Revenue:
Revenue
is the value of out put supplied to customers
Gross inflow of assets or the
gross decrease in liabilities
Operating revenue:
Arising
from the main operations or business (sale of products manufactured by a
company)
Non-operating revenue:
Indirect
to the main operations of the firm (sale of an old equipment similarly dividend
and interest from temporary investments)
Expenditure:
The
cost of earning revenue. When assets or consumed or liabilities are increased.
Operating expenses:
Relating
to the main operations (manufacturing expenses)
Non-operating expenses:
Which
are indirect to the main operations (legal expenses)
Capital expenditure:
Money
spent to acquire physical assets, which are buildings, machinery, and land.
Company:
Is a
voluntary and autonomous association of certain persons which capital divided
into numerous transferable shares formed to carry out a particular purpose.
Company formed and registered under the company’s act 1956.
Kinds of companies:
Charted
companies: East India company
Statutory
companies: RBI, IFC
Registered
companies: Incorporated under company’s act 1956.
Difference between Private limited
company and Public limited company:
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 shareholders.
Equity
shareholders have the voting right.
Preference shares:
Preference
shareholders will get dividend and repayment of capital in the winding up of
the company over the equity shareholders
Types:
Cumulative
preference shares, Non-cumulative preference shares
Redeemable
preference shares (usually non-redeemable)
Participating
and non-participating preference shares (on surplus profits)
Debentures:
Acknowledgement
of debt, certificate issued by a company under its seal as an evidence of a
debt due from the company
Types:
Naked or simple debentures (no security)
Mortgage debentures (security)
Redeemable, Irredeemable debentures
Convertible, Non-convertible debentures
Share premium:
Value greater than its face value
Bank account Dr
To
share application account
(Being application money along with premium received)
Share application account Dr
To
share capital account
To
share premium account
(Share application money transferred to share capital
account)
Share allotment account Dr
To
share capital account
To
share premium account
(The allotment money and share premium money due on
shares)
Bank account Dr
To
share allotment account
(Share allotment money received)
Share discount:
Value less than its face value
Share discount account Dr
Discount on the issue of share account Dr
To
share capital account
Primary market:
Initial
public offering of securities (IPO), newly floated shares, first issue of
shares
Secondary market:
Buying and selling of securities (shares) is traded in
secondary market
OTCI:
Over
the counter exchange of India (no particular place to buy and selling of
shares)
Memorandum of
association:
It
the scope of the activities of the company and defines the relations of the
Company with out side world.
Registered determines office, company name,
objectives,
7
members have to promise to take at least one share each, their names and
addresses.
Articles of
association:
Rules
and regulations of the internal management of the company and very important to
the Shareholders, because they determine the relation between the company and
its members.
Subsidiary
company:
A company that is completely control by the company
Holding company:
A
company that has control over other companies through ownership of a sufficient
portion Of those companies common stock. A company that owns enough voting
stock in another
Firm to control management
EX: CAPITLA IQ is subsidiary
of S & P (standard and poor, credit rating company) S & P is holding
company of CAPITLA IQ.
Stock exchanges
in India and abroad:
Place where buying and selling of shares takes place
is stock exchange
EX:
BSE, NSE, NYSE, NASDAQ, London stock exchange, Toronto stock exchange
Depreciation:
Reduction
in the value of asset due to wear tear and laps of time, depletion and
obsolesce Convert the cost of asset into cost of operation
Methods:
Straight-line
method, Diminishing balance method or declining balance method or accelerated
method, Sinking fund method, Depletion method
Accrued expenses:
Represent
a liability that a firm has to pay for the services which has already receive, Obligations
payable by the firm. Ex: wages, salaries outstanding.
Deferred income:
Represent
funds received by the firm for goods and services, which it has agreed to
supply in Future Ex: advanced payments by the customers
SEBI:
Securities and Exchange Board of India (12th
April 1988)
To promote fair dealing. To provide a degree of
protection
To
regulate and develop a code of conduct, register and working of stock brokers
Provision:
Preparatory action of measure, money kept aside for a
specific work
Reserve:
Some
amount of profit kept aside to meet contingent expenses, put aside for future
purpose
Minority
interest:
The
ownership interest in a company held by the person other than the parent
company and Its subsidiary undertakings
General reserve:
It can be used for any purpose including distribution
of dividend
Capital reserve:
For specific purpose
Dividend:
Shareholders
will expect some return from their investments by them in the share capital Are
generally paid in cash
Dividend
declared by the board of directors in the AGM (annual general meeting)
Interim dividend:
Dividend declared for 6 months is called interim
dividend
Final dividend:
Declared at the end of the financial year
Theories:
Relevance: Walters model, Gardens model, Bird in a
hand argument
Irrelevance: Modigliani and Miller’s Hypothesis
Marginal cost:
Aggregate amount of variable cost
Variable cost:
One
which various directly with changes in the level of output over a defined
period of time
Fixed cost:
One
which is not affected by changes in the level of out put over a defined period
of time
Semi-variable
cost:
Which
does not vary proportionally but simultaneously cannot remain stationary at all
times
Ex: Depreciation, repairs
Partnership:
A
business relationship where two or more persons carry on a business with a view
to make a profit.
Joint-venture:
A
foreign company joins hands with local company for local interest to carry out
a single project pr a limited number of projects, in specific period of time.
