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G.Krishna
Assoc.Prof. -ICBM-SBE
krishna@icbm.ac.in
WELCOME TO THE FINANCE WORLD

1.Definition of accounting: The art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which are, in part at least of a
financial character and interpreting the results there of.
2.Book keeping: It is mainly concerned with recording of financial data relating to the business
operations in a significant and orderly manner.
3. Concepts of accounting:
A. separate entity concept
B. going concernconcept
C. money measurement concept
D. cost concept
E. dual aspect concept
F. accounting period concept
G. periodic matching of costs and revenue concept
H. realization concept.
4 Conventions of accounting
A. conservatism
B. full disclosure
C. consistency
D materiality.
5. Systems of book keeping:
A. single entry system
B. double entry system
6. Systems of accounting
A. cash system accounting
B. mercantile system of accounting.
7. Principles of accounting
G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in
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a. personal a/c : Debit is the receiver and Credit is the giver

b. real a/c
: Debit what comes in credit what goes out
c. nominal a/c : Debit all expenses and losses credit all gains and incomes
8. Meaning of journal: Journal means chronological record of transactions.
9. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business
enterprise whether real, nominal, personal.
10. Posting: It means transferring the debit and credit items from the journal to their respective
accounts in the ledger.
11. Trial balance: Trial balance is a statement containing the various ledger balances on a
particular date.
12. Credit note: The customer when returns the goods get credit for the value of the goods
returned. A credit note is sent to him intimating that his a/c has been credited with the value of
the goods returned.
13. Debit note: When the goods are returned to the supplier, a debit note is sent to him
indicating that his a/c has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is recorded on both the debit and credit side of
the cashbook is known as the contra entry.
15. Petty cash book: Petty cash is maintained by business to record petty cash expenses of the
business, such as postage, cartage, stationery, etc.
16.Promisory note: It is an instrument in writing containing an unconditional undertaking
igned by the maker, to pay certain sum of money only to or to the order of a certain person or to
the barer of the instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Steale cheque: A stale cheque means not valid of cheque that means more than six months
the cheque is not valid.
20. Bank reconciliation statement: It is a statement reconciling the balance as shown by the
bank passbook and the balance as shown by the Cash Book. Obj: to know the difference & pass
necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the revenue.
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22. Capital income: The term capital income means an income which does not grow out of or
pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular business
transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the purpose of
obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business
transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is incurred during an accounting
period but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold on
credit.
28. Depreciation: depreciation denotes gradually and permanent decrease in the value of asset
due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or property.
Examples of preliminary expenses, discount on issue of shares, debit balance in the profit and
loss account when shown on the assets side in the balance sheet.
30.Intanglbe Assets: Intangible assets mean the assets which is not having the physical
appearance. And its have the real value, it shown on the assets side of the balance sheet.
31. Accrued Income : Accrued income means income which has been earned by the business
during the accounting year but which has not yet been due and, therefore, has not been received.
32. Out standing Income : Outstanding Income means income which has become due
the accounting year but which has not so far been received by the firm.
during
33. Suspense account: The suspense account is an account to which the difference in the trial
balance has been put temporarily.
34. Depletion: It implies removal of an available but not replaceable source, Such as
extracting coal from a coal mine.
35. Amortization: The process of writing of intangible assets is term as amortization.
36. Dilapidations: The term dilapidations to damage done to a building or other property
during tenancy.
37. Capital employed: The term capital employed means sum of total long term funds
employed in the business. i.e.
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(share capital+ reserves & surplus +long term loans (non business assets + fictitious assets)
38. Equity shares: those shares which are not having pref. rights are called equity shares.
39. Pref.shares: Those shares which are carrying the pref.rights is called pref. shares
Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the even of
company winding up.
40. Leverage: It is a force applied at a particular work to get the desired result.
41. Operating leverage: The operating leverage takes place when a changes
greater changes in EBIT.
in revenue
42. Financial leverage : It is nothing but a process of using debt capital to increase the rate of
return on equity
43. Combine leverage: it is used to measure of the total risk of the firm = operating risk +
financial risk.
44. Joint venture: A joint venture is an association of two or more the persons who
combined for the execution of a specific transaction and divide the profit or loss their of an
agreed ratio.
45. Partnership: partnership is the relation b/w the persons who have agreed to share the
profits of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives
against its receivables, from a financial institutions (called factor)
advances
47. Capital reserve: The reserve which transferred from the capital gains is called capital
reserve.
48.General reserve: the reserve which is transferred from normal profits of the firm is
general reserve
called
49. Free Cash: The cash not for any specific purpose free from any encumbrance like
cash.
surplus
50. Minority Interest: Minority interest refers to the equity of the minority shareholders in
subsidiary company.
51. Capital receipts: Capital receipts may be defined as non-recurring receipts from the owner
of the business or lender of the money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as A recurring receipts against sale of
goods in the normal course of business and which generally the result of the trading activities.
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53. Meaning of Company: A company is an association of many persons who contribute

money or moneys worth to common stock and employs it for a common purpose. The
common stock so contributed is denoted in money and is the capital of the company.
54. Types of a company:
1.Statutory companies
2.government company
3.foreign company
4.Registered companies:
a. Companies limited by shares
b. Companies limited by guarantee
c. Unlimited companies
d. private company
e public company
55. Private company: A private co. is which by its
AOA: Restricts the right of the members to transfer of shares Limits the no. Of members 50.
Prohibits any Invitation to the public to subscribe for its shares or debentures.
56. Public company: A company, the articles of association of which does not contain the
requisite restrictions to make it a private limited company, is called a public company.
57. Characteristics of a company:
Voluntary association
Separate legal entity
Free transfer of shares
Limited liability
Common seal
Perpetual existence.
58. Formation of company:
A) Promotion
B )Incorporation
C) Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: It is the maximum amount of the share capital, which a
company can raise for the time being.
61. Issued capital: It is that part of the authorized capital, which has been allotted to the public
for subscriptions.
62. Subscribed capital: It is the part of the issued capital, which has been allotted to the public
63. Called up capital: It has been portion of the subscribed capital which has been called up by
the company.
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64. Paid up capital: It is the portion of the called up capital against which payment has been
received.
65. Debentures: Debenture is a certificate issued by a company under its seal
a debt due by it to its holder.
acknowledging
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a subsidiary company to public
company it satisfies the following terms/conditions Sec 3(1)3:
1.Having minimum share capital 5 lakhs
2.Accepting investments from the public
3.No restriction of the transferable of shares
4.No restriction of no. of members.
5.Accepting deposits from the investors
68. Secret reserves: secret reserves are reserves the existence of which does not appear on the
face of balance sheet. In such a situation, net assets position of the business is stronger than that
disclosed by the balance sheet. These reserves are crated by:
1.Excessive dep.of an asset, excessive over-valuation of a liability.
2.Complete elimination of an asset, or under valuation of an asset.
69. Provision: provision usually means any amount written off or retained by way of providing
depreciation, renewals or diminutions in the value of assets or retained by way of providing for
any known liability of which the amount can not be determinedwith substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the purpose it was
originally made is also considered as reserve Provision is charge against profits while reserves is
an appropriation of profits Creation of reserve increase proprietors fund while creation of
provisions decreases his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which clear investment
etc
72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with some
other a/c or group of accounts so that the existence of the reserve is not known such reserve is
called an undisclosed reserve.
73. Finance management: Financial management deals with procurement of funds and their
effective utilization in business.
74. Objectives of financial Mngt: Financial management having two objectives that Is:
1. Profit maximization: The finance manager has to make his decisions in a manner so that
the profits of the concern are maximized.
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2. Wealth maximization: Wealth maximization means the objective of a firm should be to

