What Does Capital Reserve Mean?

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.

What is general reserve ?

It is a reserve created by transferring certain amount of undistributed profit for funding expansion,
acquisition, paying dividends, discharging of liabilities, writing off extraordinary and/or contingent
losses ,buyback and/or redemption of securities.

What Does Free Reserves Mean?

A measurement of a bank's reserves that is equal to the difference between borrowed reserves and
excess reserves. This is the amount which the bank has available to lend to clients. A bank is required
by federal law to hold a specific amount of reserves at any given time. The excess reserves are
calculated by subtracting the required reserves from the total reserves it holds.

There are two main types of reserves which I am explaining with

following way :-

1. Open reserves
Open reserves may be defined all reserves which shows in the balance sheet. Every person or
public can know such reserves of company. Those reserves provide full information to
shareholders about which amount has gone to reserves or why they are not getting all amount
of dividend. This type can also divide in sub parts

a) Capital reserves

Capital reserves are main type of open reserves. It is not created out of profit of company.
This reserve is not used for distributing the dividend to shareholders of company. The main
sources of these reserves are following:-

1. profit earned prior to incorporation

2. Premium on the issue of shares and debentures.
3. Profit on reissue of forfeited shares
4. Profit set aside for the purpose of redemption of preference shares.
5. Profit on sale of undertaking or part of it.
6. Surplus on revaluation of assets and liabilities.

b) Revenue reserves

Revenue reserves are that part of open reserves which are created out of profit of company. It
is showed in profit and loss appropriation account .It can be used for dividend to
shareholders. There are following benefits of revenue reserves:-

1. Extension of business
 2. Set off unknown losses of business.
3. Used to create strength in the financial position of business.
4. To make stability in the dividend rate.

These revenue reserves can also divide into two parts.

i) general reserves
ii ) Specific reserves = Specific reserves includes dividend equalization reserve, debenture
redemption reserve , staff reserve. Investment fluctuation reserve, taxation reserve and
contingency reserves.

2. Secret Reserves
Secret reserves may be defined as that type of reserves which is not shown in final account of
company. Means it has neither been shown in profit and loss appropriation account nor in
balance sheet. These reserves can easy created by showing less value of assets and more
value of liabilities in balance sheet. If a company has created such secret reserves for the
benefits of company, it will be surely strong his financial position. These secrete reserves can
be created by following ways:

• showing heavy depreciation value

• Showing the less value of goodwill and closing stock of business.
• Secrete of sale value of business.
• Showing heavy liabilities which is not of company.
• Showing capital expenses as revenue expenses.
• Grouping of free reserves with creditors.
• Current asset not shown in balance sheet.

But company laws are not in favor because, it increases

accounting scams.

3. Other Reserves

i) Foreign currency translation reserve

This reserve is made on the estimation of loss of translating from foreign currency to
domestic currency. When a company is dealing more than one country, at that time this
reserve is needed for keeping money separated for adjustment of currency differences due to
difference in the rates applied. It is shown in the liability side of company.

What Does Expense Mean?

1. The economic costs that a business incurs through its operations to earn
revenue. In order to maximize profits, businesses must attempt
to reduce expenses without also cutting into revenues. Because expenses are
such an important indicator of a business's operations, there are
specific accounting rules on expense recognition.

2. Money spent or costs incurred that are tax-deductible and reduce taxable
income.

What Does Capital Expenditure - CAPEX Mean?

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.

Investopedia explains Income Statement

The income statement is the one of the three major financial statements. The
other two are the balance sheet and the statement of cash flows. The income
statement is divided into two parts: the operating and non-operating sections.

The portion of the income statement that deals with operating items is
interesting to investors and analysts alike because this section discloses
information about revenues and expenses that are a direct result of the regular
business operations. For example, if a business creates sports equipment, then
the operating items section would talk about the revenues and expenses
involved with the production of sports equipment.

The non-operating items section discloses revenue and expense information

about activities that are not tied directly to a company's regular operations. For
example, if the sport equipment company sold a factory and some old plant
equipment, then this information would be in the non-operating items section.

