Capital IQ

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 determines the scope of the activities of the company and defines the relations of the

Company with out side world.

Registered office, company name, objectives,

7 members have to promise to take at least one share each, their names and addresses.

Articles of association:

Rules and regulations of the internal management of the company and very important to the

Shareholders, because they determine the relation between the company and its members.

Subsidiary company:

A company that is completely control by the company

Holding company:

A company that has control over other companies through ownership of a sufficient portion

Of those companies common stock. A company that owns enough voting stock in another

Firm to control management

EX: CAPITLA IQ is subsidiary of S & P (standard and poor, credit rating company)

S & P is holding company of CAPITLA IQ.

Stock exchanges in India and abroad:

Place where buying and selling of shares takes place is stock exchange

EX: BSE, NSE, NYSE, NASDAQ, London stock exchange, Toronto stock exchange

Depreciation:

Reduction in the value of asset due to wear tear and laps of time, depletion and obsolesce

Convert the cost of asset into cost of operation

Methods:

Straight-line method

Diminishing balance method or declining balance method or accelerated method

Sinking fund method

Depletion method

Accrued expenses:

Represent a liability that a firm has to pay for the services which has already receive,

Obligations payable by the firm. Ex: wages, salaries outstanding.

Deferred income:

Represent funds received by the firm for goods and services, which it has agreed to supply in

Future Ex: advanced payments by the customers

SEBI:

Securities and Exchange Board of India (12th

April 1988)

To promote fair dealing. To provide a degree of protection

To regulate and develop a code of conduct, register and working of stock brokers

Provision:

Preparatory action of measure, money kept aside for a specific work

Reserve:

Some amount of profit kept aside to meet contingent expenses, put aside for future purpose

Minority interest:

The ownership interest in a company held by the person other than the parent company and

Its subsidiary undertakings

General reserve:

It can be used for any purpose including distribution of dividend

Capital reserve:

For specific purpose

Dividend:

Shareholders will expect some return from their investments by them in the share capital

Are generally paid in cash

Dividend declared by the board of directors in the AGM (annual general meeting)

Interim dividend:

Dividend declared for 6 months is called interim dividend

Final dividend:

Declared at the end of the financial year

Theories:

Relevance: Walters model, Gardens model, Bird in a hand argument

Irrelevance: Modigliani and Miller’s Hypothesis

Marginal cost:

Aggregate amount of variable cost

Variable cost:

One which various directly with changes in the level of output over a defined period of time

Fixed cost:

One which is not affected by changes in the level of out put over a defined period of time

Semi-variable cost:

Which does not vary proportionally but simultaneously cannot remain stationary at all times

Ex: Depreciation, repairs

Partnership:

A business relationship where two or more persons carry on a business with a view to make a

profit.

Joint-venture:

A foreign company joins hands with local company for local interest to carry out a single

project pr a limited number of projects, in specific period of time.

Non-recurring items in P & L account (Profit and loss account):

Sale of investments

Non-cash expenditure in P & L account:

Depreciation

Depletion:

Used of oil wells, mines or deposits for depreciation

Amortization:

For long term investments such as patens copyrights, paying of debt gradually

Capital profits:

Sale of fixed assets

Revenue profits:

From main operation of the firm (sale of goods and services)

Mutual fund:

An open-ended fund operated by an investment company, which arises money from

shareholders and investments in a group of 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 exceeds 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 principles of consistency will controversy

Feasibility: assets are recorded at cost less depreciation

Petty cash book:

Small amounts and high frequency Ex: payment of stationary, postage, telegrams, and

carriage

Errors not disclosed by Trail Balance:

Omission in recording the transaction in the books of original entry debit and credit side both

Wrong recording in the original books

Posting to wrong account with correct amount and no correct side

Compensatory error: forgetting to post

Error of principle

Errors disclosed by trail balance:

Error in casting of subsidiary books (make total)

Error in carrying forward the one page to another page

Error in posting to ledger

Error in balancing the amount

Preparation of debtors and creditors schedule

How to find out the errors:

Divide the difference by 2 and find out the equal figure appear in the trail balance

If the difference is evenly divisible by ‘9’ error the trans position (847 treated as 987)

If the amount is net round figure its mistake in posting

If the amount is round figure mistake in casting or carrying forward

If the difference is large amount compare this year trail balance to previous year