maximize its value or wealth, or value of a firm is represented by the market price of its common
stock.
75. Functions of financial manager:
a) Investment decision
b) Dividend decision
c) Finance decision
d) Cash management decisions
e) Performance evaluation
f) Market impact analysis
76. Time value of money: The time value of money means that worth of a rupee received
today is different from the worth of a rupee to be received in future.
77. Capital structure: It refers to the mix of sources from where the long-term funds required
in a business may be raised; in other words, it refers to the proportion of debt, preference capital
and equity capital.
78. Optimum capital structure: Capital structure is optimum when the firm has a combination
of equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of capital
computed by reference to the proportion of each component of capital as weights.
80. Financial break-even point: It denotes the level at which a firms EBIT is just sufficient
to cover interest and preference dividend.
81. Capital budgeting: Capital budgeting involves the process of decision making with regard to
investment in fixed assets. Or decision making with regard to investment of money in long-term
projects.
82. Pay back period: Period represents the time period required for complete recovery of the
initial investment in the project.
83. ARR: Accounting or average rate of return means the average annual yield on the project.
84. NPV: The net present value of an investment proposal is defined as the sum of the present
values of all future cash in flows less the sum of the present values of all cash out flows
associated with the proposal.
85. Profitability index: Where different investment proposal each involving different initial
investments and cash inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of discounted cash inflows
equals the discounted cash out flow.
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87. Treasury management: It means it is defined as the efficient management of liquidity and
financial risk in business.
88. Concentration banking: It means identify locations or places where customers are placed
and open a local bank a/c in each of these locations and open local collection canter.
89. Marketable securities: surplus cash can be invested in short term instruments in order to
earn interest.
90. Ageing schedule: in a ageing schedule the receivables are classified according to their age.
91. Maximum permissible bank finance (MPBF): it is the maximum amount that banks can
lend a borrower towards his working capital requirements.
92. Commercial paper: a cp is a short term promissory note issued by a company, negotiable by
endorsement and delivery, issued at a discount on face value as may be determined by the
issuing company.
93. Bridge finance: It refers to the loans taken by the company normally from a commercial
banks for a short period pending disbursement of loans sanctioned
by the financial institutions.
94. Venture capital: It refers to the financing of high-risk ventures promoted by new qualified
entrepreneurs who require funds to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on the basis
of a package of assets (called asset pool).
96. Lease financing: Leasing is a contract where one party (owner) purchases assets and
permits its views by another party (lessee) over a specified period
97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of
business.
98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed to
overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance up to
certain limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any
tangible security.
101. Share capital: The sum total of the nominal value of the shares of a company is called
share capital.
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102. Funds flow statement: It is the statement deals with the financial resources for running
business activities. It explains how the funds obtained and how they used.
103.Sources of funds: There are two sources of funds Internal sources and external sources.
Internal source: Funds from operations is the only internal sources of funds and some
important points add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets
Deduct the following items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation
Of fixed assets
External sources: (a) Funds from long-term loans (b) Sale of fixed assets
(c) Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of
tax liability (d) Payment of fixed liability
105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For
example 6 months or less from another company which have surplus liquidity. Such eposits
made by one company in another company are called ICD.
106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt issued
by banks there is no prescribed interest rate on such CDs it is based on the prevailing market
conditions.
107. Public deposits: It is very important source of short term and medium term finance. The
company can accept PD from members of the public and shareholders. It has the maturity
period of 6 months to 3 years.
108.Euro issues: The euro issues means that the issue is listed on a European stock Exchange.
The subscription can come from any part of the world except India.
109.GDR (Global depository receipts): A depository receipt is basically a negotiable
certificate , dominated in us dollars that represents a non-US company publicly traded in local
currency equity shares.
110. ADR (American depository receipts): Depository receipt issued by a company in the
USA are known as ADRs. Such receipts are to be issued in accordance with the provisions
stipulated by the securities Exchange commission (SEC) of USA like SEBI in India.
111.Commercial banks: Commercial banks extend foreign currency loans for international
operations, just like rupee loans. The banks also provided overdraft.
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112.Development banks:
currency loans
It offers long-term and medium term loans including foreign
113.International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide

indirect assistance for obtaining foreign currency.
114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for
professionally or technically qualified entrepreneurs and persons possessing relevant experience
and skills and entrepreneur traits.
115. Unsecured loans:It constitutes a significant part of L/T finance available to an enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one period
to another.
117.Sources of cash: Internal sources(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
( e) Creation of reserves External sources(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits
119. Budget: It is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies.
120. Budgetary control: It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the actual results compared
with the forecasted and planned ones.
121. Cash budget: It is a summary statement of firms expected cash inflow and outflow over
a specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the purpose of
presenting in one report the highlights of the budget forecast.
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123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of the
level of activity actually attained.
124. Zero- base- budgeting: It is a management tool which provides a systematic method for
evaluating all operations and programmes, current of new allows for budget reductions and
expansions in a rational manner and allows reallocation of source from low to high priority
programs.
125. Goodwill: The present value of firms anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and balance
shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the causes of
difference between the two balances and pass necessary correcting or adjusting entries in the
books of the firm.
128.Responsibilities of accounting: It is a system of control by delegating and locating the
Responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the expense
incurs and revenue it earns.
130.Cost centre: A location, person or item of equipment for which cost may be ascertained
and used for the purpose of cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing costs for
determination of costs of products or services planning, controlling and reducing such costs and
furnishing of information management for decision making.
133. Elements of cost:
(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components of total costs: (A) Prime cost (B) Factory cost (C)Total cost of production
(D) Total cost
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also
known as basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include cost of
indirect material indirect labour and indirect expenses incurred in factory. This cost is also
known as works cost or production cost or manufacturing cost.
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137. Cost of production: in office and administration overheads are added to factory cost,
office cost is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production to get
the total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs may
be ascertained or expressed.
140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing (D)Operation
costing (E)Operating costing (F)Unit costing (G)Batch costing.
141. Techniques of costing: (a) marginal costing (b) direct costing (c)absorption costing (d)
uniform costing.
142. Standard costing: Standard costing is a system under which the cost of the product is
determined in advance on certain predetermined standards.
143. Marginal costing: It is a technique of costing in which allocation of expenditure to production
is restricted to those expenses which arise as a result of production, i.e., materials, labour, direct
expenses and variable overheads.
144. Derivative: Derivative is product whose value is derived from the value of one or more
basic variables of underlying asset.
145. Forwards: A forward contract is customized contracts between two entities were
settlement takes place on a specific date in the future at todays pre agreed price.
146. Futures: A future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Future contracts are standardized exchange traded
contracts.
147. Options: An option gives the holder of the option the right to do some thing. The option
holder option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to sell an asset by a
certain date for a certain price.
150. Option price: Option price is the price which the option buyer pays to the option seller. It is
also referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called expiration date.
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152. European option: Tt is the option at exercised only on expiration date it self.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between future prices and spot prices can be summarized in terms
of what is known as cost of carry.
155. Initial margin: The amount that must be deposited in the margin a/c at the time of first entered
into future contract is known as initial margin.
156 Maintenance margin: This is some what lower than initial margin.
157. Mark to market: In future market, at the end of the each trading day, the margin a/c is
adjusted to reflect the investors gains or loss depending upon the futures selling price. This is
called mark to market.
158. Baskets : Basket options are options on portfolio of underlying asset.
159. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future
according to a pre agreed formula.
160. Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects the costs
faced when actually trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the market it deals with the long term investment funds. It
consists of two markets 1.primary market 2.secondary market.
163. Primary market: those companies which are issuing new shares in this market. It is also
called new issue market.
164. Secondary market: secondary market is the market where shares buying and selling. In India
secondary market is called stock exchange.
165. Arbitrage: it means purchase and sale of securities in different markets in order to profit
from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by price
fluctuations of securities held in a portfolio.
166. Meaning of ratio: Ratios are relationships expressed in mathematical terms between figures
which are connected with each other in same manner.
167. Activity ratio: it is a measure of the level of activity attained over a period.
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168. mutual fund : a mutual fund is a pool of money, collected from investors, and is invested
according to certain investment objectives.
169. characteristics of mutual fund : Ownership of the MF is in the hands of the of the
investors MF managed by investment professionals The value of portfolio is updated every day
170.Advantage of MF to investors : Portfolio diversification Professional management
Reduction in risk Reduction of transaction casts Liquidity Convenience and flexibility
171.net asset value : The value of one unit of investment is called as the Net Asset Value
172.open-ended fund : Open ended funds means investors can buy and sell units of fund, at NAV
related prices at any time, directly from the fund this is called open ended fund. For ex; unit 64
173.close ended funds : Close ended funds means it is open for sale to investors for a specific
period, after which further sales are closed. Any further transaction for buying the units or
repurchasing them, happen, in the secondary markets.
174. Dividend option : Investors who choose a dividend on their investments, will receive
dividends from the MF, as when such dividends are declared.
175.Growth option : Investors who do not require periodic income distributions can be choose the
growth option.
176.Equity funds : Equity funds are those that invest pre-dominantly in equity shares of company.
177.Types of equity funds : Simple equity funds Primary market funds Sectoral funds Index
funds
178. Sectoral funds : Sectoral funds choose to invest in one or more chosen sectors of the equity
markets.
179.Index funds :The fund manager takes a view on companies that are expected to perform well,
and invests in these companies
180.Debt funds : The debt funds are those that are pre-dominantly invest in debt securities.
181.Liquid funds : The debt funds invest only in instruments with maturities less than one year.
182. gilt funds : Gilt funds invests only in securities that are issued by the GOVT. and therefore
does not carry any credit risk.
183.balanced funds :Funds that invest both in debt and equity markets are called balanced funds.
184. sponsor : Sponsor is the promoter of the MF and appoints trustees, custodians and the AMC
with prior approval of SEBI .
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185. trustee : Trustee is responsible to the investors in the MF and appoint the AMC for managing
the investment portfolio.
186. AMC : The AMC describes Asset Management Company, it is the business face of the MF, as
it manages all the affairs of the MF.
187. R & T Agents : The R&T agents are responsible for the investor servicing functions, as they
maintain the records of investors in MF.
188. Custodians : Custodians are responsible for the securities held in the mutual funds portfolio.
189. Scheme take over : If an existing MF scheme is taken over by the another AMC, it is called
as scheme take over.
190.Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive at the
price.
192. Market capitalization : Market capitalization means number of shares issued multiplied with
market price per share.
193.Price earning ratio : The ratio between the share price and the post tax earnings of company is
called as price earning ratio.
194. Dividend yield : The dividend paid out by the company, is usually a percentage of the face
value of a share.
195. Darket risk : It refers to the risk which the investor is exposed to as a result of adverse
movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk : It the risk which an investor has to face as a result of a fall in the
interest rates at the time of reinvesting the interest income flows from the fixed income security.
197. Call risk : Call risk is associated with bonds have an embedded call option in them. This
option hives the issuer the right to call back the bonds prior to maturity.
198. Credit risk : Credit risk refers to the probability that a borrower could default on a
commitment to repay debt or band loans
199.Inflation risk :Inflation risk reflects the changes in the purchasing power of the cash flows
resulting from the fixed income security.
200 Liquid risk : It is also called market risk, it refers to the ease with which bonds could be traded
in the market.
201.Drawings : Drawings denotes the money withdrawn by the proprietor from the business for his
personal use.
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202.Outstanding Income : Outstanding Income means income which has become due during the
accounting year but which has not so far been received by the firm.
203.Outstanding Expenses : Outstanding Expenses refer to those expenses which have become
due during the accounting period for which the Final Accounts have been prepared but have not
yet been paid.
204.Closing stock : The term closing stock means goods lying unsold with the businessman at the
end of the accounting year.
205. Methods of depreciation :
1.Unirorm charge methods :
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods :
a. Diminishing balance method
b.Sum of years digits method
c. Double declining method
3. Other methods :
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
206.Accrued Income : Accrued Income means income which has been earned by the business
during the accounting year but which has not yet become due and, therefore, has not been
received.
207.Gross profit ratio : It indicates the efficiency of the production/trading operations.
Formula : Gross profit
-------------------X100
Net sales
208.Net profit ratio : it indicates net margin on sales
Formula: Net profit
--------------- X 100
Net sales
209. Return on share holders funds : It indicates measures earning power of equity capital.
Formula :
profits available for Equity shareholders
--------------------------------------------------- X 100
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Average Equity Shareholders Funds

210. Earning per Equity share (EPS): It shows the amount of earnings attributable to each equity
share.
Formula :
profits available for Equity shareholders

--------------------------------------------------Number of Equity shares
211.Dividend yield ratio : It shows the rate of return to shareholders in the form of dividends
based in the market price of the share
Formula :
Dividend per share

-------------------------- X 100
Market price per share
212. Price earning ratio : It a measure for determining the value of a share. May also be used to
measure the rate of return expected by investors.
Formula : Market price of share(MPS)
---- ----------------------------------- X 100
Earning per share (EPS)
213.Current ratio : It measures short-term debt paying ability.
Formula :
Current Assets
-----------------------Current Liabilities
214. Debt-Equity Ratio : It indicates the percentage of funds being financed through borrowings;
a measure of the extent of trading on equity.
Formula :
Total Long-term Debt

--------------------------Shareholders funds
215.Fixed Assets ratio : This ratio explains whether the firm has raised adepuate long-term funds
to meet its fixed assets requirements.
Formula :
Fixed Assets
------------------Long-term Funds
216 . Quick Ratio : The ratio termed as liquidity ratio. The ratio is ascertained y comparing the
liquid assets to current liabilities.
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Formula :
Liquid Assets
-----------------------Current Liabilities
217. Stock turnover Ratio : The ratio indicates whether investment in inventory in efficiently
used or not. It, therefore explains whether investment in inventory within proper limits or not.
Formula:
cost of goods sold

-----------------------Average stock
218. Debtors Turnover Ratio : The ratio the better it is, since it would indicate that debts are
being
collected more promptly. The ration helps in cash budgeting since the flow of cash from
customers can be worked out on the basis of sales.
Formula:
Credit sales
----------------------------------Average Accounts Receivable
219.Creditors Turnover Ratio : It indicates the speed with which the payments for credit
purchases are made to the creditors.
Formula:
Credit Purchases
----------------------Average Accounts Payable
220. Working capital turnover ratio : It is also known as Working Capital Leverage Ratio. This
ratio
Indicates whether or not working capital has been effectively utilized in making sales.
Formula:
Net Sales
-----------------------Working Capital
221.Fixed Assets Turnover ratio : This ratio indicates the extent to which the investments in
fixed assets contributes towards sales.
Formula:
Net Sales
--------------------Fixed Assets
222 .Pay-out Ratio : This ratio indicates what proportion of earning per share has been used
for
paying dividend.
Formula:
Dividend per Equity Share

-------------------------------------- X 100
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Earning per Equity share

223.Overall Profitability Ratio : It is also called as Return on Investment (ROI) or Return on
Capital Employed (ROCE) . It indicates the percentage of return on the total capital employed in
the business.
Formula :
Operating profit
----------------------Capital employed
X 100
The term capital employed has been given different meanings

a) Sum total of all assets whether fixed or current
b) Sum total of fixed assets,
c) Sum total of long-term funds employed in the business, i.e., share capital +reserves &surplus
+long term loans (non business assets + fictitious assets).
Operating profit means profit before interest and tax
224 . Fixed Interest Cover ratio : The ratio is very important from the lenders point of view.
It indicates whether the business would earn sufficient profits to pay periodically the interest
charges.
Formula :
Income before interest and Tax
-------------------------------------Interest Charges
225. Fixed Dividend Cover ratio : This ratio is important for preference shareholders entitled to
get dividend at a fixed rate in priority to other shareholders.
Formula :
Net Profit after Interest and Tax

-----------------------------------------Preference Dividend
226. Debt Service Coverage ratio : This ratio is explained ability of a company to make payment
of principal amounts also on time.
Formula :
-
Net profit before interest and tax

