Prepared By VENKAT

Accounting and Finance Material

Golden accounting rules
Personal account:
Debit the receiver and Credit the giver Example: Suppliers, creditors
Real account: Debit what comes in and credit what goes out
Example: Tangible land, buildings, machinery
Intangible Goodwill, patents, intellectual properties
Nominal account: Debit all losses and expenses and credit all incomes and gains
Example: Salaries, rent, commission, and discount, insurance
Accounting Concepts: Accounting concepts are 8
1. Business Entity Concept: While preparing the financial statements the Business entity and Owners are
Deferent
Example: When owners are invited money in the business, then the Company has to treat that money as
a liability and also, whenever owners takes money from the company, then it would be recorded as
drawings and same will be adjusted to the owners equity.
2. Money Measurement Concept: While preparing the financial statements, all the transactions,
classifications and summarized reports must be presented in money terms of that country. Example: A
Company has 10 acres of land, it cant show as land =10 acres in the balance sheet. Instead the same
has to be converted in money terms.
3. Going concern concept: The company is continue to exit in the near future then the company and
auditor have to be maintain same in annual reports.
Example Discontinued Operations.
4. Accounting Period concept: Financial Statements must be prepared for particular time duration, Most
of the companies are preparing for 12 months but some companies are preparing for 15 months and
18 months
5. Historical Cost Concept:: While preparing financial statements the value of assets like land building
etc must be recorded at purchase price including the transportation cost and installation cost etc. not at
present market price.
6. Dual aspect concept: Every business transaction will have a twofold effect
Every credit has a corresponding debit. Example: Assets=liabilities+owners equity
7. Revenue Recoganization concept: The company can recognize the transaction as revenue or
expenses based on the legal proof like invoice, purchase order etc.
Example at the time of sales there are two types, credit and cash sales accrual basis and cash basis, so
we has to recognize both as revenue
8. Matching Concept: we has to deduct all the expenses form the revenue like, COGS, Depreciation&
amortization expenses etc from the total revenue.
Accounting conventions: There are 4 accounting conventions,
1. Convention of Full Discloser: Accounts must be honestly prepared and all material information must
be disclosed Example: There are Contingent liabilities appearing as a note, market value of investments
appearing as a note
2. Convention of materiality: Material and immaterial matters
Examples: Value of stock: loss of markets due to competition or government regulations, increase in
wage bill

Prepared By VENKAT
Allocation of cost: allocated to every one of the three years
3. Convention of consistency: Important conclusions regarding the working of a company over a
number of years, accounting procedures and policies should be consisting.
4. Convention of conservatism: (playing sage)
Considering of all prospective losses but leaves all prospective profits
Examples: Make the provision of all prospective losses but leaves all prospective profits
Make the provision for doubtful debts Examples: Valuation of stock, provision for fluctuation of
investments, Amortization
Rectification of errors its types: Correcting mistakes that we have made while passing entries in the
accounts. There are 4 types, Error of omission and error of principle we cont find in TB.
1. Error of omission: Wherein the full transaction is omitted from the books of accounts
Example: Sold goods to Mr. Z for $100. We neither entered this transaction in sales account nor have
we entered in Mr. Z account.
2. Error of Commission: where we have entered the correct amounts but in wrong persons account. For
example: Sales of goods to Mr. A were entered in Mr. B account
3. Error of Principle: This type of error takes place when an item is entered in wrong head or class of
accounts
Example: Purchase of fixed asset is entered in expenses account or sale of fixed asset such as building is
entered in sales account
4. Error of Duplication: Error of transition can be defined as switching the sequence of digits of amount
or figure of a transaction.
Example: Sales amount to $123 were entered as $321. A purchase of equipment worth $72 was entered
as $27 in equipment account and cash account respectively.
Debt & Credit: Every account has two sides left side Debit and right side Credit
Accounting definition: Accounting is art of recording classifying and summarizing in a sufficient manner
in terms of money, It records business transactions takes place during the accounting period with a
view to prepare financial statements
Book Keeping: Book keeping is the art of recording the financial information.
Example keeping the record sale of goods
whats difference between Accounting and Book Keeping?
Book keeping only involve in recording the financial information while accounting collects, records,
summarizes and communicates the financial information, Booking is just one basic phase of accounting
the recording phase
Why should we keep Accounts?
Man has been keeping accounts for thousands of years because they help to keep track of money, by
showing where did money come from and how we have spent it
Different fields of accounting or branches of accounting
Financial accounting: It is the general accounting field engages in recording and communicating
financial information
Cost accounting: It is specialized field of accounting involves in controlling the cost of production and
distribution


