dinner to take out a client, that meal is a
possible write-off towards your income because you presumably discussed
business opportunities during the dinner. Suppose, for another
example, you made a sale on credit to a customer, but two weeks later the
client's business declared bankruptcy and became completely unable to pay
off the credit account with you. This uncollectible debt would then
be written off by your company and recorded as an expense by accountants.
Write-Up
An
increase made to the book value of an asset because it is undervalued
compared to market values.
A
write-up will increase a company's accounting book value without any
expenditures. For example, if an economy experiences significant inflation, a
production company may decide to write up its inventory to better match the
market price.
Equity
Method
An
accounting technique used by firms to assess the profits earned by their
investments in other companies. The firm reports the income earned on the
investment on its income statement and the reported value is based on the
firm's share of the company assets. The reported profit
is proportional to the size of the equity investment. This is the standard
technique used when one company has significant influence over another.
When
a company holds approximately 20-25% or more of another company's stock, it is
considered to have significant control, which signifies the power that a
company can exert over another company. This power includes representation
on the board of directors, partaking in company policy development and
the interchanging of managerial personnel. If a firm
owns 25% of a company with a $1 million net income, that
firm would report earnings of $250,000.
Generally Accepted Accounting Principles (GAAP)
The
common set of accounting principles, standards and procedures that companies
use to compile their financial statements. GAAP are a combination of
authoritative standards (set by policy boards) and simply the commonly accepted
ways of recording and reporting accounting information.
GAAP
are imposed on companies so that investors have a minimum level of consistency
in the financial statements they use when analyzing companies for investment
purposes. GAAP cover such things as revenue recognition, balance sheet item
classification and outstanding share measurements. Companies are expected to
follow GAAP rules when reporting their financial data via financial statements.
If a financial statement is not prepared using GAAP principles, be very wary!
That said, keep in mind that GAAP is only a set of standards. There is plenty
of room within GAAP for unscrupulous accountants to distort figures. So, even
when a company uses GAAP, you still need to scrutinize its financial statements.
This
is an excellent way to buy shares in a foreign company while realizing any
dividends and capital gains in U.S. dollars. However, ADRs do not
eliminate the currency and economic risks for the underlying shares in another
country. For example, dividend payments in euros would be converted to
U.S. dollars, net of conversion expenses and foreign taxes and in
accordance with the deposit agreement. ADRs are listed on either
the NYSE, AMEX or Nasdaq.
The
relationship between all the stakeholders in a company. This includes the
shareholders, directors, and management of a company, as defined by the
corporate charter, bylaws, formal policy and rule of law.
Ethical
companies are said to have excellent corporate governance.
Securitization:
Securitization
is a structured finance process in which assets, receivables or financial
instruments are acquired, classified into pools, and offered as collateral
for third-party investment.[1] It involves the selling
of financial instruments which are backed by
the cash flow
or value of the underlying assets.[2]
Securitization utilizes a special purpose vehicle (SPV)
(alternatively known as a special purpose entity [SPE] or special purpose
company [SPC]) in order to reduce the risk of bankruptcy
and thereby obtain lower interest rates from potential lenders. A credit
derivative is also generally used to change the credit quality of
the underlying portfolio so that it will be acceptable to the final investors.]
Corporate
governance:
Corporate
governance is the set of processes, customs, policies, laws and institutions
affecting the way in which a corporation is directed, administered or
controlled. Corporate governance also includes the relationships among the many
players involved (the stakeholders) and the goals for which the
corporation is governed. The principal players are the shareholders,
management
and the board of directors. Other stakeholders include
employees, suppliers, customers, banks and other lenders, regulators, the
environment and the community at large.
Recently there has been considerable interest in the
corporate governance practices of modern corporations, particularly since the
high-profile collapses of a number of large U.S. firms such as Enron
Corporation and Worldcom.
Board members and those with a responsibility for
corporate governance are increasingly using the services of external providers
to conduct anti-corruption auditing,
due diligence
and training.
Definition
The term
corporate governance has come to mean two things.
- The processes by which all companies are directed
and controlled.
- A field in economics, which studies the many issues
arising from the separation of ownership and control.[1]
Relevant
rules include applicable laws of the land as well as internal rules of a
corporation. Relationships include those between all related parties, the most
important of which are the owners, managers,
directors of the board, regulatory authorities and to a lesser extent employees
and the community at large. Systems and processes deal with matters such as
delegation of authority.
The
corporate governance structure specifies the rules and procedures for making
decisions on corporate affairs. It also provides the structure through which
the company objectives are set, as well as the means of attaining and
monitoring the performance of those objectives.
Corporate
governance is used to monitor whether outcomes are in accordance with plans and
to motivate the organization to be more fully informed in order to
maintain or alter organizational activity. Corporate governance is the
mechanism by which individuals are motivated to align their actual behaviors
with the overall participants
Wasting asset: An
asset which has a
limited life and therefore decreases in value over time, such as an option which is out of the money.
Wasting
assets are held for too long, they will ultimately lose all their value.
Derivatives such as options are thought of as wasting assets since they have
fixed expiration dates and lose value as the time gap until expiration narrows.
An asset which has a
limited life and therefore decreases in value over time, such as an option which is out of the money.
Marginal Cost (MC)
The
marginal cost of an additional unit of output is the cost of the additional
inputs needed to produce that output. More formally, the marginal cost is
the derivative of total production costs with respect to the level of output.Marginal
cost and average cost can differ greatly. For example, suppose it costs
$1000 to produce 100 units and $1020 to produce 101 units. The average
cost per unit is $10, but the marginal cost of the 101st unit is $20 Marginal
costs are defined as the change in total costs resulting from a one unit change
in output. They are the variable costs associated with increasing output in the
short run. A change in marginal costs might come about for example because
of a change in the prices of essential raw materials or an increase in the wage
rate paid to part-time employees.
PerpetualSuccession:
A company does not die or cease
to exist unless it is specifically wound up or the task for which it was formed
has been completed. Membership of a company may keep on changing from time to
time but that does not affect life of the company. Death or insolvency of
member does not affect the existence of the company.
SeparateLegalEntity:
On
incorporation under law, a company becomes a separate legal entity as compared
to its members. The company is different and distinct from its members in law.
It has its own name and its own seal, its assets and liabilities are separate
and distinct from those of its members. It is capable of owning property,
incurring debt, and borrowing money, having a bank account, employing people,
entering into contracts and suing and being sued separately.
LimitedLiability:
The liability
of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay
only the uncalled money due on shares held by him when called upon to pay and
nothing more, even if liabilities of the company far exceeds its assets. On the
other hand, partners of a partnership firm have unlimited liability i.e. if the
assets of the firm are not adequate to pay the liabilities of the firm, the
creditors can force the partners to make good the deficit from their personal
assets. This cannot be done in case of a company once the members have paid all
their dues towards the shares held by them in the company.
Types of Companies
1.Public Company means
a company which not a private company.
2.Private Company means a company which by its articles of
association :-
- Restricts the right of
members to transfer its shares
- Limits the number of its
members to fifty. In determining this number of 50, employee-members and
ex-employee members are not to be considered.
- Prohibits an invitation
to the public to subscribe to any shares in or the debentures of the
company.
If
a private company contravenes any of the aforesaid three provisions, it ceases
to be private company and loses all the exemptions and privileges which a
private company is entitled.
Following
are some of the privileges and exemptions of a private limited company:-
1. Minimum number is members is 2
(7 in case of public companies)
2. Prohibition of allotment of the
shares or debentures in certain cases unless statement in lieu of prospectus
has been delivered to the Registrar of Companies does not apply.
3. Restriction contained in
Section 81 related to the rights issues of share capital do not apply. A
special resolution to issue shares to non-members is not required in case of a
private company.
4. Restriction contained in
Section 149 on commencement of business by a company does not apply. A private
company does not need a separate certificate of commencement of business.
5. Provisions of Section 165
relating to statutory meeting and submission of statutory report does not
apply.
6. One (if 7 or less members are
present) or two members (if more than 7 members are present ) present in person
at a meeting of the company can demand a poll.
7. In case of a private company
which not a subsidiary of a public limited company or in the case of a private
company of which the entire paid up share capital is held by the one or more
body corporates incorporated outside India, no person other than the member of
the company concerned shall be entitled to inspect or obtain the copies of
profit and loss account of that company.
8. Minimum number of directors is
only two. (3 in case of a public company)
Profit Maximization Vs Wealth
Maximization:
Frequently, maximization of
profits is regarded as the proper objective of the firm, but it is not as
inclusive a goal as that of maximizing stockholder wealth. For one thing, total
profits are not as important as earnings per stock. A firm could always raise
total profits by issuing stock and using the proceeds to invest in Treasury
bills. Even maximization of earnings per stock, however, is not a fully
appropriate objective, partly because it does not specify the timing or
duration of expected returns. Is the investment project that will produce a
$100,000 return 5 years from now more valuable than the project that will
produce annual returns of $15,000 in each of the next 5 years? An answer to
this question depends upon the time value of money. Few existing stockholders
would think favorably of a project that promised its first return in 100 years,
no matter how large this return. We must take into account the time pattern of
returns in our analysis.
Another shortcoming of the
objective of maximizing earnings per stock is that it does not consider the
risk or uncertainty of the prospective earnings stream. Some investment
projects are far more risky than others. As a result, the prospective stream of
earnings per stock would be more uncertain if these projects were undertaken.
In addition, a company will be more or less risky depending upon the amount of
debt in relation to equity in its capital structure. This financial risk is
another uncertainty in the minds of investors when they judge the firm in the marketplace.
Finally, earnings per stock objective do not take into account any dividend the
company might pay.
For the reasons given, an
objective of maximizing earnings per stock may not be the same as maximizing
market price per stock. The market price of a firm's stock represents the value
that market participants place on the firm. 
Especially For
Interview
1 Dematerialization vs.
Rematerialization
Dematerialization----The move from physical
certificates to electronic book keeping. Actual stock certificates are slowly
being removed and retired from circulation in exchange for electronic
recording.
Rematerialization is a compiler optimization
which saves time by recomputing a value instead of loading it from memory. It
is typically tightly integrated with register allocation, where it is used as
an alternative to spilling registers to memory.
