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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 concern concept
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 signed 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


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
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


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

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 moneys 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

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

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 lakhs
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 proprietors 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

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 firms 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
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
(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
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
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-

(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

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 firms 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

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 firms 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
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

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
todays 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

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

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

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 asset value : The value of one unit of investment is called as the Net
Asset Value 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 funds 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

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

Formula : Gross profit
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

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
Operating profit means profit before interest and tax

224 . Fixed Interest Cover ratio : The ratio is very important from the
lenders 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

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 proprietors 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

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

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

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


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

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

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

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

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

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

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

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

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

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
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
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 companys 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 than 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
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

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
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. Whichever 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, commitment or
diminution in the value of assets known to exit at the date of balance
sheet.Amounts calculated or transferred from 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

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

Cash flow is a term that refers to the amount of cash being received and
spent by a business during a defined period of time, sometimes tied to a
specific project. Measurement of cash flow can be used

Preferred stock differs from common stock in that it typically does not carry
voting rights but is legally entitled to receive a certain level of dividend
payments before any dividends can be issued to other shareholders.

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

Nifty, an index for large cap stocks on the National Stock Exchange of India

Accounting is the discipline of measuring, communicating and interpreting

financial activity. Accounting is also widely referred to as the "language of

ROE It measures a firm's efficiency at generating profits from every dollar of

net assets (assets minus liabilities), and shows how well a company uses
investment dollars to generate earnings growth.

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:

1) What are the models of valuation of the company?

2) Explain about APP in SAP fico module?






6) What is exact difference b/w Accounts and finance?
7) IPO?
8) What is net worth?
9) What is quick asset?
10) What are different types of invoice?
11) How to joine accountancy?
12 What do you mean by Investment Banking?
13) What is General Ledger
14) What is business entity concept?
15) How to prepare Profit and los accounts?

Forward contract: Its an agreement between two parties to buy or sell an

asset at a pre-agreed future point in time.

Futures contract : Its 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

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. 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

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

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

venture capital fund: Its a pooled investment vehicle (often a limited

partnership) that primarily invests the financial capital of third-party
investors in enterprises that are too risky for the standard capital markets or
bank loans.

Net worth (sometimes "net assets") is the total assets minus total liabilities
of an individual or a company. For a company, this is called shareholders'
equity and may be referred to as book value. Net worth is stated for a
particular point in time

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

1. What are the exemptions from salary?

2. What is Excise & Service Tax? What's Diffarance Excise & Service Tax?
3. Why are component values not adding up to total values in some
4. Why are component values not adding up to total values in some
5. What is the difference between income year, financial year and FBT
6. What is the present rate of T.D.S and what is the tax for person salary
at present
7. What is business?
8. What is the meaning of dealer?
9. What is the meaning of dealer?
10. How a dealer shall be registered under O.S.T. & C.S.T. Act?
11. What is Profession Tax?
12. What is the mode of payment of Entry Tax?
13. At is the mode of payment of Entry Tax?
14. What is Entry Tax as enforceable from 1.12.1999?
15. What is Entry Tax as enforceable from 1.12.1999?
16. What is luxury tax?
17. What is Entertainment Tax?
18. How the dealer is paying Admitted Tax?
19. What do you mean by Commercial Tax?

Audit Related Questions

1. What type of questions will be asked in the interviews?

2. Corporate frauds?
3. Secretarial audit?
4. Duties of auditor?
5. Investigation vs. audit?
6. Cost audit system?
7. Investigation vs. audit?
8. Cost audit system?
9. Comptroller auditor general of India functions?
10. Audit papers?
11. Audit programme?
12. Internal check system?
13. Internal audit?
14. What duty to auditors and independent examiner have to report
problems to the Commission?
15. When is income from rented accommodation to be treated as
investment income and when as trading income?
16. Is materiality by fund balance or transactions?
17. 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?
18. 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:

American Stock Exchange

Australian Stock Exchange
Bermuda Stock Exchange
Bolsa Mexicana de Valores
Bombay Stock Exchange
Budapest Stock Exchange
Casablanca Stock Exchange
Euronext Amsterdam
Euronext Brussels
Euronext Lisbon
Euronext Paris
Frankfurt Stock Exchange
Ghana Stock Exchange
Helsinki Stock Exchange
Hong Kong Stock Exchange
Istanbul Stock Exchange
Jakarta Stock Exchange
Johannesburg Securities Exchange
Karachi Stock Exchange
Korea Stock Exchange
Kuwait Stock Exchange
Lahore Stock Exchange
London Stock Exchange
Madrid Stock Exchange
Malaysia Stock Exchange
Milan Stock Exchange
Nagoya Stock Exchange
National Stock Exchange of India
New York Stock Exchange
Osaka Securities Exchange
Philippine Stock Exchange
Santiago Stock Exchange
So Paulo Stock Exchange
Shanghai Stock Exchange
Singapore Exchange
Stockholm Stock Exchange
Taiwan Stock Exchange
Tokyo Stock Exchange
Toronto Stock Exchange
Zurich Stock Exchange

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
A stock market: Is a private or public market for the trading of company
stock and derivatives of company stock at an agreed price; both of these are
securities listed on a stock exchange as well as those only traded privately.
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 Open Directory Project (ODP), also known as dmoz (from, its original domain name), is a multilingual open
content directory of World Wide Web links owned by Netscape that is
constructed and maintained by a community of volunteer editors

Stock Market Boom: A stock market bubble is a type of economic bubble

taking place in stock markets when price of stocks rise and become
overvalued by any measure of stock valuation.
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

A mutual fund: Is a professionally-managed form of collective investments

that pools money from many investors and invests it in stocks, bonds, short-
term money market instruments, and/or other securities.[1] In a mutual
fund, the fund manager, who is also known as the portfolio manager, trades
the fund's underlying securities, realizing capital gains or losses, and collects
the dividend or interest income
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.

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.
The reserve requirement (or required reserve ratio) is a bank regulation that
sets the minimum reserves each bank must hold to customer deposits and
notes. These reserves are designed to satisfy withdrawal demands, and
would normally be in the form of fiat currency stored in a bank vault (vault
cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing
the country's economy, borrowing, and interest rates.[
The Federal Reserve System (also the Federal Reserve; informally The Fed) is
the central banking system of the United States. The Federal Reserve
System, created in 1913, is a quasi-public, quasi-private banking system
composed of (1) the presidentially-appointed Board of Governors of the
Federal Reserve System in Washington, D.C.; (2) the Federal Open Market
Committee; (
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 was created via the Federal Reserve Act of
December 23rd, 1913.[17] The Reserve Banks opened for business on
November 16, 1914. Federal Reserve Notes were created as part of the
legislation, to provide a supply of currency. The notes were to be issued to
the Reserve Banks for subsequent transmittal to banking institutions.
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
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

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

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.


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


1. In general, the point at which gains equal losses.

2. 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

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

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

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
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

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

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

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:

1. A bond that sells at a significant discount from par value.

2. 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.
3. 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.
4. 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.
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 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
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
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

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)

In general, the market value of assets an investment company manages on

behalf of investors
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

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.
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
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)

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.
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
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)

A ratio that indicates the efficiency and profitability of a company's capital


Calculated as:

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)

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

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.

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)

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.

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:
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.
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:

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.
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

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

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:

1. 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
2. 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.


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

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
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.

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

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

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

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.


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

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

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

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
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

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.

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

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
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.

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

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

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.

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


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.
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

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

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.

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.

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.

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

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

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 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
Securitization typically applies to assets that are illiquid (i.e. cannot easily be
sold). It is common in the real estate industry, where it is applied to pools of
leased property, and in the lending industry, where it is applied to lenders'
claims on mortgages, home equity loans, student loans and other debts.
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
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.


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
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
The concept in accounting of recognizing expenses in the same accounting
period when the related revenues are recognized
The concept in accounting of recognizing expenses in the same accounting
period when the related revenues are recognized

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.
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.
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.
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 :-
a. Restricts the right of members to transfer its shares
b. 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.
c. 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
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

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


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

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

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


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 : 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

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

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

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

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

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

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
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

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.