Prepared By VENKAT
Management accounting: It concerns in selecting best method of accounting among various
alternatives

Government accounting: It is generally single entry system used in recording government transactions
e.g. recording revenue, expenditure, taxes and preparing budget
Auditing: It is the examination of accounting records to check the fairness and accuracy
Stakeholders, interested parties or parties interested in accounting information
First off, the business owner want to know the financial position of business whether the
business is in profit or in loss
Investors because they want to invest in the business (e.g. they purchase shares, bonds etc.)
Loan provider, banks and creditors want to know the business profitability and financial position
Management of business needs information for the decision-making
Business employees want to know the business stability, future prospects and business scope for
their own welfare in the business organization
Government for the income tax purpose and government agencies for various other purposes
Book keeping: Recording of business transactions by following accounting procedures, in Single entry
system and double entry system
Single Entry: Where only one effect or aspect of a financial transaction is recorded
Double Entry: An Entry-making technique or a system of recording financial information where two
effects or aspects of every financial transaction are recorded in accounts
Example of Double Entry: Good sold for cash. In this case, the increase in sales (revenue) will
be recorded in sales account and increase in cash will be recorded in cash account. Therefore, there are
two aspects or effects of this transaction first one is Increase in sales or revenue and second is increase
in cash, both will be recorded.
Basic Terms of Accounting
Business: In general term any activity undertaken for purpose of earning profit
Capital: Capital represents cash and resources introduced by the owner(s) of the business to set up or
to run the business
Drawing: Drawing represents cash and resources withdrawn by the owner of business for personal use
Owner: The person(s) who starts a business by introducing capital
Transaction Any dealing between two persons that can be measured in money.
For example sale of good by business is a transaction
Account A record or log used to record the transactions of business
Invoice: Any written evidence of occurrence of a transaction like invoice for purchase of goods on credit
Trade discount: A discount given by seller to buyer on listed price of good
Cash discount: A discount for quick payment of credit.
For example a company has purchased goods on credit and if it makes payment of credit within specific
period time, the seller would give the company cash discount on quick payment
Stock: Goods or commodities remaining unsold at the end of accounting period (Generally 1 year)
Creditor/account payable: A person or an organization has purchased goods or services on credit
Debtor or account receivable: A person or an organization has sold goods or services on credit

Prepared By VENKAT
Accounting heads or type of accounts: Every financial transaction affects at least one head of
accounting. For example cash received from debtor, this transaction has two effects i.e increase in cash
(asset) and decrease in debtor (asset). Following are the five accounting heads
1. Assets: Assets are the tangible or intangible resources controlled or owned by the business to get
future economic benefits
Examples of assets: Cash, A/C receivable or debtors, notes receivable, building, plant and machinery,
stock of goods, bonds and share or any kind of financial securities, patents, copyrights, franchises,
goodwill, trademarks, trade names, prepaid expenses, earned or Accrued incomes etc.
2. Expenses or losses: Gross outflow of economic benefits which can be measured in money for getting
services or goods. Technically expenses are events by which assets are decreased or liabilities
are increased.
Examples of Expenses: Purchase of goods or services, rent, employee wages or salaries, factory leases
and depreciation expenses, heating and electricity expense, repair and renewal of machinery and plant,
freight and demurrage expense etc.
3. Income or gains: Gross inflow of economic benefits that can be measured in money for providing
services or goods. Technically incomes are events by which assets are increased or liabilities are
decreased.
Examples of incomes: Sale of goods or services, commission, discount received, profit on the sale fixed
asset etc.
4. Liabilities: These are the obligations of business arisen by past transaction or event
Examples of liabilities: A/C Payable or creditor notes or bills payable, accrued interest and
commission, bank loan, mortgage loan, issued bonds, unearned income, accrued tax etc.
5. Capital or owner's equity
The investment in business to set up or to run the business either in the form of cash, cash equivalent,
assets or economic resources by the owner(s) of business
Examples of capital: Investment of cash or assets (machinery, plant, vehicle..) to start a business
Types of Business Entities
1. Profit Oriented / Commercial Entities: Profit oriented or commercial entities are those
entities/organizations whose main aim of carrying out business is to earn profit for the owner or owners
of the business organization
Sole Proprietorship: Where one person (owner) start a business and risks and returns rest with a single
owner
Partnership: Where in two or more persons owned a business and all partners (owners) of a
firm/business are jointly and severally liable to repay the liabilities of the firm. This implies that in case
of bankruptcy of firm/business, the personal properties of partners can be used for the repayment of
debts or liabilities of the business as well
Companies or Corporate: Companies are separate legal entities formed under the Companies
Ordinance or law of a country. In case of a company the liability of owners (shareholders) is limited.
Limited liability implies that the personal property of shareholders or owners won't be used for the
repayment of debts or liabilities of the company even through company gets bankrupted