-------------------------------------------------- 1-Tax rate
Interest + Principal payment installment
227. Proprietary ratio : It is a variant of debt-equity ratio . It establishes relationship between the
proprietors funds and the total tangible assets.
Formula :
Shareholders funds
---------------------------Total tangible assets
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228.Difference between joint venture and partner ship : In joint venture the business is carried
on without using a firm name, In the partnership, the business is carried on under a firm name.
In the joint venture, the business transactions are recorded under cash system In the partnership,
the business transactions are recorded under mercantile system. In the joint venture, profit and
loss is ascertained on completion of the venture In the partner ship , profit and loss is ascertained
at the end of each year. In the joint venture, it is confined to a particular operation and it is
temporary. In the partnership, it is confined to a particular operation and it is permanent.
229.Meaning of Working capital : The funds available for conducting day to day operations of an
enterprise. Also represented by the excess of current assets over current liabilities.
230.Concepts of accounting :
1.Business entity concepts :- According to this concept, the business is treated as a separate
entity distinct from its owners and others.
2.Going concern concept :- According to this concept, it is assumed that a business has a
reasonable expectation of continuing business at a profit for an indefinite period of time.
3.Money measurement concept :- This concept says that the accounting records only
those transactions which can be expressed in terms of money only.
4.Cost concept :- According to this concept, an asset is recorded in the books at the price
paid to acquire it and that this cost is the basis for all subsequent accounting for the asset.
5.Dual aspect concept :- In every transaction, there will be two aspects the receiving
aspect and the giving aspect; both are recorded by debiting one accounts and crediting another
account. This is called double entry.
6.Accounting period concept :- It means the final accounts must be prepared on a periodic
basis.
Normally accounting period adopted is one year, more than this period reduces the utility of
accounting data.
7.Realization concept :- According to this concepts, revenue is considered as being earned
on the data which it is realized, i.e., the date when the property in goods passes the buyer and he
become legally liable to pay.
8.Materiality concepts :- It is a one of the accounting principle, as per only important
information will be taken, and un important information will be ignored in the preparation of the
financial statement.
9.Matching concepts :- The cost or expenses of a business of a particular period are
compared with the revenue of the period in order to ascertain the net profit and loss.
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10.Accrual concept :- The profit arises only when there is an increase in owners capital,
which is a result of excess of revenue over expenses and loss.
231. Financial analysis : The process of interpreting the past, present, and future financial
condition of a company.
232. Income statement : An accounting statement which shows the level of revenues, expenses
and profit occurring for a given accounting period.
233.Annual report : The report issued annually by a company, to its share holders. it containing
financial statement like, trading and profit & lose account and balance sheet.
234. Bankrupt : A statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration
235 . Lease : Lease is a contract between to parties under the contract, the owner of the asset gives
the right to use the asset to the user over an agreed period of the time for a consideration
236.Opportunity cost : The cost associated with not doing something.
237. Budgeting : The term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and control of business enterprise.
238.Capital : The term capital refers to the total investment of company in money, tangible and
intangible assets. It is the total wealth of a company.
239.Capitalization : It is the sum of the par value of stocks and bonds out standings.
240. Over capitalization : When a business is unable to earn fair rate on its outstanding securities.
241. Under capitalization : When a business is able to earn fair rate or over rate on it is
outstanding securities.
242. Capital gearing : The term capital gearing refers to the relationship between equity and
long term debt.
243.Cost of capital : It means the minimum rate of return expected by its investment.
244.Cash dividend : The payment of dividend in cash
245.Define the term accrual : Recognition of revenues and costs as they are earned or incurred . it
includes recognition of transaction relating to assets and liabilities as they occur irrespective of
the actual receipts or payments.
245. accrued expenses : An expense which has been incurred in an accounting period but for
which no enforceable claim has become due in what period against the enterprises.
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246.Accrued revenue : Revenue which has been earned is an earned is an accounting period but in
respect of which no enforceable claim has become due to in that period by the enterprise.
247.Accrued liability : A developing but not yet enforceable claim by an another person which
accumulates with the passage of time or the receipt of service or otherwise. it may rise from the
purchase of services which at the date of accounting have been only partly performed and are not
yet billable.
248.Convention of Full disclosure : According to this convention, all accounting statements
should be honestly prepared and to that end full disclosure of all significant information will be
made.
249.Convention of consistency : According to this convention it is essential that accounting
practices and methods remain unchanged from one year to another.
250.Define the term preliminary expenses : Expenditure relating to the formation of an
enterprise. There include legal accounting and share issue expenses incurred for formation of the
enterprise.
251.Meaning of Charge : charge means it is a obligation to secure an indebt ness. It may be fixed
charge and floating charge.
252.Appropriation : It is application of profit towards Reserves and Dividends.
253.Absorption costing : A method where by the cost is determine so as to include the appropriate
share of both variable and fixed costs.
254.Marginal Cost : Marginal cost is the additional cost to produce an additional unit of a product.
It is also called variable cost.
255. What are the ex-ordinary items in the P&L a/c : The transaction which are not related to
the business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses on
the sale of fixed assets, interest received from other company investments, profit or loss on
foreign exchange, unexpected dividend received.
256 . Share premium : The excess of issue of price of shares over their face value. It will be
showed with the allotment entry in the journal, it will be adjusted in the balance sheet on the
liabilities side under the head of reserves & surplus.
257.Accumulated Depreciation : The total to date of the periodic depreciation charges on
depreciable assets.
258.Investment : Expenditure on assets held to earn interest, income, profit or other benefits.
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259.Capital : Generally refers to the amount invested in an enterprise by its owner. Ex; paid up
share capital in corporate enterprise.
260. Capital Work In Progress : Expenditure on capital assets which are in the process of
construction as completion.
261. Convertible Debenture : A debenture which gives the holder a right to conversion wholly or
partly in shares in accordance with term of issues.
262.Redeemable Preference Share : The preference share that is repayable either after a fixed (or)
determinable period (or) at any time dividend by the management.
263. Cumulative preference shares : A class of preference shares entitled to payment of umulates
dividends. Preference shares are always deemed to be cumulative unless they are expressly made
non-cumulative preference shares.
264.Debenture redemption reserve : A reserve created for the redemption of debentures at a
future date.
265. Cumulative dividend : A dividend payable as cumulative preference shares which it unpaid
cumulates as a claim against the earnings of a corporate before any distribution is made to the
other shareholders.
266. Dividend Equalization reserve : A reserve created to maintain the rate of dividend in future
years.
267. Opening Stock : The term opening stock means goods lying unsold with the businessman in
the beginning of the accounting year. This is shown on the debit side of the trading account.
268.Closing Stock : The term Closing Stock includes goods lying unsold with the businessman at
the end of the accounting year. The amount of closing stock is shown on the credit side of the
trading account and as an asset in the balance sheet.
269.Valuation of closing stock : The closing stock is valued on the basis of Cost or Market price
whichever is less principle.
272. Contingency : A condition (or) situation the ultimate out come of which gain or loss will be
known as determined only as the occurrence or non occurrence of one or more uncertain future
events.
273.Contingent Asset : An asset the existence ownership or value of which may be known or
determined only on the occurrence or non occurrence of one more uncertain future events.
274. Contingent liability : An obligation to an existing condition or situation which may arise in
future depending on the occurrence of one or more uncertain future events.
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275. Deficiency : the excess of liabilities over assets of an enterprise at a given date is called
deficiency.
276.Deficit : The debit balance in the profit and loss a/c is called deficit.
277.Surplus : Credit balance in the profit & loss statement after providing for proposed
appropriation & dividend , reserves.
278.Appropriation Assets : An account sometimes included as a separate section of the profit and
loss statement showing application of profits towards dividends, reserves.
279. Capital redemption reserve : A reserve created on redemption of the average cost:- the cost
of an item at a point of time as determined by applying an average of the cost of all items of the
same nature over a period. When weights are also applied in the computation it is termed as
weight average cost.
280.Floating Change : Assume change on some or all assets of an enterprise which are not
attached to specific assets and are given as security against debt.
281.Difference between Funds flow and Cash flow statement : A Cash flow statement is
concerned only with the change in cash position while a funds flow analysis is concerned with
change in working capital position between two balance sheet dates.
A cash flow statement is merely a record of cash receipts and disbursements. While studying the
short-term solvency of a business one is interested not only in cash balance but also in the assets
which are easily convertible into cash.
282. Difference Between the Funds flow and Income statement :
A funds flow statement deals with the financial resource required for running the business activities.
It explains how were the funds obtained and how were they used, Whereas an income
statement discloses the results of the business activities, i.e., how much has been earned and how it
has been spent.
A funds flow statement matches the funds raised and funds applied during a particular period.
The source and application of funds may be of capital as well as of revenue nature. An income
statement matches the incomes of a period with the expenditure of that period, which are both of
a revenue nature.
1) American Depository Receipt ADR: A negotiable certificate issued by a U.S. bank

