Thursday, September 18, 2008
Tuesday, September 9, 2008
ACCOUNTANCY AND FINANCE INTERVIEW GUIDE
1. Debentures:
Acknowledgement of debt, certificate issued by a company under its seal as an Evidence of a
Debt due from the company
2. Types:
Naked or simple debentures (no security)
Mortgage debentures (security)
Redeemable, Irredeemable debentures
Convertible, Non-convertible debentures
3. 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 sharecapital 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)
4. Share discount:
Value less than its face value
Share discount account Dr
Discount on the issue of share account Dr
To share capital account
5. Primary market:
Initial public offering of securities (IPO), newly floated shares, first issue of shares
6. Secondary market:
Buying and selling of securities (shares) is traded in secondary market
7.OTEL:
Over the counter exchange oflndia (no particular place to buy and selling of shares)
8. 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.
9. 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.
10. Subsidiary company:
A company that is completely control by the company
11. 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.
12. 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
13. 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
14. Methods Depreciation:
Straight-line method
Diminishing balance method or declining balance method or accelerated method
Sinking fund method
Depletion method
15. 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.
16. 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
17. SEBl:
Securities and Exchange Board ofIndia (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
18. Provision:
Preparatory action of measure, money kept aside for a specific work
19. Reserve:
Some amount of profit kept aside to meet contingent expenses, put aside for future purpose
20. Minority interest:
The ownership interest in a company held by the person other than the parent company and
Its subsidiary undertakings
21. General reserve:
It can be used for any purpose including distribution of dividend
22. Capital reserve:
For specific purpose
23.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)
24. Interim dividend:
Dividend declared for 6 months is called intcrimdividend
25. Final dividend:
Declared at the end of the financial year
Theories:
26. Relevance: Walters model, Gardens model, Bird in a hand argument
27. Irrelevance: Modigliani and Miller's Hypothesis
28. Marginal cost:
Aggregate amount of variable cost
29. Variable cost:
One which various directly with changes in the level of output over a defined period of time
30. Fixed cost:
One which is not affected by changes in the level of out put over a defined period of time
31. Semi-variable cost:
Which does not vary proportionally but simultaneously cannot remain stationary at all times
Ex: Depreciation, repairs
32. Partnership:
A business relationship where two or more persons carry on a business with a view to make a
profit.
33. 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.
34. Non-recurring items in P & L account (Profit and loss account):
Sale of investments
35. Non-cash expenditure in P & L account:
Depreciation
Depletion:
Used of oil wells, mines or deposits for depreciation
36. Amortization:
For long term investments such as patens copyrights, paying of debt gradually
37. Capital profits:
Sale of fixed assets
38. Revenue profits:
From main operation of the firm (sale of goods and services)
39. Mutual fund:
An open-ended fund operated by an investment company, which arises money from
shareholders and investments in a group of assets
Raise money by selling shares of the fund to the public (income fund, growth fund)
40. Trade discount:
Which is not shown in the books
41. Cash discount:
50% out of MRP like that
42. Trade credit:
. To the credit that a customer gets from supplier of goods in the normal course
43. Duties of Finance Manager:
Raising of funds, allocation of funds, profit planning, understanding capital markets
Interim audit and statutory audit:
44.Chairman:
One of the person elected by the directors in the board of directors meeting. ,
45. Who is the Director:
one ofthe shareholders becomes director
46. CEO:
chief executive officer, top officer in the company in the executive cadre
47. Who can appoint CEO: board of directors
48. AGM: shareholders annual general meeting
49. Quorum: attend the minimum number of members in the meeting
50. Statutory books:
Register of investment holders and their names, register of earnings, register of debenture
and shareholders, register of directors and their shares
51. Financial books:
Cash book, general ledger, return outwards and return inwards, invoice, bills payable, bills
receivables
52. Resolution: solving the problem
53. Who can appoint auditor: board of directors
54. Minute books: recording of the board of directors meeting
55.Agenda: the meeting, which is discussed by the board of directors
56. Duties of director: to appoint officers and auditors, to take policy decisions.
57.Contribution: sales - variable cost
58.Role of stock exchange: to regulate the share trading in India
59. Corporation:
Business firm whose articles of incorporation have been approved in some state
A business, which is a completely separate entity from its owners
60. Difference between Corporation and Company:
An institution created to conduct business
He only invest in large well established company
He can start the company in his garage
Principles of accounting:
61. Policies: prudent, materiality, consistency
62. Assumptions: continuing, consistency, accrual (revenue and cost)
63. Proxy: it includes every proxy consensus aDd authorization with in the meaning of section
14 (a) of the act (representative)
64. Consignment:
Auction are quite simple
A consignor brings merchandise for you to sell online
Consignor - owner
Consignee - agent
65. Debit & Credit:
Debit:Receiving aspect.