What Does Dirty Stock Mean?

Stock that is not granted a good delivery status due to missing or incorrect
transfer documentation or endorsements. Dirty stock will usually disrupt the
transaction process.

What Does Divestment Mean?

The process of selling an asset. Also known as divestiture, it is made for either financial or
social goals. Divestment is the opposite of investment.

Investopedia explains Divestment

Generally you'd just say that you are selling an asset. The term divestment is more
appropriate however in the following contexts:

1) A change in corporate strategy - a firm might say that they are divesting a particular
subsidiary to focus on their core business.

2) Social goals - there are many political reasons why investors might reduce investments. A
notable example was the withdrawal of American firms from South Africa during apartheid.
What Does Short Selling Mean?
The selling of a security that the seller does not own, or any sale that is
completed by the delivery of a security borrowed by the seller. Short sellers
assume that they will be able to buy the stock at a lower amount than the price
at which they sold short.

What Does Spread Mean?

1. The difference between the bid and the ask price of a security or asset.

2. An options position established by purchasing one option and selling another

option of the same class but of a different series.

What Does Solvency Mean?

The ability of a corporation to meet its long-term fixed expenses and to
accomplish long-term expansion and growth.

What Does Sideways Trend Mean?

Describes the horizontal price movement that occurs when the forces of supply and demand
are nearly equal. A sideways trend is often regarded as a period of consolidation before the
price continues in the direction of the previous move.

A sideways price trend is also commonly known as a "horizontal trend".

Bank spread

The bank spread is the difference between the bank's cost of funds, in terms of interest paid to
depositors, and the rate the bank charges to debtors on bank loans.

What Does Strike Price Mean?

The price at which a specific derivative contract can be exercised. Strike prices is mostly used
to describe stock and index options, in which strike prices are fixed in the contract. For call
options, the strike price is where the security can be bought (up to the expiration date), while
for put options the strike price is the price at which shares can be sold.

The difference between the underlying security's current market price and the option's strike
price represents the amount of profit per share gained upon the exercise or the sale of the
option. This is true for options that are in the money; the maximum amount that can be lost is
the premium paid.

Also known as the "exercise price".

Investopedia explains Strike Price

Strike prices are one of the key determinants of the premium, which represents the market
value of an options contract. Other determinants include the time until expiration, the
volatility of the underlying security and prevailing interest rates. Strike prices are established
when a contract is first written. Most strike prices are in increments of $2.50 and $5.
What Does Spot Price Mean?
The current price at which a particular commodity can be bought or sold at a specified time
and place.

Revenue

expenditure is a reserve of money used by an establishment to acquire or

upgrade physical assets. Revenue expenditure is beneficial for the current
business year.

Comparison: Revenue expenditure and capital expenditure

Capital expenditure results the increase or acquirement of an asset, whereas

revenue expenditure is necessary for the sustenance of earning capacity.

Revenue expenditure: Purposes

Revenue expenditure is the reserve of money used by an establishment to
develop or raise physical assets like equipments, industrial buildings or
properties. The operations of an establishment include everything from
constructing structures to repairing parts of the building.

What do you mean by Cash Flow Statement?

Answer: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing
funds flow statement all the current assets and current liabilities are taken into consideration.
But in a cash flow statement only those sources of funds are taken which provide cash and
only the uses of cash are taken into consideration, even liquid asset like Debtors and Bills
Receivables are ignored.

A Cash Flow Statement is a statement, which summarises the resources of cash available to
finance the activities of a business enterprise and the uses for which such resources have been
used during a particular period of time. Any transaction, which increases the amount of cash,
is a source of cash and any transaction, which decreases the amount of cash, is an application
of cash.

Q.2. What are the objectives of Cash Flow Statement?

Answer: A Cash Flow Statement provides very useful help to financial management of a
business enterprise. It summarises the sources from where the cash may be obtained and the
specific uses to which the cash may be applied during a particular period of time.

A Cash Flow Statement has the following uses:

Helpful in short-term financial planning: Cash Flow Statement provides useful information to
a business enterprise to make decision for its short-term financial planning.