Prepared By VENKAT
2. Non Profit Oriented Entities: Non-profit oriented entities are those business entities or concerns
where the main purpose of doing business is not to earn profits for the owners / sponsors but to
provide benefits to general public or to carry out a social cause
NGOs Non-Government Organizations, Trusts, Societies
accounting cycle: An accounting cycle is the sequence in which financial data is recorded until it
becomes the part of financial statements at the end of accounting period. In other words, its a
sequence of steps to record financial information in precise manners.
Example accounting cycle is preparing journals, preparing ledger accounts, preparing trial balance,
passing adjusting entries and at the end of accounting period preparing financial statements ( such as
Income statement, Balance sheet, Cash flow statement etc)
Accounting cycle includes these major steps:
1. Identifying the financial transaction
2. Preparing the documents for transactions such a sales invoice
3. Journalizing the transactions
4. Posting the transactions from journal to ledger account
5. Preparing the trial balance to check the accuracy of accounts
6. Adjusting the entries if there are mistakes or omissions in recording transactions in any book of
accounts
7. Preparing financial statements such as Income statement, Balance sheet, Cash flow statement etc.
8. Posting closing entries to ledger account
9. Preparing 'after closing trial balance' to check the debit balance is equal to credit balance
Annual report: (10 K): It is an Audited document at the end of fiscal year of a public company required
by the SEC (balance sheet, income statement, cash flow statement).
Quarterly report: (10 Q): It is an Un-audited document required by the SEC of all us public companies
reporting the financial results for the quarter (financial statements, discussion from the management,
and 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: It 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 to rising of money from the
public by issuing shares
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

Prepared By VENKAT
Portfolio: A collection of investments allowed by the same individual or organization (equity, bonds,
debentures, preferred stock)
Bad debt reserve: An amount set aside as reserve for bad debts.
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: An amount set aside as 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.
Interim dividend: Dividend declared for 6 months is called interim dividend
Final dividend: Declared at the end of the financial year
Subsidiary company: A company that is completely control by the company
Holding company: A company that has control over other companies through ownership by holding
sufficient Common stock.(A company that owns enough voting stock in another Firm to control
management)
Example: CAPITLA IQ is subsidiary of S & P (Standard and Poor, Credit Rating Company)
S & P is holding company of CAPITLA IQ.
Spin off: The process of offering shares to the parent companys shareholders by the Subsidiary
company
Stock Spilt: increasing the number of outstanding shares without changing of capital and market
capitalization. (For retail investors) it effects on Earning per Share and Book Value per Share and it will
not effect on PE and Price to Book
Sell off: Selling shares to the outsiders by a Subsidiary company
Carve out: The process of offering shares to the public by the Subsidiary company
Net Interest Income Expense: The deference between interest receiving on loan and payment of Interest
on Deposit is called NII.
Hedge Funds: Pooling Money from few High net worth Investors and money is invested in the all high
risky assets, these are registered as LLP.
Cash Reserve Ratio: If cash reserve ratio is increased bank has to deposit more cash with RBI.
Private Equity Fund: money pooled up from the high net worth investors and that fund for used to
purchase shares from unlisted companies.
Deference b/w PE and venture capital: VC is type of private equity fund and which company having age
of 5 to 10 years is called VC.
NSE Free flood capitalization: market value of all the outstanding shares and all are listed in the NSE
Stock exchange. To prepare index
Copy right: creative writing Logo
Patent: these are issued for innovation
Tread mark: These are given for a particular product or service of that particular company
McDonalds
Mutual Fund Company: It is registered as a Trust
BRS: Rectification of the Deferences between bank statement and passbook
Contra entries: Entries posted while reconciling the bank statements