Free samples: debit to advertisement a/c and credited to purchase a/c

Closing entry:

In an account is having debit balance that is credited either trading a/c or P & L a/c similarly

like the way to credit

Debit sales a/c debit p & l a/c

Credit trading a/c credit salaries a/c

Post closing trail balance:

In order to see whether the amount in the ledger are still in balance, which are still open

Mercantilist system: period taken into account

Stock destroyed: deducted from closing stock loss is shown in debit side of P & L a/c

When not insured:

P & L a/c Dr

To Trading a/c

When fully insured:

Insurance claim a/c Dr

To Trading a/c

When partially insured:

Insurance claim a/c Dr

P & L a/c Dr

To Trading a/c

Expenses out standing:

Debit expenses (p & l a/c)

Credit expenses out standing a/c (liability)

Expenses paid in advance:

Prepaid expenses (asset)

Credit expenses (p & l a/c)

Out standing or accrued income: (asset)

Like interest on securities, dividend on shares, commission are earned but not received

It has to credited to insurance a/c

Debit accrued income (asset)

Credit income (p & l a/c credit side)

Income received in advance:

Debit income (p & l a/c)

Credit income received in advance (liability)

Depreciation:

Debit depreciation a/c (p & l a/c)

Credit asset (B/S)

Bad debts:

Debit bad debt (p & l a/c)

Credit debtors (B/S)

Bad debt provision:

Balancing of debtors (objective)

Debit p & la/c

Credit bad debts provision

Provision for discount on debtors and creditors

Discount on debtors: debit p & l a/c

Credit provision of discount on debtors

Discount on creditors: debit provision for discount on creditors

Credit p & l a/c

Interest on capital

Debit p & l a/c

Credit capital a/c

Interest on drawings:

Debit capital a/c

Credit p & l a/c

Cash paid allowed discount:

Cash a/c Dr ‘X’ a/c Dr

Discount a/c Dr To cash a/c

To ‘X’ a/c To discount a/c

Advance tax payment:

Advance tax a/c Dr Tax a/c Dr

To Bank a/c To advance tax a/c

To bank a/c

Life insurance premium: paid on life it is add to drawings

Insurance premium:

If shop – p & l a/c

If goods purchased, factory building, factory machine – Trading a/c

Loss or gain on asset sold: p & l a/c

Discount received and allowed: P & L a/c

Stock at the end appear in trail balance:

Opening stock:

Debit purchase a/c

Credit stock a/c

Closing stock:

Debit stock a/c

Credit purchase a/c

Bank reconciliation statement (BRS):

Two sources to find out the balance at bank

Bank columns of the cash book (or) bank account in the ledger

Pass book (copy of bank column in cash book)

Passbook: credit balance favorable

Cashbook: debit balance favorable

Purpose of preparing BRS:

To reconcile the two balances which often differ for various reasons

The statement show the difference between two balances

Reasons:

Cheques deposited for collection but not yet collected

Cash book – debit

Passbook - credit

If the cash book balance is given - less to the

If the pass book balance is given – add to the

Cheques issued but not yet presented for payment:

Cashbook – credit

Pass book – debit

If the cash book balance is given – add to the

If the pass book balance is given – lee to the

Credits in the pass book only:

Interest on favorable balance

Interest on fixed deposits

Dividend and interest on securities collected

Sales proceeds of securities behave of the cash

Bills promises notes collected

Amount remitted to the account of the customer by the debtors (deposit)

In all cases cashbook shows the high balance than cashbook

If the cash book balance is given – add to the

If the pass book balance is given – less to the

Debits in the pass book:

payment as per LIC premium, subscription to club

Interest on unfavorable balance (overdraft)

Bank charges

Purchase of investments

In all cases passbook balance shows less balance than cashbook

If the cash book balance is given – less

If the passbook balance is given – add

Error in passbook and cashbook

Payment side of the cashbook is undercast by 200 in case of favorable balance – add to the

passbook

In case of un favorable balance – reduce from the passbook

A cheque for Rs 100 paid to a party entered error in the cashbook – the passbook balance is

more by 100

Sa cheque for 600 draws no 1 a/c wrongly charged by the bank to no 2 a/c

No 1 a/c pass book balance increase 600 reduce the pass book balance no 2

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