2
Venture Capital-seed companies?
Venture Capital
Money
made available for investment in innovative enterprises or research, especially
in high technology, in which both the risk of loss and the potential for profit
may be considerable. Also called risk capital.
3 Institutional
investor?
Institutional
investor----A
non-bank person or organization that trades securities in large enough share
quantities or dollar amounts that they qualify for preferential treatment and
lower commissions. Institutional investors face less protective regulations
because it is assumed that they are more knowledgeable and better able to
protect themselves.
Foreign
Institutional investor
An
investor or investment fund that is from or registered in a country outside of
the one in which it is currently investing. Institutional investors include
hedge funds, insurance companies, pension funds and mutual funds.
Insider trading----The illegal buying or
selling of securities on the basis of information that is unavailable to the
public.
A
Reverse Takeover (RTO), also known
as a back door listing, or a reverse merger, is a financial transaction that
results in a privately-held company becoming a publicly-held company without
going the traditional route of filing a prospectus and undertaking an initial
public offering (IPO). Rather, it is accomplished by the shareholders of the
private company selling all of their shares in the private company to the
public company in exchange for shares of the public company.
Stock split----The dividing of a company's
existing stock into multiple shares. In a 2-for-1 split, each stockholder
receives an additional share for each share he or she holds. Refers to a
corporate action that increases the shares in a public company. The price of
the shares are adjusted such that the before and after market capitalization of
the company remains the same and dilution does not occur. Options and warrants
are included.
For example, a company has 100 shares of
stock each with a price of $50. The market capitalization is 100 × $50 = $5000.
The company splits its stock "2-for-1". There are now 200 shares of
stock and each shareholder holds twice as many shares. The price of each share
has been adjusted to $25. The market capitalization is 200 × $25 = $5000, the
same as before the split.
Reverse stock
split, or reverse split, is just the same but in
reverse: a reduction in number of shares and an accompanying increase in the
share price. The ratio is also reversed: 1-for-2, or 1-for-3.
7 Merchant banking
Merchant banking----A bank that deals mostly in
(but is not limited to) international finance, long-term loans for companies
and underwriting. Merchant banks do not provide regular banking services to the
general public.
8
Can share holders offer its share price at premium during the IPO?
9
Who regulates/controls the price of the shares?
10
Form filed for Prospectus in SEC?
Share warrant----A certificate, usually
issued along with a bond or preferred stock, entitling the holder to buy a
specific amount of securities at a specific price, usually above the current
market price at the time of issuance, for an extended period, anywhere from a
few years to forever. In the case that the price of the security rises to above
that of the warrant's exercise price, then the investor can buy the security at
the warrant's exercise price and resell it for a profit. Otherwise, the warrant
will simply expire or remain unused. Warrants are listed on options exchanges
and trade independently of the security with which it was issued. also called
subscription warrant.
Share certificate - legal document that certifies
ownership of a specific number of stock shares (or fractions thereof) in a
corporation.
Share Premium----The market value of shares
in excess of their par value.
Proxy----A representative; an agent;
a document appointing a representative.
A
proxy is a person who is designated by another to represent that individual at
a meeting or before a public body. It also refers to the written authorization
allowing one person to act on behalf of another.
Foreign
Institutional Investor - FII----An
investor or investment fund that is from or registered in a country outside of
the one in which it is currently investing. Institutional investors include
hedge funds, insurance companies, pension funds and mutual funds.
Pooling of
Interest----An
accounting method, used in mergers and acquisitions, where the balance sheet
items of the two companies are simply added together.
Joint Venture----An association of two or
more individuals or companies engaged in a solitary business enterprise for
profit without actual partnership or incorporation; also called a joint
adventure..
A
Strategic Alliance is a mutually
beneficial long-term formal relationship formed between two or more parties to
pursue a set of agreed upon goals or to meet a critical business need while
remaining independent organizations.
Partnership----An association of two or
more persons engaged in a business enterprise in which the profits and losses
are shared proportionally.
Consignment----The delivery of goods to a
carrier to be shipped to a designated person for sale. A bailment of goods for
sale.
A
consignment is an arrangement
resulting from a contract in which one person, the consignor, either ships or
entrusts goods to another, the consignee, for sale. If the goods are
transported by a carrier to the consignee, the name of the consignor appears on
the bill of lading as the person from whom the goods have been received for
shipment. The consignee's name appears on it as the person to whom delivery is
to be made. The consignee acts as an agent on behalf of the consignor, a
principal, in selling the goods and must take reasonable care of them while in
his or her possession. The consignor does not give up ownership of the goods
until their sale.
Shell Company is a company that is
incorporated but has no significant assets or operations. Shell corporations
are not in themselves illegal, and they may have legitimate business purposes.
However, they are a main component of underground economy, especially those
based in tax havens.
Blank check
company - A
company in a developmental stage that either doesn't have an established
business plan or has a business plan that revolves around a merger or
acquisition with another firm.
Reorganization----A process designed to
revive a financially troubled or bankrupt firm. A reorganization involves the
restatement of assets and liabilities, as well as holding talks with creditors
in order to make arrangements for maintaining repayments.
Restructuring----A significant modification
made to the debt, operations or structure of a company. This type of corporate
action is usually made when there are significant problems in a company, which
are causing some form of financial harm and putting the overall business in
jeopardy. The hope is that through restructuring, a company can eliminate
financial harm and improve the business.
23
Spin off Vs Split-Off
Spin off----An independent company
created from an existing part of another company through a divestiture, such as
a sale or distribution of new shares.
Split-off----The process whereby a
parent corporation organizes a subsidiary corporation to which it transfers
part of its assets in exchange for all of the subsidiary's capital stock, which
is subsequently transferred to the shareholders of the parent corporation in
exchange for a portion of their parent stock.
A
split-off differs from a spin-off in that the shareholders in a split-off must
relinquish their shares of stock in the parent corporation in order to receive
shares of the subsidiary corporation whereas the shareholders in a spin-off
need not do so.
Reverse split
Takeover----Acquiring control of a
corporation, called a target, by stock purchase or exchange, either hostile or
friendly.
Takeover----The act or an instance of
assuming control or management of or responsibility for something, especially
the seizure of power, as in a nation, political organization, or corporation.
Divestiture----The sale, liquidation, or
spinoff of a corporate division or subsidiary.
Disposition
or sale of an asset by a company. A company will often divest an asset which is
not performing well, which is not vital to the company's core business, or
which is worth more to a potential buyer or as a separate entity than as part
of the company
Corporate
governance is
the set of processes, customs, policies, laws and institutions affecting the
way a corporation is directed, administered or controlled. Corporate governance
also includes the relationships among the many players involved (the
stakeholders) and the goals for which the corporation is governed. The
principal players are the shareholders, management and the board of directors.
Other stakeholders include employees, suppliers, customers, banks and other
lenders, regulators, the environment and the community at large.
Dividend A share of profits received by
a stockholder or by a policyholder in a mutual insurance society.
Prime
rate
:The lowest
rate of interest on bank loans at a given time and place, offered to preferred
borrowers. Also called prime interest
rate.
Convertible Debentures:
Any
type of debenture that can be converted into some other security.
Certificate
of Incorporation Vs Certificate of merger
AGM Vs EGM
AGM : A mandatory yearly meeting
of shareholders that allows stakeholders to stay informed and involved with
company decisions and workings.
EGM: A meeting other than the annual general
meeting between a company's shareholders, executives and any other members. An
EGM is usually called on short notice and deals with an urgent matter.
.
Dissolution----
Act or process of dissolving; termination; winding up. In this sense it is
frequently used in the phrase dissolution
of a partnership
The
dissolution of a corporation is the termination of its existence as a legal
entity.
Anti Dumping Vs
Dumping
Dumping, selling goods at less than the
normal price, usually as exports in international trade. It may be done by a
producer, a group of producers, or a nation. Dumping is
usually done to drive competitors off the market and secure a monopoly, or to
hinder foreign competition. To counterbalance international dumping,
nations often resort to flexible tariffs. In international trade, acute
competition from foreign producers often leads to charges of dumping.
A policy of dumping depends for its effectiveness on the
possibility of maintaining separate domestic and foreign markets, on
monopolistic influences maintaining a high price in the home market, on export
bounties, or on low import duties in the foreign market. Dumping
disturbs those markets that receive dumped goods, and it may drive local
producers out of business. Governments may condone, or even sponsor, dumping in other markets for either political reasons or to
achieve a more favorable balance of payments.
Anti
Dumping----Intended
to discourage importation and sale of foreign-made goods at prices
substantially below domestic prices for the same items.
Chief Financial Officer – CFO----This is the senior manager who
is responsible for overseeing the financial activities of an entire company.
This includes signing checks, monitoring cash flow, and financial planning.
Chief Executive Officer----The highest-ranking executive
in a company or organization, responsible for carrying out the policies of the
board of directors on a day-to-day basis.
Hedging: In commerce, method by which
traders use two counterbalancing investment strategies so as to minimize any
losses caused by price fluctuations.
It
is generally used by traders on the commodities market. Typically, hedging
involves a trader contracting to buy or sell one particular good at the time of
the contract and also to buy or sell the same (or similar) commodity at a later
date. In a simple example, a miller may buy wheat that is to be converted into
flour. At the same time, the miller will contract to sell an equal amount of
wheat, which the miller does not presently own, to another trader. The miller
agrees to deliver the second lot of wheat at the time the flour is ready for
market and at the price current at the time of the agreement. If the price of
wheat declines during the period between the miller's purchase of the grain and
the flour's entrance onto the market, there will also be a resulting drop in
the price of flour. That loss must be sustained by the miller. However, since
the miller has a contract to sell wheat at the older, higher price, the miller
makes up for this loss on the flour sale by the gain on the wheat sale. Hedging
is also employed by stock and bond traders, export-import traders, and some
manufacturers.
Red herring
prospectus:
This
is an initial prospectus to be submitted by a company which is planning to have
an IPO. This prospectus has to be filed with SEC. It contains all the
information about the company except for the offer price and the effective
date, which aren't known at that time. There are several additions and edits to
this document before the final prospectus is released.