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

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.

Unlike common stock, preferred stock usually has several rights attached to

----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


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

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 companys publicly held shares;
The company merges with or sells the companys 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 block10, 100, or
even 1,000 sharesof 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 companys 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
deliveras opposed to possession ofthe 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


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

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

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 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)
The cost of earning revenue. When assets or consumed or liabilities are
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
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 companys act 1956.
Kinds of companies:
Charted companies: East India company
Statutory companies: RBI, IFC
Registered companies: Incorporated under companys act 1956.
Difference between Private limited company and Public limited company:

1. Minimum number of its members Private: (2), Public (7)

2. Maximum number of its members Private: (50), Public: unlimited
3. 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.
4. Transfer of shares: restrict to private company, freely transferable to
public company.
5. Number of Directors: Private (2), Public (5)
6. Use of the word Limited
7. Restriction regarding managerial remuneration, public limited
company not more than 11% of the net profit.
8. Legal formalities
9. 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
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
Cumulative preference shares, Non-cumulative preference shares
Redeemable preference shares (usually non-redeemable)
Participating and non-participating preference shares (on surplus profits)
Acknowledgement of debt, certificate issued by a company under its seal as
an evidence of a debt due from the company
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
OTCI: Over the counter exchange of India (no particular place to buy and selling of
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
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
Reduction in the value of asset due to wear tear and laps of time, depletion and
Convert the cost of asset into cost of operation
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
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
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 Millers 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
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
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
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)
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
Open market: a market, which is widely accessible to all investors or
Annual report: (10 K) Audited document required by the SEC and send to
the public companys 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, chairmans
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

Acquisition: As an act of acquiring effective control by one company over

the assets or management of another company without any combination of
Take over: as obtaining of control over management of a company by
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 corporations 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 shareholders
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 firms 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
pays 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 vendors 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 ones own account)
Loan-value ratio: The amount borrowed dividend by the appraised value of
the collateral (securities) in %
Common-stock ratio: A companys common stock divided by its total
Tax: A fee charged (levied) by a government on a product, income or activity
If tax is levied directly a personal or corporation income its called as direct
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
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 corporations long-term debt stock and retained
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
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
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
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 firms ability to pay debts as they mature
Solvency: refers to the firms 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:

1. Investment decision
2. Dividend decision
3. Liquidity decision
4. Financing decision

Scope: finance, production and marketing

Finance management: Is that managerial activity which is concerned with
the planning and controlling of the firms financial resources
Forfeiture of shares: when a shareholder fails to pay calls
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,
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
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
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
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
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
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
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 firms
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 firms financial situation to users
Preparation for the purpose of external reporting to owners investors and
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 firms 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
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 firms liquidity and solvency
What is business owns (assets) and owes (liability) the difference is capital
or owners 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 firms working capital
Changes in the firms cash position
Changes in the firms 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
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
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
Erriers of fixed cumulative dividend
Bills discount (if drawee doesnt pay the bill amount to bank)
Owners 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: Proprietors, 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
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
Raw materials, work in progress, finished goods
Need for holding inventories:
Transaction motive smooth production
Precautionary motive risk, unpredictable changes
Speculative motive price fluctuations
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
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 (shareholders equity) is source of
3. Decrease in assets is source of funds
4. Decrease in liabilities and retained earnings is use of funds
Fund: Its 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
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:
Chances of inventory mishandling, waste, losses increase
Defective credit policy, stock collection period
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:
Acquiring raw materials resources
Manufacturing the products finished goods
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
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

Only cash transactions depreciation is not considering
It is useful for short-term planning
Statements of changes in financial statements on cash basis
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 firms 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
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
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
Total operating expenses/360 . A firms 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 - firms current debt paying ability
For firms 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) Shareholders equity + long term debt
Net worth = Shareholders 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
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
Debtors 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 debtors speed of their
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
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: shareholders 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%
Are those persons who have already advanced some money or moneys
worth to the business
Conflicts of accounting principles:
Valuation of stock: some years 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
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
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)
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
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
Posted 30th June 2013 by NARESH GORANTLA

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