Prepared By VENKAT
Contra asset account: all accounts have debit balances but contra asset account have credit balance ex:
accumulated depreciation and provision for bad debts
Contra liability: example: selling shares on discount
Contra account: its a sub ledger bring the some balance from the main account
Capital employed: long-term funds invested in the business in liabilities side: share capital+ reserves
and surplus + long-term funds in assets side: total assets-current assets
ESOPs vs. Warrants: Employees can get benefits after the expiry date of ESOPs agreement; promoters
can get benefits before expiry date of warrants agreement.
Reverse Stock split: the process of reducing outstanding number of shares by increasing the face value
of share (if there is any delisting danger, if price is below certain range settlement will goes to 7days)
Profit margin: pat/net sales*100
Provision Vs Reserve: Provisions are created for irrespective of profit or loss and reserves are created for
future repayment of the company
Working capital: the way in which company is building its current assets, WC requirement can be for
earning operations for one year depends on production, policy, and season etc.
Net working capital: Deferences between CA and CL (current assets current liabilities) Leverage: Fixed
Commitment expenses for the finance and operating activities
Example: Bank Interest, Building lease amount
Degree of leverage: The relationship between sales EBIT
Degree of operating leverage: %Change in EBIT /%Change in Sales
Financial leverage: %Change in EPS /%Change in Sales
EOQ: The minimum quantity to be ordered so that we can reduce the ordering cost and holding cost.
EOQ

A-Annual Demand, H-Holding Cost, k-Ordering Cost

Reserve capital: Money received against by the canceled shares
Capital reserve: Profit from capital the operations for future specific purpose.
Derivative: These are financial contracts it derived price from underlying assets ex: equity derivative,
commodity derivative etc.
SWAPS: These are derivatives, exchange of cash between two parties these are two Types Currency
swaps and interest rate swaps.
Securitization: Loan taken against with group of assets from third party. Example: group of car loans,
group of home loans.

Where can you Show the opening stock and closing stock in TB: Dr the OS and Cr the CS.
Amortization: Cost allocation method for long term intangible assets
Impairment loss: If asset value is less than the purchase in present market price that deference is called
impair mantel loss
Capital Rationing: Company has limited capital to spend on long term assets then company will follow
capital rationing and choose a good project
Credit Rating: Assessing the credit worthiness of borrowing companies and indivisivals is called credit
rating Example: Moodys, ICRA
Letter of credit: it is letter issued by the buyers bank to the seller in exports and imports
Seller will get money from the buyer bank by giving Export doc. To the buyers bank Example: Invoice
Insurance of shipment.

Prepared By VENKAT
Cost Accounting: Planning, Budgeting, Analyzing the internal cost of the company
Cost of capital: Cost of using debt capital, preference capital and equity capital in the business.
Just In Time: Company order inventory only when it require
Inside Trading: It is a negative activity trading by the internal employs of that company as per
regulations.
Implicit cost: These costs will not visible Example: Promoters Time, Opportunity cost.
Explicit cost: These types of casts are clearly visible Example: Production Cost
Sunk cost: Cost is incurred but we not recover Example: Market research cost of rejected decision.
Opportunity cost: The next best opportunity cost is called Opportunity cost
Example: Benefits from best rejected choice
Marginal Cost: Cost of additional unit is called marginal cost
Example: we are produced 100 units of pens but there is a need to produce additional unit that
additional unit of production cost is marginal cost.
Cost Center: where we cant generates revenues/profits but there will be a cost Example: HR
Department
Profit Center: Where generating revenues Examples: sales and marketing department
Cost: by spending amount on product or services to get benefits in the future.
Expanse: Money spent on expired benefits Example: Salaries
Breakeven point: It means Recovering the fixed cost/no profit and no loss
Breakeven quantity: Number of units to recover fixed cost
Outstanding shares: No. of Shares Sold by the company till date
Subsidiary Shares: The Company Received Full payment for selling shares is called Subsidiary shares
Subscribed capital: Received money from the subscribed shares
Issued Shares: The Company issued total number of shares to the public
Forfeited Shares: Shares which are canceled by the company
Forfeited Capital: Company received money from canceled shares
ESOPs: Company will give facility to the most important employee to stay in the company by making
agreement.
EPS types: Basic EPS, Cash EPS and Diluted EPS
Types of dividends: Cash, Stock, Interim, Special, Liquidation.
Mutual Funds: pooling money from the group of small investors
Investment types in MF: Close ended, open-ended and Intermediary
Can tango: Future market is higher than the spot price
Operating expenses: Office salary, wages, insurance, rent, rates, taxes, stationary, printing etc
Selling expenses: Sales man salary, traveling exp, advertising, Discount paid, bad debts etc.
Distribution expenses: Sales traveling, wear housing rent, insurance
Financial expenses: Bank charges, bank commission, interest on capital etc.
Deferred Charge: Deferred charge is an expenditure that is paid for in one accounting period, but for
which the underlying asset will not be entirely consumed until one or more future periods have been
completed. Consequently, a deferred charge is carried on the balance sheet as an asset until it is
consumed. Once consumed, a deferred charge is reclassified as an expense. Example: Advertisement