Credit:Giving aspect.
Every account has two sides left side Debit and right side Credit
66.Open market: a market, which is widely accessible to all investors or consumers
67.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.
68. 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 {rom the management, list of material events)
69. Merger: two or more companies combine into one company they may form a new company
70. Absorption: two or more companies combine into an existing company
71. Passbook: credit balance favorable
72.Cashbook: debit balance favorable
73.Purpose of preparing BRS:
To reconcile the two balances which often differ for various reasons
The statement show the difference between two balances
Reasons:
74. 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
75. 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 - less to the
76. 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)
77. In all cases book 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
78. Debits in the pass book:
payment as per LIC premium, subscription to club
Interest on unfavorable balance (overdraft)
79. 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
80. 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
So cheque for 600 draws no 1 alc wrongly charged by the bank to no 2 alc
No 1 alc pass book balance increase 600 reduce the pass book balance no 2
81. Bookkeeping: Recording of business transactions by following accounting procedures
82. Accounting: following the rules and procedures
83. Manufacturing account:
It shows the expenditure in an activity or product it will transfer to trading account
84. Life insurance premium: paid on life it is acid to drawings
85. Insurance premium:
If shop - p & 1aIc
If goods purchased, factory building, factory machine - Trading alc
Loss or gain on asset sold: p & 1alc
Discount received and allowed: P & L alc
86 Stock at the end appear in trail balance:
Opening stock:
----Debit purchase alc
------------Credit stock alc
Closing stock:
----Debit stock alc
Credit purchase alc
87. 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)
88. Depreciation:
Debit depreciation alc (p & 1alc)
credit asset (B/S)
89. Bad debts:
----Debit bad debt (p & 1alc)
-----------Credit debtors (B/S)
90. Bad debt provision:
Balancing of debtors (objective)
-----Debit p & l a/c
------------Credit bad debts provision
91. Provision for discount on debtors and creditors
Discount on debtors: debit p & 1alc
Credit provision of discount on debtors
92. Discount on creditors:
debit provision for discount on creditors
Credit p & 1alc
93. Interest on capital
Debit p & 1alc
Credit capital alc
93. Interest on drawings:
Debit capital alc
Credit p & 1alc
94. Cash paid allowed discount:
Cash alc Dr
Discount alc Dr
To 'X' alc
95. Advance tax payment:
Advance tax alc Dr
To Bank alc
By last years balance bid
By net profit for the year bid
96. Price earning ratio P/E ratio: market value of the shares/ EPS
97. Market value to book value: Market value/ book value
Other ratios:
98. Fixed assets ratio: fixed assets/ long-term funds
Standard 0.67
This ratio should not be more than 1
Ifless than 1 it shows that a part of the working capital has been financed through long-term
funds
99. 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
100. 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
101. Section 210 - preparation and presentation of final accounts
102. Section 211 - balance sheet and P & L alc
Profit and loss appropriation a/c
To transfer for reserves
To income tax for previous year
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
103. Divisible profits: dividend to shareholders
104. Transfer to reserve: not exceed 10% of the PAT should not less than 2.5%
Interest on dividend: 23%
105. Creditors:
Are those persons who have already advanced some money or money's worth to the business
106. 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
107. Petty cash book:
Small amounts and high frequency Ex: payment of stationary, postage, telegrams, and
carrIage
108. 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
109.Errors disclosed by trail balance:
debit p & 1alc
credit salaries alc
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
110. 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
111. Free samples: debit to advertisement ale and credited to purchase ale
112. Closing entry:
In an account is having debit balance that is credited either trading alc or P & L alc similarly
like the way to credit
Debit sales alc
Credit trading alc
113. Post closing trail balance:
In order to see whether the amount in the ledger are still in balance, which are still open
114. Mercantilist system: period taken into account
115. Stock destroyed: deducted from closing stock loss is shown in debit side of P & L ale
116. When not insured:
P & L alc Dr
To Trading ale
117. When fully insured:
Insurance claim alc Dr
To Trading alc
118. When partially insured:
Insurance claim aIc Dr
To P & L alc Dr
To Trading alc
119. Expenses out standing:
Debit expenses (p &1 alc)
Credit expenses out standing alc (liability)
120. Expenses paid in advance:
Prepaid expenses (asset)
Credit expenses (p & 1alc)
121. 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 ale
Debit accrued income (asset)
Credit income (p & 1ale credit side)
122. Income received in advance:
Debit income (p & 1alc)j
Credit income received in advance (liability)
123. Liquidity ratios:
Essential for a firm to be able to meet its obligations as they become due
Measure the ability of the firm to meet its current obligations
Firm should not suffer from lack of liquidity will result in a poor credit worthiness
Loss of creditors confident
A very high degree of liquidity is also bad idle assets earn nothing
124. Current ratio: current assets/ current liabilities
Standard is 2 to 1 (or) 2:1
For measuring short-term solvency
It represents a margin of safety for creditors
125. 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
126. Cash ratio: cash + marketable securities/ current liabilities
127. 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
128. Operating exp: expenses + cost of goods sold + selling & administrative expenses + general
expenses - depreciation
129. Net working capital (NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
130. Leverage ratios:
For bankers - firm's current debt paying ability
For firm's long-tenn 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
131. Total debt ratio: total debt/ total debt + net worth (or) TD/ NA
132. TD: total debt, NA: net assets
For long term solvency of a firm
133. Capital employed = net assets (or) Shareholder's equity + long term debt
134. Net worth = shareholder's equity
135. 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
136. Capital employed to net worth ratio (CE): CE/ NW
By lenders and owners contribution
137. Total liabilities to total assets ratio: TL/ TA
Financial risk: preference capital include in net worth
Lease payment = debt
138. Debt ratio: TD + value of lease/ TD + value of lease + net worth
Coverage ratios:
139. 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
140. Debt service coverage ratio:
EBIT/ interest + principle payment installment/ 1- tax rate
Whether the company to make payment of principle amount
141. 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 '
142. Turnover ratios: balance between sales and assets
143. Inventory turnover ratio: cost of goods sold/ average inventory
The ratio indicates the efficiency of the firm in selling its product
143. 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
144. Average debtors: opening balance + closing balance/ 2
145. Collection period: 360/ debtors' turnover
Average collection period measures the quality of debtor's speed of their collection
146. Creditors turnover ratio: credit purchases/ average creditors (not important)
147. Assets turnover ratio: sales/ net assets
Assets used to generate sales
Ex: Sales of one rupee of capital employed in net assets
148. Total assets: sales/ TA
150. 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
151. 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
152. Gross profit margin: sales - cost of goods sold/ sales
Efficiency which management produces each unit of product
153. Contribution ratio: sales - variable exp/ sales (or)
1 - variable exp/ sales
154. 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
155. Operating expenses ratio: operating expenses/ sales
For changes in the profit margin (EBIT)
A higher operating expenses ratio is unfavorable
156. Cost of goods sold ratio (CGS): CGS/ sales
157. Return on investment (ROI):
158. Return on total assets: EBIT (l-T)/ TA (or) EBIT/ TA
159. Return on net assets: EBIT (l-T)/ NA (or) EBIT/ NA
160. Return on equity (ROE): PAT/NW
161. Earnings per share (EPS): PAT/number of common shares outstanding
162. Dividend per share (DPS):earnings paid to shareholders/ no. Of ordinary shares out
163. Dividend payout ratio: Dps/ EPS
164. Dividend yield ratio: DPS/ market value of the share
Manufacturing cycle
Sales growth
Production policy
Price level changes
Operating efficiency and performance
Firms credit policy
Availability of credit
165.Estimating working capital:
Current assets holdings period
Ratio of sales
Ratio of fixed investments
166. 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
166. Sources:
Profitable operations of the firm
Decrease in assets (except cash)
Increase in liabilities
167. 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
168. Common-size statements:
Vertical analysis
Take sales as 100
Take total assets and total liabilities as 100
169. Trend analysis: (time series analysis)
The direction of changes over a period of years
Applicable to the items of P & L alc
Trends of sales and net income
170. 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
171. Standards of comparison:
Past ratios from the past reports, project ratios, competition ratios
Industry ratios - ratios of the industry to which the firms belongs
172. Uses of ratio analysis:
The ability of the firm to meet its current obligations
Long-term solvency by borrowing funds
The efficiency utilizing assets in generating sales revenue
Overall operating efficiel1cy and performance of the firm
Financial ratios as predic'ators of failure
173. Types: liquidity, leverage, activity, and profitability
Up to a certain specified limit during a stipulated period, interest charged on daily basis
operates the account through cheques
174. Cash credit:
Borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit
175. 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
Increase in assets is use of funds
Increase in liabilities and net worth (shareholder's equity) is source of funds
Decrease in assets is source of funds
Decrease in liabilities and retained earnings is use of funds
176. Fund:
It's a financial product, change in cash only,
Change in working capital, change in financial resources
177. Working capital:
Fund required to run the day-to-day business activities cannot be overemphasized
Finance provided to support the short-term assets Athe business
178. 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)
179. Need: To run the day to day operations of the business
180. Fixed working capital:
Minimum level of current assets is referred to as permanent or fixed working capital
181. Degree of excessive working capital:
Chances of inventory mishandling, waste,Liabilities increase Defective credit policy, stock collection period Higher incident of bad debts, managerial inefficiency
182. Inadequate working capital: Difficult to implement operating plan, operating inefficiency, Fixed assets are not efficiently utilized, losses its reputation Acquiring raw materials - resources Manufacturing the products - finished goods Accounts receivables - through sales if credit sales book debts
184. Use of working capital: Adjusted net loss from operations Purchase of non-current assets Repayment of long-term debt Redemption of redeemable preferred shares Payment of cash dividend
185. Determinants: ' Nature and size of business
186. 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
187. Margin of safety: The excess of actual sales (or) budgeted sales over the break even sales is known as M.S
188. Ratio: budgeted sales - break-even sales/ budgeted sales
189. Target sales: fixed cost + desired profit/ contribution ratio (or) p/v ratio
190. Budget: Is a detailed plan of operations for some specific future period
191. Corporate finance: It is concerned with the raising and administration of funds used in business Deals with practices and policies Deals with financial problems
192. Marketable securities: Are the temporary short-term investments in shares, debentures and bonds Commercial papers, UTI units, inter corporate lending
193. Bad debts: debts, which will never be collected, are called
193. Bills receivables: Represents the promises made in writing by debtors to pay definite some of money after some specific period of time
194. Loans and advances: due from employees and associates
195. Patents: Right granted by the government enabling the holder to control the use of an invention
196. Copy right: Exclusive right to reproduce and sell literacy musical and artistic works
197. Franchises: Contracts giving exclusive right to perform celtain functions or to sell certain products or servIces
198. Other assets (preliminary exp, deferred revenue expenditure): Prepayments for services or benefits for period longer than the accounting period Ex: advertising, preliminary exp
199. 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)
200. 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 Banks charge - discount charges
Over draft: The borrower is allowed to withdraw funds in excess of the balance in his current account
Debit credit Personal accounts: the receiver 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
PV ratio: sales - variable cost/ sales
BEP (rupees): fixed cost/ p/v ratio (or) contribution ratio
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 (liabilities) 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
Journal proper:
Opening entries adjusting and closing post entries, correcting entries
Personal accounts:
Proprietor's, suppliers, creditors
Artificial persons - limited company alc, insurance company alc, government company alc
Representative persons - common title, salaries outstanding, rent prepaid
Real accounts:
Tangible -land, buildings, machinery
Intangible - goodwill, patents, intellectual properties,
Nominal accounts:
Salaries, rent, commissiop, discount, insurance
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:
For decision making
To provide reliable financial information about economic resources and obligations of
business enterprise.