The
reason it is called a Red herring is due to a section of the document colored
in red which explicitly states that the issuing company is not attempting to
sell its shares before it has been given official approval.
"Red
Herring Prospectus" is a prospectus which does not have details of either
price or number of shares being offered or the amount of issue. This means that
in case the price is not disclosed, the number of shares and the upper and
lower price bands are disclosed. On the other hand, an issuer can state the
issue size and the number of shares are determined later.
Book Building
The
process by which an underwriter attempts to determine at what price to offer an
IPO based on demand from institutional investors.
Shareholders and
Stake Holders.
Shareholders----Any
person, company, or other institution that owns at least 1 share in a company.
A shareholder may also be referred to as a stockholder.
Net Present Value - NPV ----The difference between the
present value of cash inflows and the present value of cash outflows. NPV is
used in capital budgeting to analyze the profitability of an investment or
project.
The
internal rate of return (IRR) is defined as the discount rate that gives
a net present value (NPV) of zero. The NPV is calculated from an annualized
cash flow by discounting all future amounts to the present.
The
length of time required to recover the cost of an investment.
Franchise,
Examples of Franchise Vs Affiliate
Franchise----A privilege granted or
sold, such as to use a name or to sell products or services. In its simplest
terms, a franchise is a license from the owner of a trademark or trade name
permitting another to sell a product or service under that name or mark. More
broadly stated, a franchise has
evolved into an elaborate agreement under which the franchisee undertakes to
conduct a business or sell a product or service in accordance with methods and
procedures prescribed by the franchisor, and the franchisor undertakes to
assist the franchisee through advertising, promotion, and other advisory
services.
Royalty: A payment to an owner for the
use of property, especially patents, copyrighted works, franchises or natural
resources.
Leasing Vs Hire
Purchase
A
lease or tenancy is an interest in personal property or real property given by
a lessor to another person (usually called the lessee or tenant) for a fixed
period of time, and the lessee obtains exclusive possession of the property in
return for paying the lessor a fixed or determinable consideration.
Hire
Purchase----Purchase of a commodity on an installment plan.
Debtors in
Possession: A
company that continues to operate while under the Chapter 11 bankruptcy process.
Mutual Funds
(open ended Vs closed ended)
A
fund, in the form of an investment company, in which shareholders combine their
money to invest in a variety of stocks, bonds, and money-market investments
such as U.S. Treasury bills and bank certificates of deposit.
Intellectual
Property:
Intellectual
property describes a wide variety of property created by musicians, authors,
artists, and inventors. The law of intellectual property typically encompasses
the areas of copyright, patent, and trademark law. It is designed to encourage
the development of art, science, and information by granting certainproperty
rights to all artists, which include inventors in both the arts and the
sciences. These rights allow artists to protect themselves from infringement,
or the unauthorized use and misuse of their creations.
Copyright: The legal right granted to an author, composer, playwright,
publisher, or distributor to exclusive publication, production, sale, or
distribution of a literary, musical, dramatic, or artistic work.
Patent :A government license that gives the holder exclusive rights to a
process, design, or new invention for a designated period of time.
Trade mark :- A name, symbol, or other
device identifying a product, officially registered and legally restricted to
the use of the owner or manufacturer.
Independent
Director
Independent
Director: In order for a director to qualify as an "independent
director," the Board must affirmatively determine that the director has no
material relationship with Occidental (either as a partner, stockholder or
officer of an organization that has a relationship with Occidental) that would
preclude that nominee from being an independent director. For the purpose of such determination, an
"independent director" is a director who:
- Has not been employed by
Occidental within the last five years;
- Has not been an employee
or affiliate of any present or former internal or external auditor of
Occidental within the last three years;
- Has not received more than
$60,000 in direct compensation from Occidental, other than director and
committee fees, during the current fiscal year or any of the last three
completed fiscal years;
- Has not been an executive
officer or employee of a company that made payments to, or received
payments from, Occidental for property or services in an amount exceeding
the greater of $1 million or 2 percent of such other company's
consolidated gross revenues during the current fiscal year or any of the
last three completed fiscal years;
Audit Committee :An Audit Committee is an
operating committee of a publicly-held company. Committee members are normally
drawn from members of the Company's board of directors. An audit committee of a
publicly traded company in the United States is composed of independent or outside
directors.
Quorum :In law, a quorum is the
minimum number of members of a deliberative body necessary to conduct the
business of that group.
EPS :The portion of a company's profit allocated
to each outstanding share of common stock. EPS serves as an indicator of a
company's profitability.
Net
income-Dividends on preferred stocks/Average outstanding stocks
What are Liquid
assets: Cash,
or property immediately convertible to cash, such as securities, notes, life
insurance policies with cash surrender values, U.S. savings bonds, or an
account receivable.
Treasury Stock
(shares buy back):Corporate
stock that is issued, completely paid for, and reacquired by the corporation at
a later point in time. Treasury stock or shares may be purchased by the corporation,
or reacquired through donation, forfeiture, or some other method. It is then
regarded as the personal property of the corporation and part of its assets.
The corporation can sell the stock for cash or credit, for par value or market
value, or upon any terms that it could be sold by a stockholder. Shares that
the corporation has not issued in spite of its authority to do so are
ordinarily not regarded as treasury shares but are merely unissued shares.
Public Company Vs
Private Company: A
company that has issued securities through an initial public offering and which
are traded on at least one stock exchange or over-the-counter market.
Index (Stock
index): A statistical indicator providing a
representation of the value of the securities which constitute it. Indices
often serve as barometers for a given market or industry and benchmarks against
which financial or economic performance is measured.
Sensex :An abbreviation of the Bombay
Exchange Sensitive Index (Sensex) - the benchmark index of the Bombay Stock
Exchange (BSE). It is composed of 30 of the largest and most actively-traded
stocks on the BSE. Initially compiled in 1986, the Sensex is the oldest stock
index in India.
BSE: The BSE SENSEX (also known as the BSE 30) is a
value-weighted index composed of 30 scrips, with the base April 1979=100. The
set of companies which make up the index has been changed only a few times in
the last 20 years. These companies account for around one-fifth of the market
capitalization of the BSE.
Joint Stock Company
Vs Joint venture
Joint
Stock Company----A company which has some features of a corporation and some
features of a partnership. The company sells fully transferable stock, but all
shareholders have unlimited liability.
Joint
Stock Company----A business whose capital is held in transferable shares of
stock by its joint owners.
Joint
venture----A contractual agreement joining together two or more parties for the
purpose of executing a particular business undertaking. All parties agree to
share in the profits and losses of the enterprise.
Joint
venture----An association of two or more individuals or companies engaged in a
solitary business enterprise for profit without actual partnership or
incorporation; also called a joint adventure.
Restructuring : A significant modification made to the debt,
operations or structure of a company. This type of corporate action is usually
made when there are significant problems in a company, which are causing some
form of financial harm and putting the overall business in jeopardy. The hope
is that through restructuring, a company can eliminate financial harm and
improve the business.
Disinvestment:
The action of an organization or government
selling or liquidating an asset or subsidiary. Also known as "divestiture". A reduction in capital expenditure, or the
decision of a company not to replenish depleted capital goods
Underwriter:
1.
A person or firm engaged in the insurance business.
2.
An insurance agent who assesses the risk of enrolling an applicant for coverage
or a policy.
3.
One that guarantees the purchase of a full issue of stocks or bonds.
A
company or other entity that administers the public issuance and distribution
of securities from a corporation or other issuing body. An underwriter works
closely with the issuing body to determine the offering price of the
securities, buys them from the issuer and sells them to investors via the
underwriter's distribution network.
Insurance Vs
Reinsurance:
Insurance----A
contract whereby, for a specified consideration, one party undertakes to
compensate the other for a loss relating to a particular subject as a result of
the occurrence of designated hazards.
Reinsurance----The
contract made between an insurance company and a third party to protect the
insurance company from losses. The contract provides for the third party to pay
for the loss sustained by the insurance company when the company makes a
payment on the original contract.
Preferred Stock:
A
preferred stock, also known as a preferred share or simply a preferred, is a
share of stock carrying additional rights above and beyond those conferred by
common stock.
Rights
Unlike
common stock, preferred stock usually has several rights attached to it.
----The
core right is that of preference in dividends. Before a dividend can be
declared on the common shares, any dividend obligation to the preferred shares
must be satisfied.
----The
dividend rights are often cumulative, such that if the dividend is not paid it
accumulates in arrears.
----Preferred
stock has a par value or liquidation value associated with it. This represents
the amount of capital that was contributed to the corporation when the shares
were first issued.
----Preferred
stock has a claim on liquidation proceeds of a stock corporation, equivalent to
its par or liquidation value. This claim is senior to that of common stock,
which has only a residual claim.
----Almost
all preferred shares have a fixed dividend amount. The dividend is usually
specified as a percentage of the par value or as a fixed amount. For example
Pacific Gas & Electric 6% Series A preferred.
----Variable
preferreds are rare exceptions: their changing dividends depend on prevailing
interest rates, or varying as a percentage of net income.
----Some
preferred shares have special voting rights to approve certain extraordinary
events (such as the issuance of new shares or the approval of the acquisition
of the company) or to elect directors, but most preferred shares provide no
voting rights associated with them.
----Usually
preferred shares contain protective provisions which prevent the issuance of
new preferred shares with a senior claim. This results in corporations often
having several series of preferred shares that have a subordinate relationship.
GDP :The total market value of all
the goods and services produced within the borders of a nation during a
specified period.
Option and its
Types
Option----A
privilege, for which a person has paid money that grants that person the right
to purchase or sell certain commodities or certain specified securities at any
time within an agreed period for a fixed price.
OTC Over-the-Counter : Over-The-Counter, method of
buying and selling securities outside the organized stock exchange.
NASDAQ
(National Association of securities Dealers Automated Quotation system)
Nasdaq
Stock Market, Inc. (Nasdaq) is a provider of securities listing, trading and
information products and services.
Negotiable
Instrument: A commercial paper, such as a
check or promissory note, that contains the signature of the maker or drawer;
an unconditional promise or order to pay a certain sum in cash that is payable
either upon demand or at a specifically designated time to the order of a
designated person or to its bearer.