Non-recurring items in P & L account
(Profit and loss account):
Sale
of investments
Non-cash expenditure in P & L
account:
Depreciation
Depletion:
Used
of oil wells, mines or deposits for depreciation
Amortization:
For
long term investments such as patens copyrights, paying of debt gradually
Capital profits:
Sale
of fixed assets
Revenue profits:
From
main operation of the firm (sale of goods and services)
Mutual fund:
An
open-ended fund operated by an investment company, which arises money from
shareholders and investments in a group of assets
Raise
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
Interim audit and statutory audit:
Chairman: One of
the person elected by the directors in the board of directors meeting.
Who is the Director: one of the shareholders becomes director
CEO:
chief executive officer, top officer in the company in the executive cadre
Who can appoint CEO: board of directors
AGM:
shareholders annual general meeting
Quorum: attend
the minimum number of members in the meeting
Statutory books:
Register
of investment holders and their names, register of earnings, register of
debenture and shareholders, register of directors and their shares
Financial books:
Cash
book, general ledger, return outwards and return inwards, invoice, bills
payable, bills receivables
Resolution: solving
the problem
Who can appoint auditor: board of directors
Minute books: recording of the board of directors meeting
Agenda: the
meeting, which is discussed by the board of directors
Duties of director: to appoint officers and auditors, to take policy
decisions.
Contribution: sales – variable cost
Role of stock exchange: to regulate the share trading in India
Corporation:
Business
firm whose articles of incorporation have been approved in some state
A
business, which is a completely separate entity from its owners
Difference between Corporation and
Company:
Company: an
institution created to conduct business
He
only invest in large well established company
He
can start the company in his garage
Principles of accounting:
Policies: prudent,
materiality, consistency
Assumptions: continuing, consistency, accrual (revenue and cost)
Proxy: it includes
every proxy consensus and authorization with in the meaning of section
14
(a) of the act (representative)
Consignment:
Auction
are quite simple
A
consignor brings merchandise for you to sell online
Consignor
– owner
Consignee
– agent
Debt & Credit: every account has two sides left side Debit and right
side Credit
Open market: a market, which is widely accessible to all investors
or consumers
Annual report: (10 K)
Audited
document required by the SEC and send to the public company’s or mutual funds
share at the end of each fiscal year (balance sheet, income statement, cash
flow statement and description of company operations, auditors report, summary
of operations, chairman’s speech) contain in annual report.
Quarterly report: (10 Q)
Un
audited document required by the SEC of all us public companies reporting the
financial results for the quarter and noting any significant changes and events
in the quarter (financial statements, discussion from the management, list of
material events)
Merger: two or
more companies combine into one company they may form a new company
Absorption: two or
more companies combine into an existing company
Consolidation: is a combination of 2 or more companies into a new
company
Acquisition:
As
an act of acquiring effective control by one company over the assets or
management of another company without any combination of companies.
Take over: as
obtaining of control over management of a company by another
Types of merger: horizontal, vertical, and conglomerate
Reverse acquisition:
One
way of a company to become publicly traded by acquiring a public company and
then installing its own management team and renaming the acquiring company.
Reverse merger:
The
acquiring of a public company by a private company allowing the private company
to bypass the usually lengthy and complex process of going public.
ADR: American
depository receipts, a negotiable certificate issued by a U.S
Debt: a liability
or economic obligation in the form of bonds, loans
Equity: ownership
interest in a company in the form of common stock or preferred stock
Shareholders equity: total assets – total liabilities
Depression: a
period during which business activity drops significantly
Portfolio: A collection of investments allowed by the same individual or
organization (equity, bonds, debentures, preferred stock)
Portfolio Management:
Choosing
and maintaining appropriate investments and allocating funds accordingly
Security analysis: the entire process of estimating return and risk for
individual securities
Portfolio analysis:
To
determine the future risk and return in holding various blends of individual
securities
Prospects:
A
legal document offering securities for sale required by the securities section
act 1933 it must explain the offer including the terms, issuer, objectives,
historical financial statements
Private placement:
The
sale of securities directly to institutional investors such as banks, mutual
funs, LIC
Bad debt reserve: an amount set aside as reserve for bad debts
Listing:
The
acceptance of securities for trading in a registered stock exchange (at least
49 % offer to public) total paid up capital should not be less than 3 crore
GDR: global
depositary receipts (CITI Bank 1990 introduced)
Underwritings:
The
procedure by which an underwriter brings a new security issue to the investing
public in an offering. The process of insuring someone or something
Inventory: raw
material, work-in-progress, finished goods not at been sold
Affiliate:
A
company in which another company has a minority interest related to another
company
Venture capital:
Funds
made available for startup firms small business with exceptional growth
potential
Capital: cash
or goods used to generate income
Capital budgeting:
Firms
decision to invest its current funds most effectively in the long-term assets
in anticipation of an expected flow of benefits over a series of years
Blue chip:
Stock
of large, national company with a solid record of stable earnings and/or
dividend growth and reputation for high quality management, (first class equity
shares)
Board of directors:
Individuals
elected by a corporation’s shareholders to over the management of the company
Strategic alliance:
An
agreement between two or more individuals to achieve a common goal
Stock split:
To
attract the potential investors changing the shareholder’s equity announcing
two or one split of common stock to reduce the face value of the share (pare
value)
Securitization:
The
process of aggregating similar investment such as loan mortgage into negotiable
securities,
SENSEX:
An
index composed of 30 largest and most actively trading stock companies in BSE,
NSE
Cost of capital:
Minimum
acceptable rate of return that a firm must earn on its investments for the
market value.