representing a specified number of shares (or one share) in a foreign stock that is traded on a
U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a
U.S. financial institution overseas, and help to reduce administration and duty costs on each
transaction that would otherwise be levied.
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2) Global Depository Receipt GDR: 1. A bank certificate issued in more than one country
for shares in a foreign company. The shares are held by a foreign branch of an international
bank. The shares trade as domestic shares, but are offered for sale globally through the various
bank branches.
3) Working Capital Cycle: The Cycle of working capital rotates from cash, raw materials,
overheads, work-in-progress, debtors and ends with again cash.
4) Negative effects of working capital: The total current liabilities are in excess of total
current assets gives the negative effect of working capital.
5) Depreciation: It is a measure of wearing out, consumption or other loss of value of a
depreciable assets arising from its usage or passage of time.
6) Depletion : It is a method of providing depreciation on wasting assets like mineral ores e.t.c.
7) Amortization: It is a method to witting off of the asset over a period of time similar to
depreciation. This method is generally used for Intangible assets.
8) Profit & Loss (appropriation) account : The provisions contained in part II of schedule
VI of the companies act require that the appropriation made out of profit like proposed dividend,
transfer to and from reserves and other appropriations should be disclosed in profit & loss
(appropriation) a/c.
9)NPV: Net Present Value: The difference between the present value of cash inflows and the
present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an
investment or project
10) Internal Rate of Return: It is the rate at which the sum totals of cash inflows after
discounting equals to the discounted cash outflows. The IRR of a project is the discount rate
which makes net present value of the project equal to zero.
11) Treatment of dividends in cash flow statements: When we pay dividend for the
investments made by the outsiders, it is called as financing activity and taken into consideration
of cash flow from financing activity where as the receipt of dividend in respect of investment
that we made considered in cash flow from investing activity.
12) Treatment of interest in cash flow statements: When we pay interest on the borrowed
amount, it is called as financing activity and taken into consideration of cash flow from financing
activity where as the receipt of interest in respect of advances that we made considered in cash
flow from investing activity.
13)Profit & loss account Vs Cash flow statement: P & L a/c is a period end account which
gives the details of revenue earned with that of the expenses charged shows the net profit or loss
for the period.
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Cash flow statement is as on date statement which gives the details of flow of cash through
receipts and expenses irrespective of revenues and expenditure.
14) Operating income Vs Net income: Income generated from the regular operating
activities of the business is called operating income.
Income that is left after taking into consideration of operating income, expenses, non-operating
income and non-operating expenses and income taxes is called net income.
15) Gross working capital Vs Net working capital: The total of investments in all current
assets is known as gross working capital.
Excess of total current assets over total current liabilities is called net working capital.
16) Prospectus : It is defined as a public document described or issued as a prospectus and
includes any notice, circular, advertisement or other document, inviting the public to subscribe or
purchase of any shares or debentures of a body corporate.
17) Interim dividend Vs Final dividend: Dividend which is paid in the middle of the fiscal
year or before the due date in accordance with the provisions of the companies act is called as
Interim dividend.
Dividend paid as on due date as per the provisions of the companies act is called final dividend.
If the interim dividend is paid then the final dividend will be paid after excluding the interim
dividend.
18)Net worth.: The total of share holders funds and reserves and surplus after deducting
fictitious assets is called as net worth.
19) Capitalization of reserves: The process of conversion of accumulated profits and reserves
into equity shares is called as capitalization of reserves. This is used while issue of bonus shares.
20) P/E Ratio: It is the relationship between the contribution and sales values. It is expressed as
a percentage.
Contribution/sales * 100 = (Sales-Variable costs)/Sales * 100.
21) Premium on shares: When the shares are issued at a value more than the nominal value
then it is called shares issued at premium.
22) Discount on shares: When the shares are issued at less than the nominal value then it is
called shares issued at discount.
23) Bull market/Bear market: When stock prices are rising for an extended period, it is called
bull market which is an opposite to that of bear market.
24) Retained Earnings: Which is nothing but the balance carried forward in the profit and loss
account to the next year shown under reserves and surplus.
OR
Page 26
The percentage of net earnings not paid out as dividends, but retained by the company to be
reinvested in its core business or to pay debt. It is recorded under reserves and surplus on the
balance sheet.
25) Fixed asset/Financial Asset: The property of the company which aids the production
includes machinery, land, equipment and others.
The assets of the company which earns the revenue to the company in terms of interest or
dividend is called financial asset.
26) Sunk costs: Historical costs incurred in the past are known as sunk costs.
27) SEBI Vs SEC: SEBI: It is called as the stock exchange board of India which is regulatory
authority in India established under the act to safeguard the interests of the shareholders.
SEC: It is called as the Securities exchange and commission act which is a regulatory authority
in USA established under the act similar to that of SEBI in India.
28) Intangible Assets Vs Fictious Assets
Intangible Assets: These are the assets which are useful for the appreciation of the business and
helps for the growth of the business but they are not tangible. Exp: Good will, patents,
trademarks e.t.c.
Fictitious Assets: These are the debit balances of expenditure which are treated assets to be
written off over a period of time like preliminary expenditure written off, miscellaneous
expenditure written off e.t.c.
29) Gross Profit Vs Net Profit: The surplus balances in the trading account which is carried
forward to the P&L a/c is called as the Gross profit which is arrived from trading or production
activities.
The surplus balance in the P&L account which is reflected in the balance sheet is called as Net
profit arrived after taking into account of operating and non-operating revenues, operating and
non-operating expenses.
30) Equity Vs Preferred: Equity holders are those who are the real owners of the company and
are entitled to ownership rights, preferred holders are those who are entitled to preferential rights
upon the equity holders in terms of dividends and the distribution of assets at the time of
liquidation.
31) Preliminary Expenditure: Expenditure incurred before the incorporation of the company
is called as preliminary expenses.
32) Cash flow: It is a statement which gives the details about the cash generated from various
activities like operating, investing and financing and the cash expended on such activities during
the period
33) Minority interest: **Paid up equity capital held by outsider plus share of reserves and
surplus on the date of balance sheet
A significant but non-controlling ownership of less than 50% of a company's voting shares by
either an investor or another company
Page 27
34) Private vs. public: Private ltd is registered company which is limited by shares and limited by
its no. of members and prohibits to publish the prospectus

Public is a registered company which is opposite to that as private company
35) Goodwill: It is treated to be intangible assets which is purchased for the appreciation as the
business that is acquired and it is amortized over a period of time
36) GAAP: These are generally accepted accounting principles called as accounting standards
which are to be followed while prepares the financial statements like profit and loss a\c and
balance sheet
37) Market capitalization: It is total value as all the outstanding shares with that as the current
market price as the share
38) Annual report: It is the report which is to be field with the register and companies details
the financial results as the company for the year and the preceding year, the report consists as
companys projects and other year end statistics
38) IPO: When a company initial listing with the stock exchanges board of India. Then it is
called as Initial public offering.
39) SM\AGM\EGM: SM: Every company limited by share and every company limited by
guarantee and having a share capital shall with in a period of not less that one month or more
than six months from the date of which the company is entitled to commence business , hold a
general meeting of the members of the company. This is called as Statuatory meeting.
AGM: Every company shall in each year hold in addition to any other meeting a general meeting
as its annual general meeting and shall specify the meeting as such in the notice calling it.
EGM: any meeting other than the two above is called E.G.M. It is conducted for special and
urgent business.
40) QUORUM: The minimum no of members who must be present in order to constitute a
valid meeting and transact business there off.
5 members in the case of a public company.