Negotiable
instrument, bill of exchange, check, promissory note, or other written contract
for payment that may serve as a substitute for money.
1.
The promise or order to pay must be unconditional;
2.
The payment must be in a specific sum of money, although interest may be added
to the sum;
3.
The payment must be made on demand or at a definite time;
4.
The instrument must be payable to bearer or to order.
NOW (Negotiable
Order of Withdrawal)
In
the United States, a Negotiable Order of Withdrawal account (NOW account) is a
deposit account that pays interest, on which checks may be written. Authorized
on a national scale in 1981, these accounts typically pay a relatively small
return, although some banks offer high-interest NOW accounts in order to
attract depositors. Unless your interest rate is high, the balances in NOW
accounts should be kept at the minimum necessary to provide needed funds
without incurring service charges.
Merchant
bank----A bank that deals mostly in (but is not limited to) international
finance, long-term loans for companies and underwriting. Merchant banks do not
provide regular banking services to the general public.
Going
Private
A
company "goes private" when it reduces the number of its shareholders
to fewer than 300 and is no longer required to file reports with the SEC.
A
number of transactions can result in a company going private, including:
- Another company or
individual makes a tender offer to buy all or most of the company’s
publicly held shares;
- The company merges with or
sells the company’s assets to another company; or
- The company can declare a
reverse stock split that not only reduces the number of shares but also
reduces the number of shareholders. In this type of reverse stock split,
the company typically gives shareholders a single new share in exchange
for a block—10, 100, or even 1,000 shares—of the old shares. If a
shareholder does not have a sufficient number of old shares to exchange
for new shares, the company will usually pay the shareholder cash based on
the current market price of the company’s stock.
While
SEC rules don't prevent companies from going private, they do require companies
to provide information to shareholders about the transaction that caused the
company to go private. The company may have to file a merger proxy statement or
a tender offer document with the SEC. In addition, if the transaction is
initiated by an affiliate (an insider) of the company, Rule
13e-3 of the Securities Exchange Act of 1934 requires the affiliate to file
a Schedule 13E-3
with the SEC.
Going
private transactions require shareholders to make difficult decisions. To
protect shareholders, some states have adopted corporate takeover statutes that
provide shareholders with dissenter's rights. These statutes provide
shareholders the opportunity to sell their shares on the terms offered, to
challenge the transaction in court, or to hold on to the shares. Once the
transaction is concluded, remaining shareholders may find it very difficult to
sell their retained shares because of a limited trading market.
Futures : -Contracts that promise to
purchase or sell standard commodities at a forthcoming date and at a fixed
price. This type of contract is an extremely speculative transaction and
ordinarily involves such standard goods as rice or soybeans. Profit and loss
are based upon promises to deliver—as opposed to possession of—the actual
commodities.
Exit Strategy:
1.
The method by which a venture capitalist or business owner intends to get out
of an investment that he or she has made in the past. In other words, the exit
strategy is a way of "cashing out" an investment. Examples include an
initial public offering (IPO) or being bought out by a larger player in the
industry. Also referred to as a "harvest strategy" or "liquidity
event".
2.
In the context of an active trader, a plan as to when a trade will be closed
out.
Monopoly :Exclusive control by one group
of the means of producing or selling a commodity or service
MRTP
Monopoly & Restrictive Trade Practices Act
Inflation : A
persistent increase in the level of consumer prices or a persistent decline in
the purchasing power of money, caused by an increase in available currency and
credit beyond the proportion of available goods and services.
A
Patent is a set of exclusive rights
granted by a state to a person (the patentee, usually the inventor) for a fixed
period of time in exchange for the regulated, public disclosure of certain
details of a device, method, process or composition of matter (substance)
(known as an invention) which is new, inventive, and useful or industrially
applicable.
A
Copyright is a law that gives the
creator of a document, musical piece, book, etc. the right to their creation
and the control of its distribution. This protects the creators ability to sell
their work. Once copyrighted, a work can only be copied at the creator's
disposal. By having copyright laws, our government is encouraging the formation
of new ideas and concepts by securing the creator's reward for their hard work
and great consumption of time.
Red herring
prospectus :This
is an initial prospectus to be submitted by a company which is planning to have
an IPO. It contains all the information about the company except for the offer
price and the effective date, which aren't known at that time. There are
several additions and edits to this document before the final prospectus is
released.
The
reason it is called a Red herring is due to a section of the document colored
in red which explicitly states that the issuing company is not attempting to
sell its shares before it has been given official approval by the SEC.
Book Building is a process of fixing the
share price based on the demand at various price levels.
CRISIL----Credit Rating Information
Services of India Limited
Portfolio
Management
The
science of making decisions about investment mix and policy.
SEDAR :System for Electronic
Document Analysis and Retrieval
EDGAR : Electronic Data Gathering
Analysis and Retrieval
Spread: Difference between bid and
offer prices; also, difference between high and low prices of a particular
security over a given period.
BID: An offer or proposal made by an investor or
broker to buy a security.
Offer: A proposal or offer made by
an investor or broker to sell a security.
Write essay on
any one of the following
1)
Women reservation bill
2)
Globalization
3)
Effect of movies on youth
4)
Education system in India
5)
Role of the media in the society
6)
Can the film stars become good administrators?
7)
Importance of small states
8)
Impact of western culture on Indian culture
9)
Most unforgettable/favorite movement
10)
Role model
11)
Is Hyderabad a hi-tech city?
12)
BPO and KPO
13)
Economic crisis
14)
Write about your role model
Revenue:
Revenue is the value of out put
supplied to customers
Gross inflow of assets or the
gross decrease in liabilities
Operating revenue:
Arising from the main
operations or business (sale of products manufactured by a company)
Non-operating revenue:
Indirect to the main operations
of the firm (sale of an old equipment similarly dividend and interest from
temporary investments)
Expenditure:
The cost of earning revenue.
When assets or consumed or liabilities are increased.
Operating expenses:
Relating to the main operations
(manufacturing expenses)
Non-operating expenses:
Which are indirect to the main
operations (legal expenses)
Capital expenditure:
Money spent to acquire physical
assets, which are buildings, machinery, and land.
Company:
Is a voluntary and autonomous
association of certain persons which capital divided into numerous transferable
shares formed to carry out a particular purpose. Company formed and registered
under the company’s act 1956.
Kinds of companies:
Charted companies: East India
company
Statutory companies: RBI, IFC
Registered companies:
Incorporated under company’s act 1956.
Difference between Private
limited company and Public limited company:
- Minimum
number of its members Private: (2), Public (7)
- Maximum
number of its members Private: (50), Public: unlimited
- Issue
of prospects: a private company cannot invite public to subscribe to its
shares or debentures by issue of prospects. Public company must issue the
prospects.
- Transfer
of shares: restrict to private company, freely transferable to public
company.
- Number
of Directors: Private (2), Public (5)
- Use
of the word Limited
- Restriction
regarding managerial remuneration, public limited company not more than
11% of the net profit.
- Legal
formalities
- Commencement
of business
Equity shares:
Represent the ownership
position in a company; equity shareholders will get dividend and repayment of
capital after meeting the claims of preference shareholders.
Equity shareholders have the
voting right.
Preference shares:
Preference shareholders will
get dividend and repayment of capital in the winding up of the company over the
equity shareholders
Types:
Cumulative preference shares,
Non-cumulative preference shares
Redeemable preference shares
(usually non-redeemable)
Participating and
non-participating preference shares (on surplus profits)
Debentures:
Acknowledgement of debt,
certificate issued by a company under its seal as an evidence of a debt due
from the company
Types:
Naked
or simple debentures (no security)
Mortgage
debentures (security)
Redeemable,
Irredeemable debentures
Convertible,
Non-convertible debentures
Share
premium:
Value
greater than its face value
Bank
account Dr
To share application account
(Being
application money along with premium received)
Share
application account Dr
To share capital account
To share premium account
(Share
application money transferred to share capital account)
Share
allotment account Dr
To share capital account
To share premium account
(The
allotment money and share premium money due on shares)
Bank
account Dr
To share allotment account
(Share
allotment money received)
Share
discount:
Value
less than its face value
Share
discount account Dr
Discount
on the issue of share account Dr
To share capital account
Primary
market: Initial
public offering of securities (IPO), newly floated shares, first issue of
shares
Secondary
market Buying
and selling of securities (shares) is traded in secondary market
OTCI:
Over the
counter exchange of India (no particular place to buy and selling of shares)
Memorandum of association: It determines the scope of the
activities of the company and defines the relations of the Company with out
side world. Registered office, company name, objectives, 7 members have
to promise to take at least one share each, their names and addresses.
Articles of association: Rules and regulations of the
internal management of the company and very important to the Shareholders,
because they determine the relation between the company and its members.
Subsidiary
company: A
company that is completely control by the company
Holding company: A
company that has control over other companies through ownership of a sufficient
portion
Of
those companies common stock. A company that owns enough voting stock in
another
Firm to
control management
EX:
CAPITLA IQ is subsidiary of S & P (standard and poor, credit rating
company)
S &
P is holding company of CAPITLA IQ.
Stock
exchanges in India and abroad:
Place
where buying and selling of shares takes place is stock exchange
EX:
BSE, NSE, NYSE, NASDAQ, London stock exchange, Toronto stock exchange
Depreciation:
Reduction
in the value of asset due to wear tear and laps of time, depletion and
obsolesce
Convert
the cost of asset into cost of operation
Methods:
Straight-line
method
Diminishing
balance method or declining balance method or accelerated method
Sinking
fund method
Depletion
method
Accrued
expenses:
Represent
a liability that a firm has to pay for the services which has already receive,
Obligations
payable by the firm. Ex: wages, salaries outstanding.