Short selling:
Trader
sells the shares with a small profit a short period by gaining limited returns
in a short period.
ABC analysis:
Statistical
tool used over inventory that a firm should not excuse some degree of control
over its items which are most costly as compared to less costly items.
EOQ: (economic order quantity)
Refers
to the order size that will result in the lowest total of orders and carrying
of an item of an inventory.
Leverage:
Meeting
a fixed cost or paying a fixed return for employing resources or funds,
Describe the firm’s ability to use fixed cost assets or funds to magnify the
returns to its owners.
Operating leverage:
Defined
as tendency of operating profit to vary disproportionately with sales
High
operating leverage – fixed cost more than the variable cost
Formula: Contribution/operating profit
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
Formula: operating profit (EBIT)/ PBT
Degree of financial leverage: %change in EPS/ %change in
EBIT
EPS: earnings per
share, PBT: profit before tax
Combination of operating and financial leverage:
%Change
in EPS/ % change in sales
Discounted cash flow technique: time value of money concept NPV, IRR, PI
Bankruptcy: becoming
insolvent
IRR:
Is
that the rate of which the sum of discounted cash inflow equals the sum of
discounted cash outflow. Where NPV is ‘0’
Shareholder: one who owns share of stock in a corporate or mutual
funds
Liquidate:
To
convert into cash (or) to sell all of a company assets pay outstanding debts
and distribute the remaining to shareholders and then go out of business.
Savings account:
A
deposit account at a bank or savings and loan which pay’s interest but cannot
be withdrawn by check writing
Transaction:
An
agreement between a buyer and a seller to exchange an asset for payment
Credit: the
borrowing capacity of an individual or company
Accounts payable:
Money
which is owned to vendor’s for products and services purchased on credit
Accounts receivables:
Money
which is owned to a company by a customer for products and services provided on
credit.
Broker:
An
individual or firm acting as intermediary between a buyer and seller, usually
charging a commission.
Dual trading:
The
practice by a broker of acting as an agent and simultaneously acting as a
dealer (buying and selling of one’s own account)
Loan-value ratio:
The
amount borrowed dividend by the appraised value of the collateral (securities)
in %
Common-stock ratio:
A
company’s common stock divided by its total capitalization
Tax:
A
fee charged (levied) by a government on a product, income or activity
If
tax is levied directly a personal or corporation income it’s called as direct
tax.
If
tax is levied on price of goods or services is called as indirect tax
Income Tax:
Annual
tax levied by the federal government on an individual or corporations net
profit
Earnings report:
An
official quarterly or annually final document published by a public company
Shows
earnings, expenses and net profit
Net profit: gross
sales – (taxes + interest + depreciation + other expenses)
Retail price: price charged to retail customers
Whole sage: the
purchase of goods in quantity for resale purpose
Retail: selling
directly to consumers or customers
Credit card:
Any
card that may be used repeatedly to borrow money or buy products and services
on credit issued by bank
Debit card:
A
card, which allows customer to access their funds immediately electronically
Profit: the
positive gain from an investment or business operations
Face value: the
nominal $ amount assigned to a security by the issuer
AMEX:
(American stock exchange)
Second
largest stock exchange in the US after NYSE (Newyork stock exchange) largest
representation of stock and bonds issued by smaller companies than the NYSE
In
1998 the NASDAQ purchased the AMEX
Compound interest:
Interest
which is calculated not only on the initial principal but also the accumulated
interest of prior period.
Capitalization: the sum of corporation’s long-term debt stock and
retained earnings
ADS:
American
depositary shares the share issued under American depositary agreement, which
is actually traded
GATT:
General
agreement on tariffs and trade affiliate with the United Nations, to facilitate
international trade
Tariff:
A
tax imposed on a product when it is imported into a country or company
EBITDA: earning before interest tax dividend and amortization
Exchange ratio:
The
number of shares of the acquiring company that shareholders will receive for
one share of the acquired company
Form S 1: a
registration statement used in the initial public offering of securities
Pooling of interest:
In
which the balance sheet of the two companies combined line by line without a
tax impact
Capital budgeting decisions: operating, administration and strategic
Decision tree:
Define
investment, identify decision alternatives, draw decision tree, and analyze
data
Concept of cash flow:
Initial
investment, annual net cash flow, terminal cash flow
Investment evaluation:
Estimation
of cash flow, estimation of required rate of return decision rule for making
the choice.