2 in the case of public company.
Subsidiary Company: It is a registered company whose maximum share is held by holding
company.
Prepaid Vs O/s Exp: Any expenditure which is paid in advance is called as prepaid expense. It
is treated as an asset and deducted from the current expenditure.
Any Expenditure which is payable shall be treated as o/s expenses and it is treated as current
liability in the balance sheet.
Operating Vs Non-Operating: Operating Exp are those which are incurred in the regular course
of business for generating revenues.
Non-Operating Exp are one time Expenditure which are expended not for regular course of
business.
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NAV-Net Assets Value: The value of assets applicable to one unit. This is calculated as total
assets minus all prior charges and divided by the number of the total outstanding units.
AOA Vs MOA: MOA is the most important document which is called as charter of the company
and regulates the external affairs of the company.
AOA specifies the rules regulations and bye-laws for the internal management of the affairs of
the company.
Minority Interest: The portion of net assets of subsidiary onthe date of consolidation not
controlled by the parent itself or through its subsidiary.
Paid up share capital held by the outsider (outside group) + share of reserves.
A significant but non-controlling ownership of less than 50% of a company's voting shares by
either an investor or another company
Capital Employed: It is defined as the amount which is invested in the business to generate
production and revenue with the aid of such capital employed capital. It is calculated as
Share capital + Reserves & Surplus + Debenture & long term debt fictituous assets
Or
Fixed Assets + intangible assets + Net working capital.
Deferred tax asset/ liability: Difference between the tax expense which is calculated on accrual
basis and current tax liability to be paid for particular period as per income tax act is called
deferred tax asset/liability.
Call Option: A contract giving the holders a right to buy an underlying security at a specified
price with in a specified time period.

Diversification: An investment strategy to reduce risks by investing in securities, common stock,
debenture or bonds of several companies.

Share Warrant: A Share warrant is a bearer document issued only by a public company to the
holder on the approval of central govt. it is negotiable without any instrument of transfer.
Rights issue: Where a company proceeds to issue any further shares after the expiry of
Two years from the date of incorporation of the company
One year after the first allotment of shares. Which ever is earlier.
Such an allotment should be made to the shareholders of the company in proportion to the capital
paid.
Reserves Vs Provisions: Reserves are amounts appropriated out of profit which are not intended
to meet any liability contingency, commitement or diminuition in the value of assets known to
exit at the date of balance sheet.Amounts calculated or transferred form profits to make food the
diminuition in asset values due to the fact that that some of them have been lost or destroyed as a
result of some natural calamities or debts have proved to be irrecoverable are also described as
provisions.
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Revenue Reserves: Represents profits that are available for distribution to shareholders held for
the time being or any on or more purpose.
Capital Reserve: A capital reserve represents surplus of profit earned in respect of certain types
of transactions like sale of fixed assets at a price in excess of cost realization of profits on issue
of forfeited shares or balances. It generally used for writing down fictituous assets or losses for
issuing bonus shares.
Capital redemption reserve: When there is redemption of redeemable preference shares out of
accumulated profit. It will be necessary to transfer to the CRR account an amount equal to the
amount repaid on the redemption of preference shares on a/c of face value less proceeds of a
fresh issue of capital made for the purpose of redemption.
NPL Vs NPA: An asset shall be treated as non performing when income on it is not received for
certain period.
A loan amount is said to be non performing when the interest and the principle amount is not
received for certain period.
Share is one of a finite number of equal portions in the capital of a company, entitling the owner
to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the
value of the company in case of liquidation
Bank reconciliation allows companies or individuals to compare their account records to the
bank's records of their account balance in order to uncover any possible discrepancies
Cash flow is a term that refers to the amount of cash being received and spent by a business
during a defined period of time, sometimes tied to a specific project. Measurement of cash flow
can be used
Preferred stock differs from common stock in that it typically does not carry voting rights but is
legally entitled to receive a certain level of dividend payments before any dividends can be
issued to other shareholders.
Retained earnings refer to the portion of net income which is retained by the corporation rather
than distributed to its owners. Similarly, if the corporation makes a loss, then that loss is retained.
Retained earnings are cumulative from year to year.
American Depositary Receipt (or ADR) represents ownership in the shares of a foreign company
trading on US financial markets
Nifty, an index for large cap stocks on the National Stock Exchange of India
Accounting is the discipline of measuring, communicating and interpreting financial activity.
Accounting is also widely referred to as the "language of business".[
Page 30
ROE It measures a firm's efficiency at generating profits from every dollar of net assets (assets
minus liabilities), and shows how well a company uses investment dollars to generate earnings
growth.
ROCE It basically can be used to show how much a business is gaining for its assets, or how
much it is losing for its liabilities
Finance means the study of different ways in which individuals, businesses and organizations
raise and allocate monetary resources and use the same for business purposes keeping the risks
involved in mind
Accounts Related Questions:
1) What are the models of valuation of the company?
2) Explain about APP in SAP fico module?
3) WHAT IS SECONDARY TRACKING FLEX FIELD QUALIFIER AND HOW IT
IS USED?
IS USED?
IS USED?
6) What is exact difference b/w Accounts and finance?

7) IPO?
8) What is net worth?
9) What is quick asset?
10) What are different types of invoice?
11) How to joine accountancy?
12 What do you mean by Investment Banking?
13) What is General Ledger
14) What is business entity concept?
15) How to prepare Profit and los accounts?
Forward contract: Its an agreement between two parties to buy or sell an asset at a pre-agreed
future point in time.
Futures contract : Its a standardized contract traded on a futures exchange, to buy or sell a
certain underlying instrument at a certain date in the future, at a specified price. The future date
is called the delivery date or final settlement date
Options: are financial instruments that convey the right, but not the obligation, to engage in a
future transaction on some underlying security.
The primary Market : It is that part of the capital markets that deals with the issuance of new
securities.
Page 31
The secondary market: is the financial market for trading of securities that have already been
issued in an initial private or public offering.
Stock exchange, share market or bourse is a corporation or mutual organization which provides
facilities for stock brokers and traders, to trade company stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities as well as other
financial instruments and capital events including the payment of income and dividends
Stock split increases the number of shares in a public company. The price of adjusted such that
the before and after market capitalization of the company remains the same and dilution does not
occur. Options and warrants are included. Also known as a Stock Divide.
Initial Public Offering (IPO): Its is the first sale of stock by a private company to the public.
IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be
done by large privately-owned companies looking to become publicly traded
The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index
composed of 30 stocks with the base April 1979 = 100. It consists of the 30 largest and most
actively traded stocks, representative of various sectors, on the Bombay Stock Exchange
Portfolio management :Involves deciding what assets to include in the portfolio, given the
goals of the portfolio owner and changing economic conditions. Selection involves deciding
what assets to purchase, how many to purchase, when to purchase them, and what assets to
divest. These decisions always involve some sort of performance measurement, most typically
expected return on the portfolio, and the risk associated with this return (i.e. the standard
deviation of the return). Typically the expected return from portfolios comprised of different
asset bundles are compared.
Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement
for companies that indicates how Revenue (money received from the sale of products and
services before expenses are taken out, also known as the "top line") is transformed into net
income (the result after all revenues and expenses have been accounted for, also known as the
"bottom line"). The purpose of the income statement is to show managers and investors whether
the company made or lost money during the period being reported.
Capital budgeting (or investment appraisal) is the planning process used to determine a firm's
long term investments such as new machinery, replacement machinery, new plants, new
products, and research and development projects
Global Depository Receipt or (GDR) is a certificate issued by a depository bank, which
purchases shares of foreign companies and deposits it on the account.