Prepared By VENKAT
Deferred Revenue or income/unearned income or revenue It is a payment from a customer for services
or goods that have not yet been delivered to the customer by the seller. The seller should record as a
liability until delivery is made then it will record as revenue.
For example one company is received money before providing service to the customer the company
should record that money treated as un earned revenue.
Cash a/c Dr 1000 (company received money in advance)
To unearned revenue 1000 after service performed
Unearned revenue a/c Dr 800
To Cash 800
The company have Rs. 200 revenue is still unearned
Capital budgeting: Capital budgeting is the planning process of spending capital in efficient way on
longterm projects
Capital Budgeting Techniques: Discounting and Non-Discounting.
Methods: NPV, IRR, ARR and Payback Period
IRR: Is that the rate of which the sum of discounted cash inflow equals the sum of discounted cash
outflow. Where NPV is 0
Capital budgeting: Below are the steps involved in capital budgeting.
Identify long-term goals of the individual or business.
Identify potential investment proposals for meeting the long-term goals identied in Step 1.
Estimate and analyze the relevant cash ows of the investment proposal identied in Step 2.
Determine nancial feasibility of each of the investment proposals in Step 3
By using the capital budgeting methods outlined below.
Choose the projects to implement from among the investment proposals outlined in Step 4.
Implement the projects chosen in Step 5.
Monitor the projects implemented in Step 6 as to how they meet the capital budgeting
projections and make adjustments where needed.
There are several capital budgeting analysis methods that can be used to determine the economic
feasibility of a capital investment. They include the Payback Period, Discounted Payment Period, Net
Present Value, Protability Index, Internal Rate of Return, and Modied Internal Rate of Return.

Payback Period: A simple method of capital budgeting is the Payback Period. It represents the amount
of time required for the cash ows generated by the investment to repay the cost of the original
investment. For example, assume that an investment of $600 will generate annual cash ows of $100
per year for 10 years. The number of years required to recoup the investment is six years.
Inventory: Raw material + Work in progress + Finished goods
Inventory Methods:
LIFO, FIFO, Weighted Average Method and Specific Identification Method

Prepared By VENKAT
Good will calculation Methods:
1. Average profit method, 2. Super profit method, 3. Capitalization method.
Depreciation Methods:
1. Straight line method,
2 declaiming balancing method
Double Declaiming
And Triple Declaiming
3. Sinking fund method
4. Depletion method
Translation reserve: The Company having oversees subsidiaries reserve raising the money in the form of
debt.
Comprehensive income: Adding direct to the share holders equity
Comprehensive income = net income + other comprehensive income