Financial analysis:
It
is the process of identifying the financial strength and weakness of the firm
by properly establishing relationship between the items of the balance sheet
and the profit and loss a/c
Liquidity: Refers
to the firm’s ability to pay debts as they mature
Solvency: refers
to the firm’s ability to meet eventually all its long-term and short-term debt
Accounting system:
A
source of financial information of a firm should know the financial
implications of its operations
Treasurer: auditing
cost control
Controller: planning
and budgeting, inventory management, accounting
Finance:
Is
the conversion of accumulated funds to productive use
Finance
aptly been called as science of money
Finance functions:
Investment
decision
Dividend
decision
Liquidity
decision
Financing
decision
Scope: finance,
production and marketing
Finance management:
Is
that managerial activity which is concerned with the planning and controlling
of the firm’s financial resources
Forfeiture of shares: when a shareholder fails to pay calls
Dividend:
Profit
and loss a/c Dr
To proposed dividend a/c
(Being
dividend proposed by the directors)
Preliminary expenses:
Are
those expenses which are incurred on the formation of the company
Cost: the amount of
expenditure incurred on attributable to a specific thing or activity
Short-term finance:
Trade
credit, bank credit, public deposits, advances, personal loans, retained
earnings, accrued expenses, and provision for tax, depreciation
Commerce: business
Calls in erriers will be disclosed in
balance sheet:
Deduction
from subscribed capital
Father of scientific management: F.W Tayler
Espit Decorps:
Employee
at all levels should be given the opportunity to take initiative and exercise
judgment
Government Company:
Central
government or state government holds 51 % more of the total paid up capital
Entrepot trade: import of foreign goods view to re export
Calls in advances will be disclosed in
balance sheet:
Deduction
from subscribed capital
Under share premium disclosed in B/S: reserves and
surplus
Net profit on reissue of forfeited shares
will be transferred to: capital reserve
Condition for issue of shares at
discount:
After
one year from the date of certificate of commencement of business
Discount on issue of shares will be
disclosed in B/S: miscellaneous expenses
Purpose of preparing receipts and payment
account:
To
know balance of cash and bank at the end of the year
Tangible assets: which are having physical existence (Fixed assets)
Intangible assets: which does not having physical existence (patents,
copyrights, and trademarks, franchises, intellectual property rights)
Not a negotiable instrument: deed of partnership
Unclaimed dividend: dividend paid out not yet claimed by the shareholder
Deferred revenue expenditure:
Expenditure
whose benefits lasts for more than one accounting period (advertisement exp)
Right issue: issue of shares to existing shareholders
Which how many days the minimum
subscription amount should be received by a company: 90 days
A public company needs the business to
start:
Certificate
of commencement of business
Fundamental analysis:
To
find out the intrinsic value of a security, true economic worth of a financial
asset
(It
contains economic analysis, industry analysis, and company analysis)
Technical analysis:
Based
on past information prices of stock depends on supply and demand
Dow theory:
Raising
trend line – no single individual or buyer can influence the major trend of the
market
Flat
trend line – market discounts natural calamities can influence the market
Falling
trend line – it is provided way to understand it
Bull market: up ward
Bear market: down ward
NSDL: national
securities depository limited
Random walk theory:
Strong
efficient market all information is reflected on prices big one
Semi
strong all public information is reflect on security prices second one
Weakly
efficient market all historical market influence the security prices small one
Markwitz theory: the effect of combining two securities
CAPM: (capital asset pricing model)
The
relationship between expected return and UN avoidable risk
Combine
risk free securities with risk securities
Derivatives:
A
financial derivative is a product that derives its value from an underlying
asset
Tools
for better financial and risk management
Confer
on the financial system are well known
Options:
Types
of contract between two parties
Put option: to
sell the securities to fixed amount
Call option: to purchase securities for fixed amount
Futures:
Is
an agreement to pay or sell an asset at a certain time in the future for a
certain price
Types
Organized
exchange – which are traded in over the counter (OTCI)
Standardization,
clearing house, margins
Risk:
Foregoing
of money (systematic, unsystematic, business risk, market risk, financial risk)
Trading system:
Through
brokers and dealers
Commission
brokers, floor brokers, odd-lot dealers, Taravaniwala, bundiwalars, arbitrager,
security dealers
Accounting:
It
records business transactions takes place during the accounting period with a
view to prepare financial statements
Accounting
is art of recording classifying and summarizing in a sufficient manner in terms
of money, (to communicate quantitative information)
Objectives:
To
measure the profit of the company, to ascertain the financial position of the
company
Accounting cycle:
Recording
– transaction in subsidiary books
Classifying
– data by posting them from subsidiary books to accounts
Closing
the books – and preparing of final accounts
Accounting concepts:
Entity concept:
Scope
of what is to be recorded or what is being excluded from the accounting books
(ex: drawings account) important to the accountant
Corporate
capital paid out only at the time of winding up of the company
Dual aspect concept:
It
is transaction based purchase, sales, payments, receipts total amount debit is
equal total amount credited capital + liabilities = assets
Going concern:
The
enterprise will continue to exist in the foreseeable future continuing in
operation for the foreseeable future
Accounting period concept:
The
time interval is called accounting period, natural business year 12 months
Money measurement concept:
Transaction
is recorded in terms of money ex: purchase of building
Matching concept:
Profit
= revenue – expenses
Cost concept: (historic)
Asset
is recorded at the price paid to acquire it purchase land 80,000 (whether it is
1,75,000 at the time of preparation of balance sheet) will not be considered
Revenue recognition concept:
The
amount received (receivables) sale of out put are called revenue
Revenue
is the gross inflow of cash (sale of goods manufactured by the company)
Accrual concept:
Cost
or recognized when they are incurred and not when paid until cash is received
Objectivity concept: (evidence)
Transaction
should be supported by verifiable document asset is shown by replacement cost
Accounting conventions:
Convention of disclosure:
Accounts
must be honestly prepared and all material information must be disclosed there
in
Contingent
liabilities appearing as a note, market value of investments appearing as a
note
Convention of materiality:
Material
and immaterial matters
Value
of stock: loss of markets due to competition or government regulations,
increase in wage bill
Allocation
of cost: allocated to every one of the three years
Convention of consistency:
Important
conclusions regarding the working of a company over a number of years,
accounting procedures, and policies should be consisting.