Deferred
income:
Represent
funds received by the firm for goods and services, which it has agreed to
supply in
Future
Ex: advanced payments by the customers
SEBI:
Securities
and Exchange Board of India (12th April 1988)
To
promote fair dealing. To provide a degree of protection
To regulate and develop a code of conduct,
register and working of stock brokers
Provision: Preparatory
action of measure, money kept aside for a specific work
Reserve:
Some amount of profit kept aside to meet
contingent expenses, put aside for future purpose
Minority
interest: The ownership interest in a
company held by the person other than the parent company and
Its
subsidiary undertakings
General
reserve:It can
be used for any purpose including distribution of dividend
Capital
reserve: For
specific purpose
Dividend:
Shareholders
will expect some return from their investments by them in the share capital
Are
generally paid in cash Dividend declared
by the board of directors in the AGM (annual general meeting)
Interim
dividend: Dividend
declared for 6 months is called interim dividend
Final
dividend: Declared
at the end of the financial year
Theories:
Relevance:
Walters model, Gardens model, Bird in a hand argument
Irrelevance:
Modigliani and Miller’s Hypothesis
Marginal
cost: Aggregate amount of variable cost
Variable
cost: One
which various directly with changes in the level of output over a defined
period of time
Fixed
cost: One
which is not affected by changes in the level of out put over a defined period
of time
Semi-variable
cost: Which
does not vary proportionally but simultaneously cannot remain stationary at all
times
Ex:
Depreciation, repairs
Partnership: A business relationship where
two or more persons carry on a business with a view to make a profit.
Joint-venture: A foreign company joins hands
with local company for local interest to carry out a single project pr a
limited number of projects, in specific period of time.
Non-recurring items in P &
L account (Profit and loss account): Sale
of investments
Non-cash expenditure in P &
L account: Depreciation
Depletion: Used of oil wells, mines or
deposits for depreciation
Amortization: For long term investments such
as patens copyrights, paying of debt gradually
Capital profits: Sale of fixed assets
Revenue profits: From main operation of the firm
(sale of goods and services)
Mutual fund: An open-ended fund operated by
an investment company, which arises money from shareholders and investments in
a group of assetsRaise money by selling shares of the fund to the public
(income fund, growth fund)
Trade discount: Which is not shown in the books
Cash discount: 50% out of MRP like that
Trade credit: To the credit that a customer
gets from supplier of goods in the normal course
Duties of Finance Manager: Raising of funds, allocation of
funds, profit planning, understanding capital markets
Chairman: One of the person elected by
the directors in the board of directors meeting.
Who is the Director: one of the shareholders becomes
director
CEO: chief executive officer, top
officer in the company in the executive cadre
Who can appoint CEO: board of directors
AGM: shareholders annual general
meeting
Quorum: attend the minimum number of
members in the meeting
Statutory books: Register of investment holders
and their names, register of earnings, register of debenture and shareholders,
register of directors and their shares
Financial books:
Cash book, general ledger,
return outwards and return inwards, invoice, bills payable, bills receivables
Resolution: solving the problem
Who can appoint auditor: board of directors
Minute books: recording of the board of
directors meeting
Agenda: the meeting, which is discussed
by the board of directors
Duties of director: to appoint officers and auditors,
to take policy decisions.
Contribution: sales – variable cost
Role of stock exchange: to regulate the share trading
in India
Corporation: Business firm whose articles of incorporation
have been approved in some state
A business, which is a completely
separate entity from its owners
Difference between Corporation
and Company:
Company: an institution created to
conduct business He only invest in large well established company
He can start the company in his
garage
Policies: prudent, materiality, consistency
Assumptions: continuing, consistency,
accrual (revenue and cost)
Proxy: it includes every proxy
consensus and authorization with in the meaning of section
14 (a) of the act
(representative)
Consignment:
Auction are quite simple
A consignor brings merchandise
for you to sell online
Consignor – owner
Consignee – agent
Debt & Credit: every account has two sides
left side Debit and right side Credit
Open market: a market, which is widely
accessible to all investors or consumers
Annual report: (10 K) Audited document required by
the SEC and send to the public company’s or mutual funds share at the end of
each fiscal year (balance sheet, income statement, cash flow statement and
description of company operations, auditors report, summary of operations,
chairman’s speech) contain in annual report.
Quarterly report: (10 Q) Un audited document required by
the SEC of all us public companies reporting the financial results for the
quarter and noting any significant changes and events in the quarter (financial
statements, discussion from the management, list of material events)
Merger: two or more companies combine
into one company they may form a new company
Absorption: two or more companies combine
into an existing company
Consolidation: is a combination of 2 or more
companies into a new company
Acquisition: As an act of acquiring
effective control by one company over the assets or management of another
company without any combination of companies.
Take over: as obtaining of control over
management of a company by another
Types of merger: horizontal, vertical, and
conglomerate
Reverse acquisition: One
way of a company to become publicly traded by acquiring a public company and
then installing its own management team and renaming the acquiring company.
Reverse merger: The acquiring of a public
company by a private company allowing the private company to bypass the usually
lengthy and complex process of going public.
ADR: American depository receipts, a
negotiable certificate issued by a U.S
Debt: a liability or economic
obligation in the form of bonds, loans
Equity: ownership interest in a company
in the form of common stock or preferred stock
Shareholders equity: total assets – total
liabilities
Depression: a period during which business
activity drops significantly
Portfolio: A collection of investments allowed by the
same individual or organization (equity, bonds, debentures, preferred stock)
Portfolio Management: Choosing
and maintaining appropriate investments and allocating funds accordingly
Security analysis: the entire process of
estimating return and risk for individual securities
Portfolio analysis: To
determine the future risk and return in holding various blends of individual
securities
Prospects: A
legal document offering securities for sale required by the securities section
act 1933 it must explain the offer including the terms, issuer, objectives,
historical financial statements
Private placement: The sale of securities directly
to institutional investors such as banks, mutual funs, LIC
Bad debt reserve: an amount set aside as reserve
for bad debts
Listing: The
acceptance of securities for trading in a registered stock exchange (at least
49 % offer to public) total paid up capital should not be less than 3 crore
GDR: global depositary receipts
(CITI Bank 1990 introduced)
Underwritings: The procedure by which an underwriter brings a
new security issue to the investing public in an offering. The process of
insuring someone or something
Inventory: raw material, work-in-progress,
finished goods not at been sold
Affiliate: A company in which another
company has a minority interest related to another company
Venture capital: Funds
made available for startup firms small business with exceptional growth
potential
Capital: cash or goods used to generate
income
Capital budgeting: Firms
decision to invest its current funds most effectively in the long-term assets
in anticipation of an expected flow of benefits over a series of years
Blue chip: Stock of large, national
company with a solid record of stable earnings and/or dividend growth and
reputation for high quality management, (first class equity shares)
Board of directors: Individuals
elected by a corporation’s shareholders to over the management of the company
Strategic alliance: An agreement between two or more individuals
to achieve a common goal
Stock split To attract the potential
investors changing the shareholder’s equity announcing two or one split of
common stock to reduce the face value of the share (pare value)
Securitization: The
process of aggregating similar investment such as loan mortgage into negotiable
securities,
SENSEX: An index composed of 30 largest
and most actively trading stock companies in BSE, NSE
Cost of capital: Minimum acceptable rate of
return that a firm must earn on its investments for the market value.
Short selling: Trader sells the shares with a
small profit a short period by gaining limited returns in a short period.
ABC analysis: Statistical tool used over
inventory that a firm should not excuse some degree of control over its items
which are most costly as compared to less costly items.
EOQ: (economic order quantity)
Refers to the order size that
will result in the lowest total of orders and carrying of an item of an
inventory.
Leverage: Meeting
a fixed cost or paying a fixed return for employing resources or funds,
Describe the firm’s ability to use fixed cost assets or funds to magnify the
returns to its owners.
Operating leverage: Defined as tendency of
operating profit to vary disproportionately with sales
High operating leverage – fixed
cost more than the variable cost
Degree of operating leverage: % of change in EBIT/ %change in
sales
EBIT: earning before interest and
tax, Contribution: sales – variable cost
Financial
leverage: Defines
as tendency of the residual income to vary disproportionately with operating
profit
Degree
of financial leverage: %change in EPS/ %change in EBIT
EPS:
earnings per
share, PBT: profit before tax
Combination
of operating and financial leverage: %Change
in EPS/ % change in sales
Discounted
cash flow technique: time
value of money concept NPV, IRR, PI
Bankruptcy:
becoming
insolvent
IRR:
Is that the
rate of which the sum of discounted cash inflow equals the sum of discounted
cash outflow. Where NPV is ‘0’
Shareholder:
one who owns
share of stock in a corporate or mutual funds
Liquidate:
To convert
into cash (or) to sell all of a company assets pay outstanding debts and
distribute the remaining to shareholders and then go out of business.
Savings
account: A
deposit account at a bank or savings and loan which pay’s interest but cannot
be withdrawn by check writing
Transaction:
An agreement between a buyer and a seller to
exchange an asset for payment
Credit:
the borrowing
capacity of an individual or company
Accounts
payable: Money which is owned to
vendor’s for products and services purchased on credit
Accounts
receivables: Money
which is owned to a company by a customer for products and services provided on
credit.
Broker:
An individual
or firm acting as intermediary between a buyer and seller, usually charging a
commission.
Dual
trading: The
practice by a broker of acting as an agent and simultaneously acting as a
dealer (buying and selling of one’s own account)
Loan-value ratio: The amount borrowed
dividend by the appraised value of the collateral (securities) in %
Common-stock
ratio: A
company’s common stock divided by its total capitalization
Tax:
A fee charged
(levied) by a government on a product, income or activity
If
tax is levied directly a personal or corporation income it’s called as direct
tax.
If
tax is levied on price of goods or services is called as indirect tax
Income
Tax: Annual
tax levied by the federal government on an individual or corporations net
profit
Earnings
report: An
official quarterly or annually final document published by a public company
Shows
earnings, expenses and net profit
Net
profit: gross
sales – (taxes + interest + depreciation + other expenses)
Retail
price: price
charged to retail customers
Whole
sage: the
purchase of goods in quantity for resale purpose
Retail:
selling
directly to consumers or customers
Credit
card: Any card
that may be used repeatedly to borrow money or buy products and services on
credit issued by bank
Debit
card: A card,
which allows customer to access their funds immediately electronically
Profit:
the positive
gain from an investment or business operations
Face
value: the
nominal $ amount assigned to a security by the issuer
AMEX: (American stock exchange)
Second
largest stock exchange in the US after NYSE (Newyork stock exchange) largest
representation of stock and bonds issued by smaller companies than the NYSE
In 1998 the NASDAQ purchased
the AMEX
Compound interest:
Interest which is calculated
not only on the initial principal but also the accumulated interest of prior
period.