Variable cost: A cost that varies with changes in the level of an activity, when other factors are held
constant. The cost of material handling to an activity, for example, varies according to the number of
material deliveries and pickups to and from that activity.
Fixed Cost: A cost that does not vary in the short term with the volume of activity. Fixed cost
Information is useful for cost savings by adjusting existing capacity, or by eliminating idle
facilities. Also called Non-Variable Cost or Constant Cost.
Variance - The amount, rate, extent, or degree of change, or the divergence from a desired
Characteristic or state.
Activity-Based Costing - A cost accounting method that measures the cost and performance
of process related activities and cost objects. It assigns cost to cost objects, such as products
or customers, based on their use of activities. It recognizes the causal relationship of cost drivers to
activities.
Prime Cost: A business's expenses for the materials and labor it uses in production. Prime cost is a way
of measuring the total cost of the production inputs needed to create a given output.
Mixed/Semi-variable cost: Semi-variable cost is an expense which contains both a fixed-cost
component and a variable-cost component.
Direct Cost - The cost of resources directly consumed by an activity. Direct costs are assigned
to activities by direct tracing of units of resources consumed by individual activities. A cost that
is specifically identified with a single cost object.
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
Fundamental analysis: Estimating the future values of assets by analyzing past financial statements, It
contains economic analysis, industry analysis, and company analysis.
Technical analysis: Estimating the stock price by analyzing data from previous price
Movements
BVPS: To know your share in the total equity. Total Equity/No. of outstanding shares
PE Ratio: market price per share/EPS
EPS: PAT-PD/No. of outstanding shares
Exceptional items: sale of fixed assets

Prepared By VENKAT
Extraordinary Items: minings
Cash Flow activities: Operating activity, investing activities, financing activity
EPS: To estimate per share earnings PAT-PD/No. outstanding shares
Bridge Finance: Taking Short term loans for working capital.
Restricted Shares: No. of shares held by the insiders
Floating Shares: No. of shares held by the public
Liquidity ratios: To know the ability of a company to pay the short-term liabilities.
Solvency ratios: To know the ability of the company to pay the long-term liabilities
Leverage ratios: To know the ability of company to pay the long-term principle debit amount
Coverage ratios: To know the ability of company to pay interest for the long-term debit
Asset utilization ratios: To know the efficiency of asset utilization of the company
Profitability Ratios: To know the ability of the company generating profits to the investors
GPM=GP/Net Sales, OPM=OP/Net Sales, NPM=NP/Net Sales
Leases:
Operating Lease: If lease asset lifetime is less than 75% it is called operating lease.
Financial Lease: If lease asset life time is more than 75% it will become financial lease.
Backwardazition: Future market is less than the spot market
Pari passu: while liquidating the company all are not having equal rights
Types of debentures
A debenture is a debt instrument similar to a bond. But bonds are secured while debentures are not.
However, many people use both the terms interchangeably.
Zero Coupon Debentures: Does not have a specified interest rate, thereby to compensate,
they are issued at a substantial discount. Interest: Difference in face value and issue price.
Specific Coupon rate Debentures: Debentures are normally issued with an interest rate
which is nothing but the coupon rate. It can be fixed or floating. Floating is associated with
the bank rates.
Convertible Debentures (Fully/ Partly convertible): Debentures which can be converted to either equity
shares or preference shares by the company or debenture holders at a specified rate 1after a certain
period. A company can also issue Partly Convertible Debentures whereby only a part of the amount can
be converted to equity/preference shares.
Non Convertible Debentures (NCDs): These cant be converted into equity/preference shares.
Primary market: Companies are issuing new shares to the public for the first time or second
time example: IPO, FPO
Secondary Market: Where the investors purchases securities from another investors rather than
the issuer issuing companies.
Current ratio: Current Assets/ Current liabilities
Quick ratio: Current assets Inventories/ Current liabilities
Cash ratio: Cash + Marketable Securities/ Current liabilities
Internal measure: Current assets Inventory/ Average Daily Operating Expenses
Total operating expenses/360
A firms ability to meet its regular cash expenses is internal measure
Arbitrage: The simultaneous purchase and sale of related products in tw o different markets in order
to profit from a discrepancy between the purchase price (undervalued) and the sale price (overvalued),
i.e. riskless Profit