Convention of conservatism: (playing
sage)
Considering
of all prospective losses but leaves all prospective profits
Make
the provision of all prospective losses but leaves all prospective profits
Make
the provision for doubtful debts
Valuation
of stock, provision for fluctuation of investments
Amortization
Financial accounting:
To
ascertain the financial results
Profit
& loss in the operations of the business during the accounting period
Cost accounting:
To
analyze the expenditure
To
ascertain the cost of various products manufacture by the company
Management accounting:
To
assist the management in taking rational policy decisions
Financial statements:
It
contains summarized information of the firm’s financial affairs organized
systematically
Financial
statements are prepared from the accounting records maintained by the firm
Generally
accepted accounting principles (GAAP)
and procedures are followed to prepare those statements
It
presents firm’s financial situation to users
Preparation
for the purpose of external reporting to owner’s investors and creditors
Objective:
For
decision making
To
provide reliable financial information about economic resources and obligations
of business enterprise.
For
estimating the earnings potential of the enterprise
Types of financial statements:
Income statement (P & L a/c):
Periodic
statement FPO (for the period of)
It
presents the summary of revenues, expenses and net income or net loss of a firm
Measure
the firm’s profitability; it is a scoreboard for a period of time
Operating expenses:
Office
salary, wages, insurance, rent, rates, taxes, stationary, printing, post
office, repairs
Selling expenses:
Sales
man salary, traveling exp, advertising, discount paid, bad debts, commission
for sales
Distribution expenses:
Sales
traveling, wear housing rent, insurance
Financial expenses:
Bank
charges, bank commission, and bank overdraft interest, interest on capital
Non-debiting expenses in P & L
account:
Drawings,
income tax, life insurance
P & L account credit items:
Interest
received, discount received, rent received, and collection of bad debts
Balance sheet:
Pointed
statement
Portrays
an exact picture of the financial position of the enterprise
About
economic resources and obligations of a business entity and about it owners as
a specific date, it is a measure of the firm’s liquidity and solvency
What is business owns
(assets) and owes (liability) the difference is capital or owner’s equity all
its contain in balance sheet
Uses: communicating
to the users, for raising further capital
Statement of retained
earnings:
It
means the accumulated excess of earnings over losses and dividends the balance
shown by the income statement is transferred to the valance sheet through this
statement after making necessary appropriations
Statement of changes
in financial position: (cash flow statement)
It is essential to identify the movement of working capital
or cash in and out of the business
Changes in the firm’s working capital
Changes in the firm’s cash position
Changes in the firm’s total financial position
Income:
Increase in the net worth of the business arising out of
business operations
Cost of goods sold:
Opening stock + purchases + direct expenses – closing stock
Assets = liabilities +
share holders equity
Assets:
Any owned physical object (tangible) or right (intangible)
having economic value to its owners
Fixes assets:
A substantial part of its capital in acquiring what are
known as fixed assets 80% - 90% of long-term funds used to acquire fixed assets
Valuation of fixed
assets:
Historical cost method, discounted cash flow method,
replacement cost method
Goodwill:
Means that old customer will resort to the old place, name
fame and reputation of the company, goodwill arises when a new partner
admitted, acquire by another, spent on R & D
Methods of calculating
goodwill:
Average method, super annuation method, capitalization method
Other assets:
Preliminary expenses, share issuing expenses, discount on
issue of shares and debentures, these should be written of from out of profits
Contingent assets:
Un called share capital of the company, not shown in the
balance sheet because principal of conservatism
Current assets:
Are those, which are realized within the operating cycle of
the business
Investments:
Idle funds of a business are invested in marketable
securities
Objective: convert them into cash with in a period of one
year
Investments in government securities
Immovable properties
Capital of partnership business
Liability:
Economic obligation of an enterprise
Current liability:
Which are paid within one year (paid out of current assets)
Long-term liabilities:
Which do not become due for payment in one year
Contingent
liabilities:
Uncalled liability on investments in another companies
Erriers of fixed cumulative dividend
Bills discount (if drawee doesn’t pay the bill amount to
bank)
Owner’s equity: equal to net worth
Subsidiary books:
Special books:
Sales book – purchase book
Returns book – sales, purchases
Bills book – payable receivables
Cashbook
General books:
Opening entries adjusting and closing post entries,
correcting entries
Personal accounts:
Proprietor’s, suppliers, creditors
Artificial persons – limited company a/c, insurance company
a/c, government company a/c
Representative persons – common title, salaries
outstanding, rent prepaid
Real accounts:
Tangible – land, buildings, machinery
Intangible – goodwill, patents, intellectual properties,
Nominal accounts:
Salaries, rent, commission, discount, insurance
Debit credit
Personal accounts: the receiver the giver
Real accounts: what comes in what goes out
Nominal accounts: all
losses and exp all gains
Ledger: is a set of accounts, ledger is the
important book of the double entry system
Posting: process of entering in the ledger
Journal entry: The book of first entry (original
entry) chronological record
Trail balance:
All the accounts of a concern are thus balanced off then
they are put in a list
Debit side trail to credit side
Debit side: losses, expenses, and assets