Capitalization: the sum of corporation’s
long-term debt stock and retained earnings
ADS: American depositary shares the share issued
under American depositary agreement, which is actually traded
GATT: General agreement on tariffs
and trade affiliate with the United Nations, to facilitate international trade
Tariff: A tax imposed on a product when
it is imported into a country or company
EBITDA: earning before interest tax
dividend and amortization
Exchange ratio: The number of shares of the
acquiring company that shareholders will receive for one share of the acquired
company
Form S 1: a registration statement used
in the initial public offering of securities
Pooling of interest: In which the balance sheet of
the two companies combined line by line without a tax impact
Capital budgeting decisions: operating, administration and
strategic
Decision tree: Define investment, identify
decision alternatives, draw decision tree, and analyze data
Concept of cash flow: Initial investment, annual net
cash flow, terminal cash flow
Investment evaluation: Estimation of cash flow,
estimation of required rate of return decision rule for making the choice.
Financial analysis: It is the process of
identifying the financial strength and weakness of the firm by properly
establishing relationship between the items of the balance sheet and the profit
and loss a/c
Liquidity: Refers to the firm’s ability to
pay debts as they mature
Solvency: refers to the firm’s ability to
meet eventually all its long-term and short-term debt
Accounting system: A source of financial
information of a firm should know the financial implications of its operations
Treasurer: auditing cost control
Controller: planning and budgeting,
inventory management, accounting
Finance: Is
the conversion of accumulated funds to productive use
Finance aptly been called as
science of money
Finance functions:
- Investment decision
- Dividend decision
- Liquidity decision
- Financing decision
Scope: finance, production and
marketing
Finance management: Is
that managerial activity which is concerned with the planning and controlling
of the firm’s financial resources
Forfeiture of shares: when a shareholder fails to
pay calls
Dividend:
Profit and loss a/c Dr
To
proposed dividend a/c
(Being dividend proposed by the
directors)
Preliminary expenses: Are those expenses which are
incurred on the formation of the company
Cost: the amount of expenditure
incurred on attributable to a specific thing or activity
Short-term finance: Trade credit, bank credit,
public deposits, advances, personal loans, retained earnings, accrued expenses,
and provision for tax, depreciation
Commerce: business
Calls in erriers will be
disclosed in balance sheet: Deduction from subscribed
capital
Father of scientific
management: F.W
Tayler
Espit Decorps: Employee
at all levels should be given the opportunity to take initiative and exercise
judgment
Government Company: Central
government or state government holds 51 % more of the total paid up capital
Entrepot trade: import of foreign goods view to
re export
Calls in advances will be
disclosed in balance sheet: Deduction
from subscribed capital
Under share premium disclosed
in B/S: reserves and surplus
Net profit on reissue of
forfeited shares will be transferred to: capital reserve
Condition for issue of shares
at discount:After
one year from the date of certificate of commencement of business
Discount on issue of shares
will be disclosed in B/S: Miscellaneous
expenses
Purpose of preparing receipts
and payment account: To
know balance of cash and bank at the end of the year
Tangible assets: which are having physical
existence (Fixed assets)
Intangible assets: which does not having physical
existence (patents, copyrights, and trademarks, franchises, intellectual
property rights)
Not a negotiable instrument: Deed of partnership
Unclaimed dividend: Dividend paid out not yet
claimed by the shareholder
Deferred revenue expenditure:
Expenditure whose benefits
lasts for more than one accounting period (advertisement exp)
Right issue: issue of shares to existing
shareholders
Which how many days the minimum
subscription amount should be received by a company: 90 days
A public company needs the
business to start: Certificate
of commencement of business
Fundamental analysis: To find out the intrinsic value
of a security, true economic worth of a financial asset
(It contains economic analysis,
industry analysis, and company analysis)
Technical analysis: Based on past information
prices of stock depends on supply and demand
Dow theory: Raising trend line – no single
individual or buyer can influence the major trend of the market
Flat trend line – market
discounts natural calamities can influence the market
Falling trend line – it is
provided way to understand it
Bull market: up ward
Bear market: down ward
NSDL: national securities depository
limited
Random walk theory:
Strong efficient market all
information is reflected on prices big one
Semi strong all public
information is reflect on security prices second one
Weakly efficient market all
historical market influence the security prices small one
Markwitz theory: the effect of combining two
securities
CAPM: (capital asset pricing
model)
The relationship between
expected return and UN avoidable risk
Combine risk free securities
with risk securities
Derivatives: A financial derivative is a
product that derives its value from an underlying asset
Tools for better financial and
risk management
Confer on the financial system
are well known
Options: Types
of contract between two parties
Put option: to sell the securities to fixed
amount
Call option: to purchase securities for
fixed amount
Futures: Is an agreement to pay or sell
an asset at a certain time in the future for a certain price
Types : Organized exchange – which are
traded in over the counter (OTCI)
Standardization, clearing
house, margins
Risk: Foregoing
of money (systematic, unsystematic, business risk, market risk, financial risk)
Trading system: Through brokers and dealers
Commission brokers, floor
brokers, odd-lot dealers, Taravaniwala, bundiwalars, arbitrager, security
dealers
Accounting: It records business
transactions takes place during the accounting period with a view to prepare
financial statements Accounting is art of recording classifying and
summarizing in a sufficient manner in terms of money, (to communicate
quantitative information)
Objectives: To measure the profit of the
company, to ascertain the financial position of the company
Accounting cycle:
Recording – transaction in
subsidiary books
Classifying – data by posting
them from subsidiary books to accounts
Closing the books – and
preparing of final accounts
Accounting concepts:
Entity concept: Scope of what is to be recorded
or what is being excluded from the accounting books (ex: drawings account) important
to the accountant
Corporate capital paid out only
at the time of winding up of the company
Dual aspect concept: It is transaction based
purchase, sales, payments, receipts total amount debit is equal total amount
credited capital + liabilities = assets
Going concern: The
enterprise will continue to exist in the foreseeable future continuing in
operation for the foreseeable future
Accounting period concept: The time interval is called
accounting period, natural business year 12 months
Money measurement concept:
Transaction is recorded in
terms of money ex: purchase of building
Matching concept: Profit = revenue – expenses
Cost concept: (historic) Asset is recorded at the price
paid to acquire it purchase land 80,000 (whether it is 1,75,000 at the time of
preparation of balance sheet) will not be considered
Revenue recognition concept:
The amount received
(receivables) sale of out put are called revenue
Revenue is the gross inflow of
cash (sale of goods manufactured by the company)
Accrual concept: Cost or recognized when they
are incurred and not when paid until cash is received
Objectivity concept: (evidence)
Transaction should be supported
by verifiable document asset is shown by replacement cost
Accounting conventions:
Convention of disclosure:
Accounts must be honestly
prepared and all material information must be disclosed there in
Contingent liabilities
appearing as a note, market value of investments appearing as a note
Convention of materiality:Material and immaterial matters
Value of stock: loss of markets
due to competition or government regulations, increase in wage bill
Allocation of cost: allocated
to every one of the three years
Convention of consistency: Important conclusions regarding
the working of a company over a number of years, accounting procedures, and
policies should be consisting.