For estimating the earnings potential of the enterprise
Types of financial statements:
Income statement (P & La/c):
Periodic statement FPO (for the period of)
It presents the summary pf revenues, expenses and net income or net loss of a firm
Measure the firm's profitability; it is a scoreboard for a period oftime
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 infOlmation)
Objectives:
To measure the profit ofthe 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, payrnents, 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
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 payor' sell an asset at a certain time in the future for a certain price
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
FOl'm 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 alc
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 film should know the financial implications of its
operations
Treasurer: auditing cost control
Controller: planning and' budgeting, inventory management, accounting
Acknowledgement of debt, certificate issued by a company under its seal as an Evidence of a
Debt due from the company
2. Types:
Naked or simple debentures (no security)
Mortgage debentures (security)
Redeemable, Irredeemable debentures
Convertible, Non-convertible debentures
3. 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 sharecapital 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)
4. Share discount:
Value less than its face value
Share discount account Dr
Discount on the issue of share account Dr
To share capital account
5. Primary market:
Initial public offering of securities (IPO), newly floated shares, first issue of shares
6. Secondary market:
Buying and selling of securities (shares) is traded in secondary market
7.OTEL:
Over the counter exchange oflndia (no particular place to buy and selling of shares)
8. 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.
9. 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.
10. Subsidiary company:
A company that is completely control by the company
11. 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.
12. 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
13. 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
14. Methods Depreciation:
Straight-line method
Diminishing balance method or declining balance method or accelerated method
Sinking fund method
Depletion method
15. 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.
16. 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
17. SEBl:
Securities and Exchange Board ofIndia (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
18. Provision:
Preparatory action of measure, money kept aside for a specific work
19. Reserve:
Some amount of profit kept aside to meet contingent expenses, put aside for future purpose
20. Minority interest:
The ownership interest in a company held by the person other than the parent company and
Its subsidiary undertakings
21. General reserve:
It can be used for any purpose including distribution of dividend
22. Capital reserve:
For specific purpose
23.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)
24. Interim dividend:
Dividend declared for 6 months is called intcrimdividend
25. Final dividend:
Declared at the end of the financial year
Theories:
26. Relevance: Walters model, Gardens model, Bird in a hand argument
27. Irrelevance: Modigliani and Miller's Hypothesis
28. Marginal cost:
Aggregate amount of variable cost
29. Variable cost:
One which various directly with changes in the level of output over a defined period of time
30. Fixed cost:
One which is not affected by changes in the level of out put over a defined period of time
31. Semi-variable cost:
Which does not vary proportionally but simultaneously cannot remain stationary at all times
Ex: Depreciation, repairs
32. Partnership:
A business relationship where two or more persons carry on a business with a view to make a
profit.
33. 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.
34. Non-recurring items in P & L account (Profit and loss account):
Sale of investments
35. Non-cash expenditure in P & L account:
Depreciation
Depletion:
Used of oil wells, mines or deposits for depreciation
36. Amortization:
For long term investments such as patens copyrights, paying of debt gradually
37. Capital profits:
Sale of fixed assets
38. Revenue profits:
From main operation of the firm (sale of goods and services)
39. Mutual fund:
An open-ended fund operated by an investment company, which arises money from
shareholders and investments in a group of assets
Raise money by selling shares of the fund to the public (income fund, growth fund)
40. Trade discount:
Which is not shown in the books
41. Cash discount:
50% out of MRP like that
42. Trade credit:
. To the credit that a customer gets from supplier of goods in the normal course
43. Duties of Finance Manager:
Raising of funds, allocation of funds, profit planning, understanding capital markets
Interim audit and statutory audit:
44.Chairman:
One of the person elected by the directors in the board of directors meeting. ,
45. Who is the Director:
one ofthe shareholders becomes director
46. CEO:
chief executive officer, top officer in the company in the executive cadre
47. Who can appoint CEO: board of directors
48. AGM: shareholders annual general meeting
49. Quorum: attend the minimum number of members in the meeting
50. Statutory books:
Register of investment holders and their names, register of earnings, register of debenture
and shareholders, register of directors and their shares
51. Financial books:
Cash book, general ledger, return outwards and return inwards, invoice, bills payable, bills
receivables
52. Resolution: solving the problem
53. Who can appoint auditor: board of directors
54. Minute books: recording of the board of directors meeting
55.Agenda: the meeting, which is discussed by the board of directors
56. Duties of director: to appoint officers and auditors, to take policy decisions.
57.Contribution: sales - variable cost
58.Role of stock exchange: to regulate the share trading in India
59. Corporation:
Business firm whose articles of incorporation have been approved in some state
A business, which is a completely separate entity from its owners
60. Difference between Corporation and Company:
An institution created to conduct business
He only invest in large well established company
He can start the company in his garage
Principles of accounting:
61. Policies: prudent, materiality, consistency
62. Assumptions: continuing, consistency, accrual (revenue and cost)
63. Proxy: it includes every proxy consensus aDd authorization with in the meaning of section
14 (a) of the act (representative)
64. Consignment:
Auction are quite simple
A consignor brings merchandise for you to sell online
Consignor - owner
Consignee - agent
65. Debit & Credit:
Debit:Receiving aspect.