Credit side: gains, revenues, liabilities
To find out the figures arithmetically correct or not
Trading account:
To find out the gross profit
Debit side: wages, carriage, and royalties – if
it is used for production
Factory expenses, package – goods are incomplete such as
biscuits consumable stores (cotton waste, grease, engine oil) factory rent
salaries
Gross profit: sales – cost of goods sold
Inventories:
Raw materials, work in progress, finished goods
Need for holding
inventories:
Transaction motive – smooth production
Precautionary motive – risk, unpredictable changes
Speculative motive – price fluctuations
Methods:
First-in first-out method (FIFO)
Last-in first-out method (LIFO)
Weighted average method
Specific identification method
Ordering cost: entire cost of acquiring raw
materials
Carrying cost: incurred for maintaining – storage,
insurance, taxes
Capital structure:
Refers the mix of long-term sources of funds, preference
capital and equity capital and retained earnings
BEP:
(break-even-point)
Total revenues equals to total cost
Behavior of profits in response to the changes in volume,
cost and prices
Need:
What minimum level of sales need be achieved to avoid
losses
What should be the sales level to earn a target profit
Make or buy decision, production planning
BEP (units): total fixes cost/ selling price – variable cost per unit
BEP (rupees): total fixed cost/ 1- variable cost
per unit/ selling price
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
Patents:
Right granted by the government enabling the holder to control
the use of an invention
Copy right:
Exclusive right to reproduce and sell literacy musical and
artistic works
Franchises:
Contracts giving exclusive right to perform certain
functions or to sell certain products or services
Other assets
(preliminary exp, deferred revenue expenditure):
Prepayments for services or benefits for period longer than
the accounting period
Ex: advertising, preliminary exp
Relation ship between
B/S and P & L a/c:
Revenue is an inflow of assets (or outflow of liabilities)
Expenses is an outflow of assets (or inflow of liabilities)
Bills of exchange:
The seller draws a bill of exchange for a specific amount
payable at a specified date in future
It is accepted by the customer or by a bank
Brawer: who write the bill
Drawee: who accepted the bill
Purchase or discount
of bills:
The amount provided under this agreement is covered within
the overall cash credit or overdraft limit implies that the bank becomes owner
of the bill
Banks holds the bill as a security for the credit
Banks charge – discount charges
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
Increase in assets is use of funds
Increase in liabilities and net worth (shareholder’s equity)
is source of funds
Decrease in assets is source of funds
Decrease in liabilities and retained earnings is use of
funds
Fund:
It’s a financial product, change in cash only,
Change in working capital, change in financial resources
Working capital:
Fund required to run the day-to-day business activities
cannot be overemphasized
Finance provided to support the short-term assets of the
business
Sources:
Over draft, cash credit, purchase or discounting of bills
What is the need to invest funds in current assets
How much funds should be invest in each type of current
assets
Gross working capital: current assets
Net working capital: current assets – current liabilities
(net current assets)
Need: To run the day to day operations of
the business
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:
Adjusted net loss from operations
Purchase of non-current assets
Repayment of long-term debt
Redemption of redeemable preferred shares
Payment of cash dividend
Determinants:
Nature and size of business
Manufacturing cycle
Sales growth
Production policy
Price level changes
Operating efficiency and performance
Firms credit policy
Availability of credit
Estimating working
capital:
Current assets holdings period
Ratio of sales
Ratio of fixed investments
Cash flow statements:
Summarizes the causes of changes in cash position between
dates of two B/S
Only cash transactions – depreciation is not considering
It is useful for short-term planning
Statements of changes in financial statements on cash basis
Sources:
Profitable operations of the firm
Decrease in assets (except cash)
Increase in liabilities
Comparative statement
analysis:
To find out the periodic changes in the financial
performance of a company, at least for two years, changes: income or decrease
aggregate changes
Common-size
statements:
Vertical analysis
Take sales as 100
Take total assets and total liabilities as 100
Trend analysis: (time
series analysis)
The direction of changes over a period of years
Applicable to the items of P & L a/c
Trends of sales and net income
Ratio analysis:
The relationship between two or more things
Benchmark for evaluating the financial position and
performance of a firm
To make large quantitative of financial data and to make
qualitative judgment about the firm’s financial performance
Standards of
comparison:
Past ratios from the past reports, project ratios,
competition ratios
Industry ratios – ratios of the industry to which the firms
belongs
Uses of ratio
analysis:
The ability of the firm to meet its current obligations
Long-term solvency by borrowing funds
The efficiency utilizing assets in generating sales revenue
Overall operating efficiency and performance of the firm
Financial ratios as predicators of failure
Types: liquidity, leverage, activity, and
profitability
Liquidity ratios:
Essential for a firm to be able to meet its obligations as
they become due
Measure the ability of the firm to meet its current
obligations
Firm should not suffer from lack of liquidity will result
in a poor credit worthiness
Loss of creditors confident
A very high degree of liquidity is also bad idle assets
earn nothing
Current ratio: current
assets/ current liabilities
Standard is 2 to 1 (or) 2:1
For measuring short-term solvency
It represents a margin of safety for creditors
Quick ratio: current
assets – inventories/ current liabilities