Prepared By VENKAT
At-the-money Option: An option with strike price equal or very close to the current price of the
underlying asset. These options have the most time value.
Average Price (Asian) Option: Options that allow the buyer to buy (or sell) the underlying asset at the
average price instead of the spot price. The payoff is the difference between the strike price and the
average price of the underlying asset over a certain time period.
Average Rate Cap/Floor: Consists of a string of caplets (floor lets). The additional feature is that
instead of the rate being based on one single reset rate, the caplet rate is the average of two or more
reset rates.
At-the-money option
An option w hose strike price is the same as, or closest to, the current market price of the underlying
share. For example, if the share Price is Rs.260, an option w ith a strike price of Rs.260 w ould be
precisely at-the-money
Backwardation:
A futures market w here further dated delivery months trade at a discount to the near month. Also, w
here a bid is higher than an offer.
Bid/offer spread: The difference between quoted bid and offer prices.
Clearing House: The organization which guarantees the performance and settlement of exchange
traded contracts to its members NSCCL
Financial markets: It is used to refer just to the markets that are used to raise finance for long term.
Capital markets: A capital market is a market for financial assets which have a long or indefinite
maturity. Generally it deals with long term securities which have a maturity period of above one year.
Like, stock markets, bond markets, commodity markets, money markets, derivative markets, future
markets, insurance markets, and foreign exchange markets.
Stock markets: which provide financing through the issuance of shares or common stock, and enable
the subsequent trading thereof.
Bond markets: It provides financing through the issuance of bonds, and enables the subsequent
trading.
Commodity markets: It facilitates the trading of commodities like, gold etc
Money markets: Money market is a market for dealing with financial assets and securities which have
a maturity period of up to one year. In other words, its a market for purely short term funds.
Derivatives markets: It provides instruments for the management of financial risk.
Futures markets: It provides standardized forward contracts for trading products at some future date.
Insurance markets: It facilitates the redistribution of various risks
Foreign exchange markets: It is a place to trading of foreign exchange
Capital markets are divided in two types: Primary market and Secondary market
Primary market: Newly issued securities are bought or sold in primary ex: IPO
Secondary market: Secondary markets allow investors to buy and sell existing securities.
Equity markets: A market where ownership of securities are issued and subscribed is known as equity
market. An example of a secondary equity market for shares is the Bombay stock exchange.
Commonsize analysis (also called vertical analysis) expresses each line item on a single year's
financial statement as a percent of one line item
Variable costs are costs that change in proportion to the good or service that a business produces.

Variable costs are also the sum of marginal costs over all units produced. They can also be considered
normal costs. Fixed costs and variable costs make up the two components of total cost. Direct Costs,


Prepared By VENKAT
Capital budgeting: Below are the steps involved in capital budgeting.
Identify long-term goals of the individual or business.
Identify potential investment proposals for meeting the long-term goals identied in Step 1.
Estimate and analyze the relevant cash ows of the investment proposal identied in Step 2.
Determine nancial feasibility of each of the investment proposals in Step 3
By using the capital budgeting methods outlined below.
Choose the projects to implement from among the investment proposals outlined in Step 4.
Implement the projects chosen in Step 5.
Monitor the projects implemented in Step 6 as to how they meet the capital budgeting
projections and make adjustments where needed.
There are several capital budgeting analysis methods that can be used to determine the economic
feasibility of a capital investment. They include the Payback Period, Discounted Payment Period, Net
Present Value, Protability Index, Internal Rate of Return, and Modied Internal Rate of Return.
Payback Period: A simple method of capital budgeting is the Payback Period. It represents the
amount of time required for the cash ows generated by the investment to repay the cost of the original
investment. For example, assume that an investment of $600 will generate annual cash ows of $100
per year for 10 years. The number of years required to recoup the investment is six years.
Government Bonds
In general, fixed-income securities are classified according to the length of time before maturity. These
are the three main categories:
Bills - Debt securities maturing in less than one year.
Notes - Debt securities maturing in one to 10 years.
Bonds - Debt securities maturing in more than 10 years.
What is a mutual fund: A mutual fund is a pool of money from group of investors who wish to save
Professional Management. Each fund's investments are chosen and monitored by qualified
professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds,
money market instruments or a combination of those.
Balanced funds: A combination of growth and income funds, also known as balanced funds.
Closed-End Funds: A closed-end fund has a fixed number of shares outstanding and operates for a
fixed duration (generally ranging from 3 to 15 years) its listed in stock exchange.
Open-End Funds: An open-end fund is one that is available for subscription all through the year and is
not listed on the stock exchanges. The majority of mutual funds are open-end funds. Investors have the
flexibility to buy or sell any part of their investment at any time at a price linked to the fund's Net Asset
Value
What is hedging: Risk reducing mechanism
Arbitrage:
Arbitrage is the simultaneous purchase and sale of the same instrument in different markets to profit
from price discrepancies. It is the ability to take advantage of different rates, prices and/or conditions
between different markets.