Credit:Giving aspect.
Every account has two sides left side Debit and right side Credit
66.Open market: a market, which is widely accessible to all investors or consumers
67.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.
68. 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 {rom the management, list of material events)
69. Merger: two or more companies combine into one company they may form a new company
70. Absorption: two or more companies combine into an existing company
71. Passbook: credit balance favorable
72.Cashbook: debit balance favorable
73.Purpose of preparing BRS:
To reconcile the two balances which often differ for various reasons
The statement show the difference between two balances
Reasons:
74. 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
75. 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 - less to the
76. 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)
77. In all cases book 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
78. Debits in the pass book:
payment as per LIC premium, subscription to club
Interest on unfavorable balance (overdraft)
79. 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
80. 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
So cheque for 600 draws no 1 alc wrongly charged by the bank to no 2 alc
No 1 alc pass book balance increase 600 reduce the pass book balance no 2
81. Bookkeeping: Recording of business transactions by following accounting procedures
82. Accounting: following the rules and procedures
83. Manufacturing account:
It shows the expenditure in an activity or product it will transfer to trading account
84. Life insurance premium: paid on life it is acid to drawings
85. Insurance premium:
If shop - p & 1aIc
If goods purchased, factory building, factory machine - Trading alc
Loss or gain on asset sold: p & 1alc
Discount received and allowed: P & L alc
86 Stock at the end appear in trail balance:
Opening stock:
----Debit purchase alc
------------Credit stock alc
Closing stock:
----Debit stock alc
Credit purchase alc
87. 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)
88. Depreciation:
Debit depreciation alc (p & 1alc)
credit asset (B/S)
89. Bad debts:
----Debit bad debt (p & 1alc)
-----------Credit debtors (B/S)
90. Bad debt provision:
Balancing of debtors (objective)
-----Debit p & l a/c
------------Credit bad debts provision
91. Provision for discount on debtors and creditors
Discount on debtors: debit p & 1alc
Credit provision of discount on debtors
92. Discount on creditors:
debit provision for discount on creditors
Credit p & 1alc
93. Interest on capital
Debit p & 1alc
Credit capital alc
93. Interest on drawings:
Debit capital alc
Credit p & 1alc
94. Cash paid allowed discount:
Cash alc Dr
Discount alc Dr
To 'X' alc
95. Advance tax payment:
Advance tax alc Dr
To Bank alc
By last years balance bid
By net profit for the year bid
96. Price earning ratio P/E ratio: market value of the shares/ EPS
97. Market value to book value: Market value/ book value
Other ratios:
98. Fixed assets ratio: fixed assets/ long-term funds
Standard 0.67
This ratio should not be more than 1
Ifless than 1 it shows that a part of the working capital has been financed through long-term
funds
99. 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
100. 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
101. Section 210 - preparation and presentation of final accounts
102. Section 211 - balance sheet and P & L alc
Profit and loss appropriation a/c
To transfer for reserves
To income tax for previous year
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
103. Divisible profits: dividend to shareholders
104. Transfer to reserve: not exceed 10% of the PAT should not less than 2.5%
Interest on dividend: 23%
105. Creditors:
Are those persons who have already advanced some money or money's worth to the business
106. 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
107. Petty cash book:
Small amounts and high frequency Ex: payment of stationary, postage, telegrams, and
carrIage
108. 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
109.Errors disclosed by trail balance:
debit p & 1alc
credit salaries alc
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
110. 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
111. Free samples: debit to advertisement ale and credited to purchase ale
112. Closing entry:
In an account is having debit balance that is credited either trading alc or P & L alc similarly
like the way to credit
Debit sales alc
Credit trading alc
113. Post closing trail balance:
In order to see whether the amount in the ledger are still in balance, which are still open
114. Mercantilist system: period taken into account
115. Stock destroyed: deducted from closing stock loss is shown in debit side of P & L ale
116. When not insured:
P & L alc Dr
To Trading ale
117. When fully insured:
Insurance claim alc Dr
To Trading alc
118. When partially insured:
Insurance claim aIc Dr
To P & L alc Dr
To Trading alc
119. Expenses out standing:
Debit expenses (p &1 alc)
Credit expenses out standing alc (liability)
120. Expenses paid in advance:
Prepaid expenses (asset)
Credit expenses (p & 1alc)
121. 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 ale
Debit accrued income (asset)