Standard is 1 to 1 (or) 1:1
Converted into cash without any loss of value
Cash is the most liquid asset
Inventories less liquidity – fluctuate
Cash ratio: cash +
marketable securities/ current liabilities
Internal measure: current assets
– inventory/ average daily operating expenses
Total operating expenses/360
A firm’s ability to meet its regular cash expenses is
internal measure
Operating exp: expenses + cost of goods sold +
selling & administrative expenses + general expenses – depreciation
Net working capital
(NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
Leverage ratios:
For bankers - firm’s current debt paying ability
For firm’s long-term financial strength
The firm has a legal obligation to pay interest to debt
holders irrespective of the profit made or loss incurred by the firm
Total debt ratio: total
debt/ total debt + net worth (or) TD/ NA
TD: total debt, NA: net assets
For long term solvency of a firm
Capital employed = net assets (or) Shareholder’s equity +
long term debt
Net worth = shareholder’s equity
Debt equity ratio: external
equity/ internal equity or TD/NW (net wroth)
A high ratio shows that claims of creditors are greater
than those of owners
A low ratio implies greater claims of owners than creditors
Capital employed to
net worth ratio (CE): CE/ NW
By lenders and owners contribution
Total liabilities to
total assets ratio: TL/ TA
Financial risk: preference capital include in net worth
Lease payment = debt
Debt ratio: TD +
value of lease/ TD + value of lease + net worth
Coverage ratios:
Interest coverage
ratio: EBIT/ interest (or) EBIDT/ interest
Whether the business would earn sufficient profits to pay
periodical the interest charges
Standard is 6 to 7 times
Debt service coverage
ratio:
EBIT/ interest + principle
payment installment/ 1 – tax rate
Whether the company to make payment of principle amount
Activity ratios:
Funds of creditors and owners are invested in various
assets to generate sales and profits
The better the management of assets the larger the amount
of sales
Turnover ratios: balance between sales and assets
Inventory turnover
ratio: cost of goods sold/ average inventory
The ratio indicates the efficiency of the firm in selling
its product
Days of inventory
holdings: 360/ inventory turnover
How rapidly the inventory is turning into receivable
through sales
Debtor’s turnover
ratio: credit sales/ average debtors (or) sales/ debtors
Average debtors: opening balance + closing balance/ 2
Collection period: 360/
debtors’ turnover
Average collection period measures the quality of debtor’s
speed of their collection
Creditors turnover
ratio: credit purchases/ average creditors (not important)
Assets turnover ratio: sales/
net assets
Assets used to generate sales
Ex: Sales of one rupee of capital employed in net assets
Total assets: sales/
TA
Fixed assets: sales/
net F.A (fixed assets)
Working capital
turnover ratio: sales/ net CA
Ex: The one rupee of sales the company need as 0.31 of net
current assets
Profitability ratios:
The company should earn profits to serve and grow over a
long period of time
Profitability in relation to sales
Profitability in relation to investment
Gross profit margin: sales –
cost of goods sold/ sales
Efficiency which management produces each unit of product
Contribution ratio: sales –
variable exp/ sales (or)
1 – variable exp/ sales
Net profit margin: profit
after tax (PAT)/ sales
It indicates management efficiency in manufacturing and
administrative and selling the products (or) EBIT (1 – T)/ sales T: tax
Operating expenses
ratio: operating expenses/ sales
For changes in the profit margin (EBIT)
A higher operating expenses ratio is unfavorable
Cost of goods sold
ratio (CGS): CGS/ sales
Return on investment
(ROI):
Return on total assets: EBIT (1 –T)/ TA (or) EBIT/
TA
Return on net assets: EBIT (1 –T)/ NA (or) EBIT/
NA
Return on equity
(ROE): PAT/ NW
Earnings per share
(EPS): PAT/ number of common shares outstanding
Dividend per share
(DPS): earnings paid to shareholders/ no. Of ordinary shares out
Dividend payout ratio: DPS/ EPS
Dividend yield ratio: DPS/
market value of the share
Price earning ratio
P/E ratio: market value of the shares/ EPS
Market value of book value: Market
value/ book value
Other ratios:
Fixed assets ratio: fixed
assets/ long-term funds
Standard 0.67
This ratio should not be more than 1
If less than 1 it shows that a part of the working capital
has been financed through long-term funds
Proprietary ratio:
shareholder’s funds/ total tangible assets
Standard 0.05
Importance to creditors
High proprietary ratio will indicates relatively little
danger to the creditors
Wasting assets;
Oil wells (lease) coal mines
Pre incorporation profit are transferred to capital
reserve
Section 210 to 220 of the companies act 1956 legal position
relating to the final accounts of joint stock company
Section 210 – preparation and presentation of final
accounts
Section 211 – balance sheet and P & L a/c
Profit and loss appropriation a/c
To transfer for reserves By
last years balance b/d
To income tax for previous year By net profit for the year b/d
Not provided
for
To interim dividend By
amount withdraw from general reserve or any other
To proposed dividend By
provision such as income tax
To surplus carried to B/S By
provision no longer required
Divisible profits: dividend to shareholders
Transfer to reserve: not exceed 10% of the PAT should
not less than 2.5%
Interest on dividend: 23%
Creditors:
Are those persons who have already advanced some money or
money’s worth to the business
Conflicts of
accounting principles:
Valuation of stock: some year’s market value
Some years cost, because of principle of conservatism
But the principle of consistency will controversy
Feasibility: assets are recorded at cost less
depreciation
Petty cash book:
Small amounts and high frequency Ex: payment of stationary,
postage, telegrams, and carriage
Errors not disclosed
by Trail Balance:
Omission in recording the transaction in the books of
original entry debit and credit side both
Wrong recording in the original books