Convention of conservatism:
(playing sage)
Considering of all prospective
losses but leaves all prospective profits
Make the provision of all
prospective losses but leaves all prospective profits
Make the provision for doubtful
debts
Valuation of stock, provision
for fluctuation of investments
Amortization
Financial accounting: To ascertain the financial
results
Profit & loss in the
operations of the business during the accounting period
Cost accounting:
To analyze the expenditure
To ascertain the cost of
various products manufacture by the company
Management accounting: To assist the management in
taking rational policy decisions
Financial statements: It contains summarized
information of the firm’s financial affairs organized systematically
Financial statements are
prepared from the accounting records maintained by the firm
Generally accepted accounting
principles (GAAP) and procedures are followed to prepare those
statements
It presents firm’s financial
situation to users
Preparation for the purpose of
external reporting to owner’s investors and creditors
Objective: 1) For decision making To
provide reliable financial information about economic resources and obligations
of business enterprise.2) For estimating the earnings potential of the
enterprise
Types of financial statements:
Income statement (P & L
a/c):
Periodic statement FPO (for the period of)
It presents the summary of
revenues, expenses and net income or net loss of a firm
Measure the firm’s
profitability; it is a scoreboard for a period of time
Operating expenses:Office salary, wages,
insurance, rent, rates, taxes, stationary, printing, post office, repairs
Selling expenses:Sales man salary, traveling
exp, advertising, discount paid, bad debts, commission for sales
Distribution expenses:Sales traveling, wear housing
rent, insurance
Financial expenses:Bank charges, bank commission,
and bank overdraft interest, interest on capital
Non-debiting expenses in P
& L account:Drawings,
income tax, life insurance
P & L account credit items:Interest received, discount
received, rent received, and collection of bad debts
Balance sheet: Pointed statement
Portrays an exact picture of
the financial position of the enterprise
About economic resources and
obligations of a business entity and about it owners as a specific date, it is
a measure of the firm’s liquidity and solvency
What is business owns (assets)
and owes (liability) the difference is capital or owner’s equity all its
contain in balance sheet
Uses: communicating to the users, for
raising further capital
Statement of retained earnings:
It means the accumulated excess
of earnings over losses and dividends the balance shown by the income statement
is transferred to the valance sheet through this statement after making
necessary appropriations
Statement of changes in
financial position: (cash flow statement)
It is essential to identify the
movement of working capital or cash in and out of the business
Changes
in the firm’s working capital
Changes
in the firm’s cash position
Changes
in the firm’s total financial position
Income:
Increase in the net worth of the business arising
out of business operations Cost
of goods sold:
Opening stock + purchases + direct expenses –
closing stock
Assets
= liabilities + share holders equity
Assets:
Any owned physical object (tangible) or right
(intangible) having economic value to its owners
Fixes
assets:
A substantial part of its capital in acquiring
what are known as fixed assets 80% - 90% of long-term funds used to acquire
fixed assets
Valuation
of fixed assets:
Historical cost method, discounted cash flow
method, replacement cost method
Goodwill:
Means that old customer will resort to the old
place, name fame and reputation of the company, goodwill arises when a new
partner admitted, acquire by another, spent on R & D
Methods
of calculating goodwill:
Average method, super annuation method,
capitalization method :
Other assets:
Preliminary expenses, share issuing expenses,
discount on issue of shares and debentures, these should be written of from out
of profits
Contingent
assets:
Un called share capital of the company, not shown in
the balance sheet because principal of conservatism
Current assets: Are
those, which are realized within the operating cycle of the business : Investments:
Idle funds of a business are invested in marketable
securities
Objective: convert them into cash with in a period
of one year
Investments in government securities
Immovable properties :Capital of partnership
business :
Liability: Economic obligation of an enterprise
Current
liability: Which
are paid within one year (paid out of current assets)
Long-term
liabilities:
Which do not become due for payment
in one year
Contingent
liabilities:
Uncalled liability on investments
in another companies
Erriers of fixed cumulative dividend
Bills discount (if drawee doesn’t pay the bill
amount to bank)
Owner’s
equity: equal to net worth
Subsidiary books:
Special books:
Sales book – purchase book
Returns book – sales, purchases
Bills book – payable receivables
Cashbook : General books: Opening entries adjusting and closing post entries, correcting entries
:
Personal accounts: Proprietor’s, suppliers, creditors
Artificial persons – limited
company a/c, insurance company a/c, government company a/c
Representative persons – common title, salaries
outstanding, rent prepaid
Real accounts: Tangible – land, buildings, machinery
Intangible – goodwill, patents,
intellectual properties,
Nominal
accounts:
Salaries, rent, commission, discount, insurance
Debit credit
Personal accounts: Is the
receiver Is the giver
Real accounts: what comes in what goes out
Nominal accounts: all losses and exp all
gains
Ledger: is a set of accounts, ledger is the important book of the double entry
system
Posting: process of entering in the ledger
Journal entry: The book of first entry (original entry) chronological record
Trail balance: All
the accounts of a concern are thus balanced off then they are put in a list
Debit side trail to credit side
Debit side: Losses, expenses, and assets
Credit side: Gains, revenues, liabilities
To find out the figures arithmetically correct or
not
Trading account: To find out the gross profit
Debit
side: wages, carriage, and royalties –
if it is used for production
Factory expenses, package – goods are incomplete
such as biscuits consumable stores (cotton waste, grease, engine oil) factory
rent salaries
Gross profit: sales – cost of goods sold
Inventories:
Raw materials, work in progress, finished goods
Need for holding
inventories:
Transaction motive – smooth production
Precautionary motive – risk, unpredictable changes
Speculative motive – price fluctuations
Methods:
First-in first-out method (FIFO)
Last-in first-out method (LIFO)
Weighted average method
Specific identification method
Ordering
cost: entire cost of acquiring raw materials
Carrying
cost: incurred for maintaining – storage, insurance, taxes
Capital
structure:Refers the mix of long-term sources of funds,
preference capital and equity capital and retained earnings
BEP:
(break-even-point) : Total revenues equals to total cost
Behavior of profits in response to the changes in
volume, cost and prices
Need: What
minimum level of sales need be achieved to avoid losses
What should be the sales level to earn a target
profit
Make or buy decision, production planning
BEP (units): Total fixes cost/ selling
price – variable cost per unit
BEP (rupees): Total fixed cost/ 1- variable cost per unit/ selling price
P/V ratio: Sales – variable cost/ sales
BEP (rupees): Fixed cost/ p/v ratio (or) contribution ratio
Angle of 45: The vertical and horizontal lines are spaced equally
with the same distance
Intersection between sales line and total cost line
is the break-even point
Margin of safety:The
excess of actual sales (or) budgeted sales over the break even sales is known
as M.S
Ratio: Budgeted sales – break-even sales/ budgeted sales
Target sales: Fixed cost + desired profit/ contribution ratio (or) p/v ratio
Budget: Is a detailed plan of operations for
some specific future period
Corporate finance: It is concerned with the raising and administration of funds used in
business
Deals with practices and policies Deals with
financial problems
Marketable
securities: Are the temporary short-term investments in
shares, debentures and bonds
Commercial papers, UTI units, inter corporate
lending
Bad debts: Debts, which will never be collected, are called
Bills receivables: Represents the promises made in writing by debtors to pay definite some
of money after some specific period of time
Loans and
advances: Due from employees and associates
Contracts giving exclusive right to perform
certain functions or to sell certain products or services
Other
assets (preliminary exp, deferred revenue expenditure):
Prepayments for services or benefits for period
longer than the accounting period
Ex: advertising, preliminary exp
Relation ship
between B/S and P & L a/c:
Revenue is an inflow of assets (or outflow of
liabilities)
Expenses is an outflow of assets (or inflow of
liabilities)
Bills of
exchange:
The seller draws a bill of exchange for a specific
amount payable at a specified date in future
It is accepted by the customer or by a bank
Brawer: who write the bill
Drawee: who accepted the bill
Purchase or
discount of bills:
The amount provided under this agreement is covered
within the overall cash credit or overdraft limit implies that the bank becomes
owner of the bill Banks holds the bill
as a security for the credit
Over draft: The
borrower is allowed to withdraw funds in excess of the balance in his current
account
Up to a certain specified limit during a stipulated
period, interest charged on daily basis operates the account through cheques
Cash credit: Borrower
is allowed to withdraw funds from the bank up to the sanctioned credit limit
Funds flow
statement:
(statement of sources and uses of funds)
The statement of changes in financial position
prepared to determine only the sources and application (or uses) of working
capital between the dates of two balance sheets
Banks and financial institutions required it when a
company approaches them for loans
1.
Increase in assets is use of funds
2.
Increase in liabilities and net worth (shareholder’s
equity) is source of funds
3.
Decrease in assets is source of funds
4.
Decrease in liabilities and retained earnings is use
of funds
Fund: It’s
a financial product, change in cash only, Change in working capital, change in financial
resources
Working capital: Fund
required to run the day-to-day business activities cannot be overemphasized
Finance provided to support the short-term assets of
the business
Sources:
Over draft, cash credit, purchase or discounting of
bills
What is the need to invest funds in current assets
How much funds should be invest in each type of
current assets
Gross working capital: current
assets
Net working capital: current
assets – current liabilities (net current assets)
Fixed working
capital: Minimum level of current assets is referred
to as permanent or fixed working capital
Degree of
excessive working capital:
v Chances
of inventory mishandling, waste, losses increase
v Defective
credit policy, stock collection period
v Higher
incident of bad debts, managerial inefficiency
Inadequate
working capital:
Difficult to implement operating plan, operating
inefficiency, Fixed assets are not efficiently utilized, losses its reputation
Working capital
cycle:
Ø Acquiring
raw materials – resources
Ø Manufacturing
the products – finished goods
Ø Accounts
receivables – through sales if credit sales book debts
Use of working
capital:
1.
Adjusted net loss from operations
2.
Purchase of non-current assets
3.
Repayment of long-term debt
4.
Redemption of redeemable preferred shares
5.
Payment of cash dividend
Determinants:
·
Nature and size of business
·
Manufacturing cycle
·
Sales growth
·
Production policy
·
Price level changes
·
Operating efficiency and performance
·
Firms credit policy
·
Availability of credit
Estimating
working capital:
·
Current assets holdings period
·
Ratio of sales
·
Ratio of fixed investments
·
Cash
flow statements:
Summarizes the causes of changes in cash position
between dates of two B/S
·
Only cash transactions – depreciation is not
considering
·
It is useful for short-term planning
·
Statements of changes in financial statements on
cash basis
Sources:
Profitable operations of the firm
Decrease in assets (except cash)
Increase in liabilities
Comparative
statement analysis:
To find out the periodic changes in the financial
performance of a company, at least for two years, changes: income or decrease
aggregate changes
Common-size
statements:
i.
Vertical analysis
ii.
Take sales as 100
iii.
Take total assets and total liabilities as 100
iv.
Trend
analysis: (time series analysis)
The direction of changes over a period of years . Applicable
to the items of P & L a/c
Trends of sales and net income
Ratio analysis:
The relationship between two or more things.Benchmark
for evaluating the financial position and performance of a firm
To make large quantitative of financial data and to
make qualitative judgment about the firm’s financial performance
Standards of
comparison:
Past ratios from the past reports, project ratios,
competition ratios
Industry ratios – ratios of the industry to which
the firms belongs
Uses of ratio
analysis:
I.
The ability of the firm to meet its current
obligations
II.
Long-term solvency by borrowing funds
III.
The efficiency utilizing assets in generating sales
revenue
IV.
Overall operating efficiency and performance of the
firm
V.
Financial ratios as predicators of failure
Types: Liquidity, leverage, activity, and profitability
Liquidity ratios:
I.
Essential for a firm to be able to meet its
obligations as they become due
II.
Measure the ability of the firm to meet its current
obligations
III.
Firm should not suffer from lack of liquidity will
result in a poor credit worthiness
IV.
Loss of creditors confident
V.