Helpful in preparing Cash Budget: A Cash Budget is an estimate of cash receipts and
disbursement for a future period of time. Cash Flow Statement provides help to the
management to prepare Cash Budget. A comparison of cash budget and cash flow statement
reveals the extent to which the sources of the business were generated and used as per the
plans of the business.

Helps to understand liquidity: Liquidity means ability of a business enterprise to pay off its
liabilities when due. Cash Flow Statement helps to know about the sources where from the
cash will be available to pay off the liabilities.

Prediction of sickness: With the help of preparing cash from operation a business enterprise
may come to know about cash losses in operation. It helps to predict this type of sickness.

Dividend decisions: Dividend is paid within 42 days, when company declares it. Cash Flow
Statement helps the management to know about the sources of cash to pay off dividend.

What Does Fringe Benefits Mean?

A collection of various benefits provided by an employer, that are exempt from taxation as
long as certain conditions are met. Any employee who receives taxable fringe benefits will
have to include the fair market value of the benefit in their taxable income for the year,

Fringe benefits commonly include health insurance, group term life coverage, education
reimbursement, childcare and assistance reimbursement, cafeteria plans, employee discounts,
personal use of a company owned vehicle and other similar benefits.

Fringe Benefits Tax (FBT) was the tax applied to most, although not all, fringe benefits. A
new tax was imposed on employers by India's Finance Act 2005 was introduced for the
financial year commencing April 1, 2005. The Fringe Benefit Tax is abolished in the Finance
Bill of 2009 by Finance Minister Pranab Mukherjee.

The following items were covered:

• Employer's expenses on entertainment, travel, employee welfare and

accommodation. The definition of fringe benefits that have become
taxable has been significantly extended. The law provides an exact list of
taxable items.
• Employer's provision of employee transportation to work or a cash
allowances for this purpose.
• Employer's contributions to an approved retirement plan (called a
superannuation fund).
• Employee stock option plans (ESOPs) have also been brought under Fringe
Benefits Tax from the fiscal year 2007-08.

Share Premium Account

Usually found on the balance sheet, this is the account to which the amount of
money paid (or promised to be paid) by a shareholder for a share is credited to,
only if the shareholder paid more than the cost of the share.

Many firms authorize shares with some nominal par value, often the smallest unit of currency
commonly in use (such as one penny or $0.01), in many jurisdictions due to legal
requirements. The firm may then sell these shares for a much higher price (as the par value is
a largely archaic and fictional concept).

Any premium received over the par value is credited to capital surplus.

For example, a company issues 100 ordinary shares of a nominal value of $1

each at a subscription price of $4 per share. The $300 difference will go to the
share premium account.

Revaluation reserves

A revaluation reserve is a reserve created when a company has an asset revalued and an
increase in value is brought to account. A simple example may be where a bank owns the
land and building of its headquarters and bought them for $100 a century ago. A current
revaluation is very likely to show a large increase in value. The increase would be added to a
revaluation reserve.

What is Capital Redemption Reserve?

Capital Redemption Revere is a reserve created when a company buys it owns
shares which reduces its share capital. This reserve is not distributable to
shareholders and can be used to pay bonus shared issued.

CAPITAL REDEMPTION RESERVE –

This is a fund created when redemption is to be done out of the profits of the
company by setting aside from the profits of the Company a sum equal to the
nominal amount of preference shares reddemable.

Dividend equalization reserve

Revenue reserve that serves as a buffer between a certain dividend level and
profits available. Sums are transferred to this reserve account in good years, and
withdrawn from in poor years to maintain the dividend amount.

Fictitious Assets:

Asset created by an accounting entry (and included under assets in the balance
sheet) that has no tangible existence or realizable value but represents actual
cash expenditure. The purpose of creating a fictitious asset is to account for
expenses (such as those incurred in starting a business) that cannot be placed
under any normal account heading. Fictitious assets are written off as soon as
possible against the firm's earnings.

Floating Assets:

Asset that is continually changing in quantity and/or value, such as amount of

accounts receivable, cash, inventory, outstanding shares.
Circulating Assets: Current Assets