Posting to wrong account with correct amount and no correct
side
Compensatory error: forgetting to post
Error of principle
Errors disclosed by
trail balance:
Error in casting of subsidiary books (make total)
Error in carrying forward the one page to another page
Error in posting to ledger
Error in balancing the amount
Preparation of debtors and creditors schedule
How to find out the
errors:
Divide the difference by 2 and find out the equal figure
appear in the trail balance
If the difference is evenly divisible by ‘9’ error the
trans position (847 treated as 987)
If the amount is net round figure its mistake in posting
If the amount is round figure mistake in casting or
carrying forward
If the difference is large amount compare this year trail
balance to previous year
Free samples: debit to advertisement a/c and
credited to purchase a/c
Closing entry:
In an account is having debit balance that is credited
either trading a/c or P & L a/c similarly like the way to credit
Debit sales a/c debit
p & l a/c
Credit trading a/c credit
salaries a/c
Post closing trail
balance:
In order to see whether the amount in the ledger are still
in balance, which are still open
Mercantilist system: period taken into account
Stock destroyed: deducted from closing stock loss is
shown in debit side of P & L a/c
When not insured:
P & L a/c Dr
To Trading
a/c
When fully insured:
Insurance claim a/c Dr
To Trading
a/c
When partially
insured:
Insurance claim a/c Dr
P & L a/c Dr
To Trading
a/c
Expenses out standing:
Debit expenses (p & l a/c)
Credit expenses out standing a/c (liability)
Expenses paid in
advance:
Prepaid expenses (asset)
Credit expenses (p & l a/c)
Out standing or
accrued income: (asset)
Like interest on securities, dividend on shares, commission
are earned but not received
It has to credited to insurance a/c
Debit accrued income (asset)
Credit income (p & l a/c credit side)
Income received in
advance:
Debit income (p & l a/c)
Credit income received in advance (liability)
Depreciation:
Debit depreciation a/c (p & l a/c)
Credit asset (B/S)
Bad debts:
Debit bad debt (p & l a/c)
Credit debtors (B/S)
Bad debt provision:
Balancing of debtors (objective)
Debit p & la/c
Credit bad debts provision
Provision for discount
on debtors and creditors
Discount on debtors: debit p & l a/c
Credit provision of discount on debtors
Discount on creditors: debit provision for discount on
creditors
Credit p & l a/c
Interest on capital
Debit p & l a/c
Credit capital a/c
Interest on drawings:
Debit capital a/c
Credit p & l a/c
Cash paid allowed
discount:
Cash a/c Dr ‘X’
a/c Dr
Discount a/c Dr To
cash a/c
To ‘X’ a/c To discount a/c
Advance tax payment:
Advance tax a/c Dr Tax
a/c Dr
To Bank a/c To advance
tax a/c
To
bank a/c
Life insurance
premium: paid on life it
is add to drawings
Insurance premium:
If shop – p & l a/c
If goods purchased, factory building, factory machine –
Trading a/c
Loss or gain on asset
sold: p & l a/c
Discount received and
allowed: P & L a/c
Stock at the end
appear in trail balance:
Opening stock:
Debit purchase a/c
Credit stock a/c
Closing stock:
Debit stock a/c
Credit purchase a/c
Bank reconciliation
statement (BRS):
Two sources to find out the balance at bank
Bank columns of the cash book (or) bank account in the
ledger
Pass book (copy of bank column in cash book)
Passbook: credit balance favorable
Cashbook: debit balance favorable
Purpose of preparing
BRS:
To reconcile the two balances which often differ for various
reasons
The statement show the difference between two balances
Reasons:
Cheques deposited for
collection but not yet collected
Cash book – debit
Passbook - credit
If the cash book balance is given - less to the
If the pass book balance is given – add to the
Cheques issued but not
yet presented for payment:
Cashbook – credit
Pass book – debit
If the cash book balance is given – add to the
If the pass book balance is given – lee to the
Credits in the pass
book only:
Interest on favorable balance
Interest on fixed deposits
Dividend and interest on securities collected
Sales proceeds of securities behave of the cash
Bills promises notes collected
Amount remitted to the account of the customer by the
debtors (deposit)
In all cases cashbook shows the high balance than cashbook
If the cash book balance is given – add to the
If the pass book balance is given – less to the
Debits in the pass
book:
payment as per LIC premium, subscription to club
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
Bookkeeping: Recording of business transactions
by following accounting procedures
Accounting: following the rules and procedures
Manufacturing account:
It shows the expenditure in an
activity or product it will transfer to trading account
Tax:
When by charges are impose on individuals or property
by the legislative branch of the federal government and by many state
governments to raise funds for public purposes
(OR)
Taxation is that charges or imposed to support the
government in exchange for the general advantages and protection afforded by
the government to the tax payer and his or her property.
(Money that you have to pay to the
government so that it can pay for public services)
Kinds:
ü Excise Tax
ü Property Tax
ü Direct & Indirect Tax
ü Federal Tax
ü State Tax
Excise Tax:
This is directly imposed by the law making body of
government or merchandise products or certain types of Transactions it is fixed
& absolute
Charge.
Property Tax:
Take the tax payer wealth in account as represented by
the tax payers income are the property he or she owns.
Direct Tax:
A direct tax is one business or income of the
individual who is to pay the tax
Indirect Tax:
Indirect tax are taxes levied upon the commodity
before they reach the consumer who ultimately pay the taxes as part of the mart
price of the commodity.
Federal Tax:
The constitution and laws passed by congress have
given the US
Government Authorization to collect various
taxes.
State Tax:
States possess the inherent power to levy both
property and an excise tax is called state tax.
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