A very high degree of liquidity is also bad idle
assets earn nothing
Current ratio: current assets/ current liabilities
1)
Standard is 2 to 1 (or) 2:1
2)
For measuring short-term solvency
3)
It represents a margin of safety for creditors
Quick ratio:
current assets – inventories/ current liabilities
Standard is 1 to 1 (or) 1:1
Converted into cash without any loss of value
Cash is the most liquid asset
Inventories less liquidity – fluctuate
Cash ratio: cash + marketable securities/
current liabilities
Internal measure: current assets – inventory/
average daily operating expenses
Total operating expenses/360 . A firm’s ability to
meet its regular cash expenses is internal measure
Operating exp: Expenses + cost of goods sold + selling & administrative expenses +
general expenses – depreciation
Net working capital
(NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
Leverage ratios:
For bankers - firm’s current debt paying ability
For firm’s long-term financial strength
The firm has a legal obligation to pay interest to
debt holders irrespective of the profit made or loss incurred by the firm
Total debt ratio: Total debt/ total debt + net
worth (or) TD/ NA
TD: Total debt, NA: Net assets
For long term solvency of a firm
Capital employed = net
assets (or) Shareholder’s equity + long term debt
Net worth = Shareholder’s equity
Debt equity ratio: External equity/ internal
equity or TD/NW (net wroth)
A high ratio shows that claims of creditors are
greater than those of owners
A low ratio implies greater claims of owners than
creditors
Capital
employed to net worth ratio (CE): CE/ NW
By lenders and owners contribution
Total liabilities
to total assets ratio:
TL/ TA
Financial risk: Preference capital
include in net worth
Lease payment = Debt
Debt ratio: TD + value of lease/ TD +
value of lease + net worth
Coverage ratios:
Interest coverage
ratio: EBIT/
interest (or) EBIDT/ interest
Whether the business would earn sufficient profits
to pay periodical the interest charges
Standard is 6 to 7 times
Debt service
coverage ratio:
EBIT/
interest + principle payment installment/ 1 – tax rate
Whether the company to make payment of principle
amount
Activity ratios:
Funds of creditors and owners are invested in
various assets to generate sales and profits
The better the management of assets the larger the
amount of sales
Turnover ratios: Balance
between sales and assets
Inventory
turnover ratio:
Cost of goods sold/ average inventory
The ratio indicates the efficiency of the firm in
selling its product
Days
of inventory holdings: 360/ inventory turnover
How rapidly the inventory is turning into
receivable through sales
Debtor’s
turnover ratio: credit sales/ average debtors (or) sales/ debtors
Average debtors: opening balance + closing
balance/ 2
Collection
period: 360/ debtors’ turnover
Average collection period measures the quality of
debtor’s speed of their collection
Creditors
turnover ratio: credit purchases/ average creditors (not important)
Assets turnover
ratio: sales/
net assets
Assets used to generate sales
Ex: Sales of one rupee of capital employed in net assets
Total
assets: sales/ TA
Fixed
assets: sales/ net F.A (fixed assets)
Working capital
turnover ratio:
sales/ net CA
Ex: The one rupee of sales the company need as 0.31
of net current assets
Profitability
ratios:
The company should earn profits to serve and grow
over a long period of time
Profitability in relation to sales
Profitability in relation to investment
Gross profit
margin: sales
– cost of goods sold/ sales
Efficiency which management produces each unit of
product
Contribution
ratio: sales –
variable exp/ sales (or)1 – variable exp/ sales
Net profit margin: Profit after tax (PAT)/ sales
It indicates management efficiency in manufacturing
and administrative and selling the products (or) EBIT (1 – T)/ sales T: tax
Operating
expenses ratio:
operating expenses/ sales
For changes in the profit margin (EBIT)
A higher operating expenses ratio is unfavorable
Cost of goods
sold ratio (CGS):
CGS/ sales
Return on
investment (ROI):
Return on total assets: EBIT (1 –T)/ TA (or) EBIT/ TA
Return on net assets: EBIT (1 –T)/ NA (or) EBIT/ NA
Return on equity
(ROE): PAT/ NW
Earnings per
share (EPS):
PAT/ number of common shares outstanding
Dividend per
share (DPS):
earnings paid to shareholders/ no. Of ordinary shares out
Dividend payout
ratio: DPS/
EPS
Dividend yield
ratio: DPS/
market value of the share
Price earning
ratio P/E ratio:
market value of the shares/ EPS
Market value of
book value:
Market value/ book value
Other ratios:
Fixed assets
ratio: Fixed
assets/ long-term funds
Standard 0.67
This ratio should not be more than 1.
If less than 1 it shows that a part of the working
capital has been financed through long-term funds
Proprietary ratio: shareholder’s funds/ total
tangible assets
Standard 0.05
Importance to creditors
High proprietary ratio will indicates relatively
little danger to the creditors
Wasting assets;
Oil wells (lease) coal mines
Pre incorporation profit are transferred to capital reserve
Section 210 to 220 of the companies act 1956 legal
position relating to the final accounts of joint stock company
Section 210 – preparation and presentation of final
accounts
Section 211 – balance sheet and P & L a/c
Profit and loss
appropriation a/c
To transfer for reserves By last years balance b/d
To income tax for previous year By net profit for the year b/d
Not
provided for
To interim dividend By
amount withdraw from general reserve or any other
To proposed dividend By
provision such as income tax
To surplus carried to B/S By provision no longer required
Divisible
profits: Dividend to shareholders
Transfer to
reserve: Not exceed 10% of the PAT should not less
than 2.5%
Interest
on dividend: 23%
Creditors:
Are those persons who have already advanced some
money or money’s worth to the business
Conflicts of
accounting principles:
Valuation of stock: some year’s market value
Some years cost, because of principle of
conservatism
But the principle of consistency will controversy
Feasibility: Assets are recorded at cost
less depreciation
Petty cash book:
Small amounts and high frequency Ex: payment of stationary,
postage, telegrams, and carriage
Errors not
disclosed by Trail Balance:
Omission in recording the transaction in the books
of original entry debit and credit side both
Wrong recording in the original books
Posting to wrong account with correct amount and no
correct side
Compensatory error: Forgetting
to post
Error of principle
Errors
disclosed by trail balance:
Error in casting of subsidiary books (make total)
Error in carrying forward the one page to another
page
Error in posting to ledger
Error in balancing the amount
Preparation of debtors and creditors schedule
How
to find out the errors:
Divide the difference by 2 and find out the equal
figure appear in the trail balance
If the difference is evenly divisible by ‘9’ error
the trans position (847 treated as 987)
If the amount is net round figure its mistake in
posting
If the amount is round figure mistake in casting or
carrying forward
If the difference is large amount compare this year
trail balance to previous year
Free
samples: debit to advertisement a/c and
credited to purchase a/c
Closing
entry:
In an account is having debit balance that is
credited either trading a/c or P & L a/c similarly like the way to credit
Debit sales a/c debit
p & l a/c
Credit trading a/c credit
salaries a/c
Post
closing trail balance:
In order to see whether the amount in the ledger are
still in balance, which are still open
Mercantilist
system: period taken into account
Stock destroyed: Deducted from closing stock loss is shown in debit side of P & L a/c
When
not insured:
P & L a/c Dr
To
Trading a/c
When
fully insured:
Insurance claim a/c Dr
To
Trading a/c
When
partially insured:
Insurance claim a/c Dr
P & L a/c Dr
To
Trading a/c
Expenses out
standing:
Debit expenses (p & l a/c)
Credit expenses out standing a/c (liability)
Expenses
paid in advance:
Prepaid expenses (asset)
Credit expenses (p & l a/c)
Out standing or
accrued income:
(asset)
Like interest on securities, dividend on shares,
commission are earned but not received
It has to credited to insurance a/c
Debit accrued income (asset)
Credit income (p & l a/c credit side)
Income received
in advance:
Debit income (p & l a/c)
Credit income received in advance (liability)
Depreciation:
Debit depreciation a/c (p & l a/c)
Credit asset (B/S)
Bad debts:
Debit bad debt (p & l a/c)
Credit debtors (B/S)
Bad debt
provision:
Balancing of debtors (objective)
Debit p & la/c Credit
bad debts provision
Provision
for discount on debtors and creditors
Discount on debtors: debit
p & l a/c
Credit provision of discount on debtors
Discount on creditors: debit provision for discount
on creditors
Credit p & l a/c
Interest
on capital
Debit p & l a/c
Credit capital a/c
Interest on
drawings:
Debit capital a/c
Credit p & l a/c
Cash
paid allowed discount:
Cash a/c Dr ‘X’
a/c Dr
Discount a/c Dr To
cash a/c
To
‘X’ a/c To
discount a/c
Advance
tax payment:
Advance tax a/c Dr Tax
a/c Dr
To
Bank a/c To
advance tax a/c
To
bank a/c
Life insurance
premium: paid on life it is add to drawings
Insurance
premium:
If shop – p & l a/c
If goods purchased, factory building, factory
machine – Trading a/c
Loss or gain on
asset sold: P & l a/c
Discount received
and allowed: P & L a/c
Stock at the end
appear in trail balance:
Opening stock:
Debit purchase a/c
Credit stock a/c
Closing stock:
Debit stock a/c
Credit purchase a/c
Bank
reconciliation statement (BRS):
Two sources to find out the balance at bank
Bank columns of the cash book (or) bank account in
the ledger
Pass book (copy of bank column in cash book)
Passbook: Credit balance favorable
Cashbook: Debit balance favorable
Purpose of
preparing BRS:
To reconcile the two balances which often differ for
various reasons
The statement show the difference between two
balances
Reasons:
Cheques
deposited for collection but not yet collected
Cash book – Debit
Passbook - Credit
If the cash book balance is given - less to the
If the pass book balance is given – add to the
Cheques
issued but not yet presented for payment:
Cashbook – Credit
Pass book – Debit
If the cash book balance is given – add to the
If the pass book balance is given – lee to the
Credits in the
pass book only:
Interest on favorable balance
Interest on fixed deposits
Dividend and interest on securities collected
Sales proceeds of securities behave of the cash
Bills promises notes collected
Amount remitted to the account of the customer by
the debtors (deposit)
In all cases cashbook shows the high balance than
cashbook
If the cash book balance is given – add to the
If the pass book balance is given – less to the
Debits in the pass book:
payment as per LIC premium, subscription to club
Interest on unfavorable balance (overdraft)
Bank charges
Purchase of investments
In all cases passbook balance shows less balance
than cashbook
If the cash book balance is given – less
If the passbook balance is given – add
Error
in passbook and cashbook
Payment side of the cashbook is undercast by 200 in
case of favorable balance – add to the passbook
In case of un favorable balance – reduce from the
passbook
A cheque for Rs 100 paid to a party entered error in
the cashbook – the passbook balance is more by 100
Sa cheque for 600 draws no 1 a/c wrongly charged by
the bank to no 2 a/c
No 1 a/c pass book balance increase 600 reduce the
pass book balance no 2
Manufacturing
account:
It shows the expenditure in an activity or product
it will transfer to trading account