Credit income (p & 1ale credit side)
122. Income received in advance:
Debit income (p & 1alc)j
Credit income received in advance (liability)
123. Liquidity ratios:
Essential for a firm to be able to meet its obligations as they become due
Measure the ability of the firm to meet its current obligations
Firm should not suffer from lack of liquidity will result in a poor credit worthiness
Loss of creditors confident
A very high degree of liquidity is also bad idle assets earn nothing
124. Current ratio: current assets/ current liabilities
Standard is 2 to 1 (or) 2:1
For measuring short-term solvency
It represents a margin of safety for creditors
125. 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
126. Cash ratio: cash + marketable securities/ current liabilities
127. 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
128. Operating exp: expenses + cost of goods sold + selling & administrative expenses + general
expenses - depreciation
129. Net working capital (NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
130. Leverage ratios:
For bankers - firm's current debt paying ability
For firm's long-tenn 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
131. Total debt ratio: total debt/ total debt + net worth (or) TD/ NA
132. TD: total debt, NA: net assets
For long term solvency of a firm
133. Capital employed = net assets (or) Shareholder's equity + long term debt
134. Net worth = shareholder's equity
135. 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
136. Capital employed to net worth ratio (CE): CE/ NW
By lenders and owners contribution
137. Total liabilities to total assets ratio: TL/ TA
Financial risk: preference capital include in net worth
Lease payment = debt
138. Debt ratio: TD + value of lease/ TD + value of lease + net worth
Coverage ratios:
139. 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
140. Debt service coverage ratio:
EBIT/ interest + principle payment installment/ 1- tax rate
Whether the company to make payment of principle amount
141. 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 '
142. Turnover ratios: balance between sales and assets
143. Inventory turnover ratio: cost of goods sold/ average inventory
The ratio indicates the efficiency of the firm in selling its product
143. 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
144. Average debtors: opening balance + closing balance/ 2
145. Collection period: 360/ debtors' turnover
Average collection period measures the quality of debtor's speed of their collection
146. Creditors turnover ratio: credit purchases/ average creditors (not important)
147. Assets turnover ratio: sales/ net assets
Assets used to generate sales
Ex: Sales of one rupee of capital employed in net assets
148. Total assets: sales/ TA
150. 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
151. 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
152. Gross profit margin: sales - cost of goods sold/ sales
Efficiency which management produces each unit of product
153. Contribution ratio: sales - variable exp/ sales (or)
1 - variable exp/ sales
154. 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
155. Operating expenses ratio: operating expenses/ sales
For changes in the profit margin (EBIT)
A higher operating expenses ratio is unfavorable
156. Cost of goods sold ratio (CGS): CGS/ sales
157. Return on investment (ROI):
158. Return on total assets: EBIT (l-T)/ TA (or) EBIT/ TA
159. Return on net assets: EBIT (l-T)/ NA (or) EBIT/ NA
160. Return on equity (ROE): PAT/NW
161. Earnings per share (EPS): PAT/number of common shares outstanding
162. Dividend per share (DPS):earnings paid to shareholders/ no. Of ordinary shares out
163. Dividend payout ratio: Dps/ EPS
164. Dividend yield ratio: DPS/ market value of the share
Manufacturing cycle
Sales growth
Production policy
Price level changes
Operating efficiency and performance
Firms credit policy
Availability of credit
165.Estimating working capital:
Current assets holdings period
Ratio of sales
Ratio of fixed investments
166. 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
166. Sources:
Profitable operations of the firm
Decrease in assets (except cash)
Increase in liabilities
167. 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
168. Common-size statements:
Vertical analysis
Take sales as 100
Take total assets and total liabilities as 100
169. Trend analysis: (time series analysis)
The direction of changes over a period of years
Applicable to the items of P & L alc
Trends of sales and net income
170. 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
171. Standards of comparison:
Past ratios from the past reports, project ratios, competition ratios
Industry ratios - ratios of the industry to which the firms belongs
172. Uses of ratio analysis:
The ability of the firm to meet its current obligations
Long-term solvency by borrowing funds
The efficiency utilizing assets in generating sales revenue
Overall operating efficiel1cy and performance of the firm
Financial ratios as predic'ators of failure
173. Types: liquidity, leverage, activity, and profitability
Up to a certain specified limit during a stipulated period, interest charged on daily basis
operates the account through cheques
174. Cash credit:
Borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit
175. 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
Increase in assets is use of funds
Increase in liabilities and net worth (shareholder's equity) is source of funds
Decrease in assets is source of funds
Decrease in liabilities and retained earnings is use of funds
176. Fund:
It's a financial product, change in cash only,
Change in working capital, change in financial resources
177. Working capital:
Fund required to run the day-to-day business activities cannot be overemphasized
Finance provided to support the short-term assets Athe business
178. 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)
179. Need: To run the day to day operations of the business
180. Fixed working capital:
Minimum level of current assets is referred to as permanent or fixed working capital
181. Degree of excessive working capital:
Chances of inventory mishandling, waste,Liabilities increase Defective credit policy, stock collection period Higher incident of bad debts, managerial inefficiency
182. Inadequate working capital: Difficult to implement operating plan, operating inefficiency, Fixed assets are not efficiently utilized, losses its reputation Acquiring raw materials - resources Manufacturing the products - finished goods Accounts receivables - through sales if credit sales book debts
184. Use of working capital: Adjusted net loss from operations Purchase of non-current assets Repayment of long-term debt Redemption of redeemable preferred shares Payment of cash dividend
185. Determinants: ' Nature and size of business
186. 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
187. Margin of safety: The excess of actual sales (or) budgeted sales over the break even sales is known as M.S
188. Ratio: budgeted sales - break-even sales/ budgeted sales
189. Target sales: fixed cost + desired profit/ contribution ratio (or) p/v ratio
190. Budget: Is a detailed plan of operations for some specific future period
191. Corporate finance: It is concerned with the raising and administration of funds used in business Deals with practices and policies Deals with financial problems
192. Marketable securities: Are the temporary short-term investments in shares, debentures and bonds Commercial papers, UTI units, inter corporate lending
193. Bad debts: debts, which will never be collected, are called
193. Bills receivables: Represents the promises made in writing by debtors to pay definite some of money after some specific period of time
194. Loans and advances: due from employees and associates
195. Patents: Right granted by the government enabling the holder to control the use of an invention
196. Copy right: Exclusive right to reproduce and sell literacy musical and artistic works
197. Franchises: Contracts giving exclusive right to perform celtain functions or to sell certain products or servIces
198. Other assets (preliminary exp, deferred revenue expenditure): Prepayments for services or benefits for period longer than the accounting period Ex: advertising, preliminary exp
199. 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)
200. 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 Banks charge - discount charges
Over draft: The borrower is allowed to withdraw funds in excess of the balance in his current account
Debit credit Personal accounts: the receiver 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
PV ratio: sales - variable cost/ sales
BEP (rupees): fixed cost/ p/v ratio (or) contribution ratio
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 (liabilities) 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
Journal proper:
Opening entries adjusting and closing post entries, correcting entries
Personal accounts:
Proprietor's, suppliers, creditors
Artificial persons - limited company alc, insurance company alc, government company alc
Representative persons - common title, salaries outstanding, rent prepaid
Real accounts:
Tangible -land, buildings, machinery
Intangible - goodwill, patents, intellectual properties,
Nominal accounts:
Salaries, rent, commissiop, discount, insurance
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:
For decision making
To provide reliable financial information about economic resources and obligations of
business enterprise.
For estimating the earnings potential of the enterprise
Types of financial statements:
Income statement (P & La/c):
Periodic statement FPO (for the period of)
It presents the summary pf revenues, expenses and net income or net loss of a firm
Measure the firm's profitability; it is a scoreboard for a period oftime
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 infOlmation)
Objectives:
To measure the profit ofthe 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, payrnents, 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
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 payor' sell an asset at a certain time in the future for a certain price
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
FOl'm 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 alc
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 film should know the financial implications of its
operations
Treasurer: auditing cost control
Controller: planning and' budgeting, inventory management, accounting
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