Zero-based processing one can forget about last year, pretend that the program is brand-new, and
see if one can provide a detail of expenses for what one would need to fully accomplish the
program
Page 32
venture capital fund: Its a pooled investment vehicle (often a limited partnership) that primarily
invests the financial capital of third-party investors in enterprises that are too risky for the
standard capital markets or bank loans.
Net worth (sometimes "net assets") is the total assets minus total liabilities of an individual or a
company. For a company, this is called shareholders' equity and may be referred to as book
value. Net worth is stated for a particular point in time
Accounting on the other hand is the measurement, disclosure or provision of assurance about
financial information that helps managers, investors, tax authorities and other decision makers
make resource allocation decisions. Financial accounting is one branch of accounting and
historically has involved processes by which financial information about a business is recorded,
classified, summarized, interpreted, and communicated. There are different categories in which
accounting can be distributed, like cost accounting, financial accounting, internal and external
accounting, etc.
Tax Related Questions
1. What are the exemptions from salary?

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

2. Corporate frauds?
3. Secretarial audit?
Page 33
4. Duties of auditor?
5. Investigation vs. audit?
6. Cost audit system?
7. Investigation vs. audit?
8. Cost audit system?
9. Comptroller auditor general of India functions?
10. Audit papers?
11. Audit programme?
12. Internal check system?
13. Internal audit?
14. What duty to auditors and independent examiner have to report problems to the
Commission?
15. When is income from rented accommodation to be treated as investment income and
when as trading income?
16. Is materiality by fund balance or transactions?
17. A company charity (gross income <? 250k) wishes to take advantage of the audit
exemption regime. However, there is an audit provision in the company's Articles.
Should they be required to change the Articles?
18. Unearned income refers to income that is not a wage.?
It includes interest, dividends or realized capital gains from investments, rent from land or
property ownership, and any other income that does not derive from work.
Unearned income has often been treated differently for tax purposes than earned income, in order
to redistribute income. Such a tax structure is most often seen implemented by a socialist
government.
A consortium is an association of two or more individuals, companies, organizations or
governments (or any combination of these entities) with the objective of participating in a
common activity or pooling their resources for achieving a common goal
A prospectus is a legal document that institutions and businesses use to describe the securities
they are offering for participants and buyers. A prospectus commonly provides investors with
material information about mutual funds, stocks, bonds and other investments, such as a
description of the company's business, financial statements, biographies of officers and directors,
detailed information about their compensation, any litigation that is taking place, a list of
material properties and any other material information. In the context of an individual securities
offering such as an initial public offering, a prospectus is distributed by underwriters or
brokerages to potential investors.
The main stock exchanges in the world include:
American Stock Exchange

Australian Stock Exchange
Bermuda Stock Exchange
Bolsa Mexicana de Valores
Bombay Stock Exchange
Budapest Stock Exchange
Casablanca Stock Exchange
Page 34
Euronext Amsterdam
Euronext Brussels
Euronext Lisbon
Euronext Paris
Frankfurt Stock Exchange
Ghana Stock Exchange
Helsinki Stock Exchange
Hong Kong Stock Exchange
Istanbul Stock Exchange
Jakarta Stock Exchange
JASDAQ
Johannesburg Securities Exchange
Karachi Stock Exchange
Korea Stock Exchange
Kuwait Stock Exchange
Lahore Stock Exchange
London Stock Exchange
Madrid Stock Exchange
Malaysia Stock Exchange
Milan Stock Exchange
Nagoya Stock Exchange
National Stock Exchange of India
NASDAQ
New York Stock Exchange
Osaka Securities Exchange
Philippine Stock Exchange
Santiago Stock Exchange
So Paulo Stock Exchange
Shanghai Stock Exchange
Singapore Exchange
Stockholm Stock Exchange
Taiwan Stock Exchange
Tokyo Stock Exchange
Toronto Stock Exchange
Zurich Stock Exchange
A bull market :Tends to be associated with increasing investor confidence, motivating investors
to buy in anticipation of further capital gains
It is described as being accompanied by widespread pessimism. Investors

anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a
vicious circle
A stock market: Is a private or public market for the trading of company stock and derivatives
of company stock at an agreed price; both of these are securities listed on a stock exchange as
well as those only traded privately.
A bear market:
Page 35
The movements of the prices in a market or section of a market are captured in price indices
called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext
indices.
The Open Directory Project (ODP), also known as dmoz (from directory.mozilla.org, its original
domain name), is a multilingual open content directory of World Wide Web links owned by
Netscape that is constructed and maintained by a community of volunteer editors
Stock Market Boom: A stock market bubble is a type of economic bubble taking place in
stock markets when price of stocks rise and become overvalued by any measure of stock
valuation.
The existence of stock market bubbles is at odds with the assumptions of efficient market theory
which assumes rational investor behaviour. Behavioral finance theory attribute stock market
bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in
real-world markets, with their inherent uncertainty and noise, but also in highly predictable
experimental markets [1]. In the laboratory, uncertainty is eliminated and calculating the expected
returns should be a simple mathematical exercise, because participants are endowed with assets
that are defined to have a finite lifespan and a known probability distribution of dividends. Other
theoretical explanations of stock market bubbles have suggested that they are rational [2], intrinsic
[3], and contagious [4].
Deferred revenue expenditure: Is that where the benefit the expenditure can be had for more
than ONE accounting period and less than FIVE accounting periods.
A mutual fund: Is a professionally-managed form of collective investments that pools money

from many investors and invests it in stocks, bonds, short-term money market instruments,
and/or other securities.[1] In a mutual fund, the fund manager, who is also known as the portfolio
manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the
dividend or interest income
A bonus share: Is a free share of stock given to current shareholders in a company, based upon
the number of shares that the shareholder already owns. An issue of bonus shares is referred to as
a bonus issue.
Securities and Exchange Board of India (SEBI) it is chaired by Mr. M. Damodaran,
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasiexecutive. It drafts rules in its legislative capacity, it conducts enquiries and enforcement action
in its executive function and it passes rulings and orders in its judicial capacity. Though this
makes it very powerful, there is an appeals process to create accountability.
CRR :
The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum
reserves each bank must hold to customer deposits and notes. These reserves are designed to
satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank
vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's
economy, borrowing, and interest rates.[
The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central
banking system of the United States. The Federal Reserve System, created in 1913, is a quasiG.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in
Page 36
public, quasi-private banking system composed of (1) the presidentially-appointed Board of

Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market
Committee; (
One major area of criticism focuses on the failure of the Federal Reserve System to stop
inflation; this is seen as a failure of the Fed's legislatively mandated duty [52] to maintain stable
prices.
The Federal Reserve System was created via the Federal Reserve Act of December 23rd,
1913.[17] The Reserve Banks opened for business on November 16, 1914. Federal Reserve Notes
were created as part of the legislation, to provide a supply of currency. The notes were to be
issued to the Reserve Banks for subsequent transmittal to banking institutions.
The Federal Reserve System tries to control the size of the money supply by conducting open
market operations, in which the Federal Reserve lends or purchases specific types of securities
with authorized participants, known as primary dealers, such as the United States Treasury.
The Indian stock market mainly consists of the Bombay Stock Exchange and the National Stock
Exchange. The market is one of the fast growing emerging markets in the world, and the BSE is
the oldest stock exchange in Asia. More than 6500 scripts are traded at the BSE and more than
2500 scripts are traded at the NSE. It contains different kind of markets: 1 metal market 2 oil
market 3 banking stock market and lots more
Debentures:
A type of debt instrument that is not secured by physical asset or collateral. Debentures are
backed only by the general creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond in order to secure capital. Like other types of
bonds, debentures are documented in an indenture.
Debentures have no collateral. Bond buyers generally purchase debentures based on the belief
that the bond issuer is unlikely to default on the repayment. An example of a
government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill
(T-bill). T-bonds and T-bills are generally considered risk free because governments, at
worst, can print off more money or raise taxes to pay these type of debts.
Any type of debenture that can be converted into some other security.
For example, a convertible bond can be converted into stock.
PVT. Co:
A company whose ownership is private. As a result, it does not need to meet the strict Securities
and Exchange Commission filing requirements of public companies.
Private companies may issue stock and have shareholders. However, their shares do not trade on
public exchanges and are not issued through an initial public offering. In general, the shares of
these businesses are less liquid and the values are difficult to determine.
Public Co:
A company that has issued securities through an initial public offering and which are traded on at
least one stock exchange or over-the-counter market. These companies must file documents and
Page 37
meet stringent reporting requirements set out by the Securities and Exchange Commission,
including the public disclosure of financial statements. Any company whose shares are available
to the public is a public company.
Director:
In relation to a company, a director is an officer of the company charged with the conduct and
management of its affairs. A director may be an inside director (a director who is also an officer)
or an outside, or independent, director. The directors collectively are referred to as a board of
directors. Sometimes the board will appoint one of its members to be the chair of the board of
directors.
Theoretically, the control of a company is divided between two bodies: the board of directors,
and the shareholders in general meeting. In practice, the amount of power exercised by the board
varies with the type of company. In small private companies, the directors and the shareholders
will normally be the same people, and thus there is no real division of power. In large public
companies, the board tends to exercise more of a supervisory role, and individual responsibility
and management tends to be delegated downward to individual professional executive directors
(such as a finance director or a marketing director) who deal with particular areas of the
company's affairs.
Margin of safety:
A principle of investing in which an investor only purchases securities when the market price is
significantly below its intrinsic value. In other words, when market price is significantly
below your estimation of the intrinsic value, the difference is the margin of safety. This
difference allows an investment to be made with minimal downside risk. The term was
popularized by Benjamin Graham (known as "the father of value investing") and his followers,
most notably Warren Buffett. Margin of safety doesn't guarantee a successful investment, but it
does provide room for error in an analyst's judgment. Determining a company's "true" worth (its
intrinsic value) is highly subjective. Each investor has a different way of calculating intrinsic
value which may or may not be correct. Plus, it's notoriously difficult to predict a company's
earnings. Margin of safety provides a cushion against errors in calculation.
Margin of safety: Is a concept used in many areas of life, not just finance. For example,
consider engineers building a bridge that must support 100 tons of traffic. Would the bridge be
built to handle exactly 100 tons? Probably not. It would be much more prudent to build the
bridge to handle, say, 130 tons, to ensure that the bridge will not collapse under a heavy load.
The same can be done with securities. If you feel that a stock is worth $10, buying it at $7.50
will give you a margin of safety in case your analysis turns out to be incorrect and the stock is
really only worth $9.
There is no universal standard to determine how wide the "margin" in margin of safety should
be. Each investor must come up with his or her own methodology.
BEP:
1. In general, the point at which gains equal losses.
Page 38
2. In options, the market price that a stock must reach for option buyers to avoid a loss if
they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the
strike price minus the premium paid
Also referred to as a "breakeven".
For businesses, reaching the break-even point is the first major step towards profitability.
Put Option:
An option contract giving the owner the right, but not the obligation, to sell a specified amount
of an underlying security at a specified price within a specified time. This is the opposite of a call
option, which gives the holder the right to buy shares.
A put becomes more valuable as the price of the underlying stock depreciates relative to the
strike price. For example, if you have one Mar 07 Taser 10 put, you have the right to sell 100
shares of Taser at $10 until March 2007 (usually the third Friday of the month). If shares
of Taser fall to $5 and you exercise the option, you can purchase 100 shares of Taser for $5 in
the market and sell the shares to the option's writer for $10 each, which means you make $500
(100 x $10-$5) on the put option.
Call Option:
An agreement that gives an investor the right (but not the obligation) to buy a stock, bond,
commodity, or other instrument at a specified price within a specific time period.
It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You
profit on a call when the underlying asset increases in price.
Intanigible Asset:
An asset that is not physical in nature. Corporate intellectual property (items such as patents,
trademarks, copyrights, business methodologies), goodwill and brand recognition are all
common intangible assets in today's marketplace. An intangible asset can be classified as either
indefinite or definite depending on the specifics of that asset. A company brand name is
considered to be an indefinite asset, as it stays with the company as long as the
company continues operations. However, if a company enters a legal agreement to operate under
another company's patent, with no plans of extending the agreement, it would have a limited life
and would be classified as a definite asset.
Tanigible Asset:
An asset that has a physical form such as machinery, buildings and land. This is the opposite of
an intangible asset such as a patent or trademark. Whether an asset is tangible or intangible isn't
inherently good or bad. For example, a well-known brand name can be very valuable to a
company. On the other hand, if you produce a product solely for a trademark, at some point you
need to have "real" physical assets to produce it.
Page 39
Rights issue:
Issuing rights to a company's existing shareholders to buy a proportional number of additional
securities at a given price (usually at a discount) within a fixed period.
Rights are often transferable, allowing the holder to sell them on the open market.
Rights:
A security giving stockholders entitlement to purchase new shares issued by the corporation at a
predetermined price (normally less than the current market price) in proportion to the number of
shares already owned. Rights are issued only for a short period of time, after which they expire.
This also known as "subscription rights" or "share purchase rights".
Employee Stock Option:
The payment of stock in lieu of cash for services provided .This is a common method used by
corporations to compensate executives. The theory is that executives will work harder since they
want their own stock to rise in value and, therefore, have the best interests of shareholders in
mind.
Insider Trading:
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock
options) by corporate insiders such as officers, directors, or holders of more than ten percent of
the firm's shares. Insider trading may be perfectly legal, but the term is frequently used to refer to
a practice, illegal in many jurisdictions, in which an insider or a related party trades based on
material non-public information obtained during the performance of the insider's duties at the
corporation, or otherwise misappropriated.[1]
All insider trades must be reported in the United States. Many investors follow the summaries of
insider trades, published by the United States Securities and Exchange Commission (SEC), in the
hope that mimicking these trades will be profitable. Legal "insider trading" may not be based on
material non-public information. Illegal insider trading in the US requires the participation
(perhaps indirectly) of a corporate insider or other person who is violating his fiduciary duty or
misappropriating private information, and trading on it or secretly relaying it. Insider trading is
believed to raise the cost of capital for securities issuers, thus decreasing overall economic
growth.[2]
Venture Capital:
Financing for new businesses. In other words, money provided by investors to startup firms and
small businesses with perceived, long-term growth potential. This is a very important source of
funding for startups that do not have access to capital markets. It typically entails high risk for
the investor, but it has the potential for above-average returns.
Venture capital can also include managerial and technical expertise. Most venture capital comes
from a group of wealthy investors, investment banks and other financial institutions that pool
such investments or partnerships. This form of raising capital is popular among new companies,
or ventures, with limited operating history, who cannot raise funds through a debt issue. The
Page 40
downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in
addition to a portion of the equity.
Seed Capital: The initial equity capital used to start a new venture or business. This initial
amount is usually quite small because the venture is still in the idea or conceptual stage. Also,
there's a high risk that the venture will fail.
Bridge Financing: A method of financing, used by companies before their IPO, to obtain
necessary cash for the maintenance of operations. These funds are usually supplied by the
investment bank underwriting the new issue. As payment, the company acquiring the bridge
financing will give a number of shares at a discount of the issue price to the underwriters that
equally offsets the loan. This financing is, in essence, a forwarded payment for the future sales of
the new issue.
Stock Split: A type of corporate action where a company's existing shares are divided into
multiple shares. Although the amount of shares outstanding increases by a specific multiple, the
total dollar value of the shares remains the same compared to pre-split amounts, because no real
value
has
been
added as
a
result
of the
split.
In the U.K., a stock split is referred to as a "scrip issue", "bonus issue", "capitalization issue" or
"free issue".
For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or
she holds.
One reason as to why stock splits are performed is that a company's share price has grown so
high that to many investors the shares are too expensive to buy in round lots.
For example, if a XYZ Corp's shares were worth $1,000 each, investors would need to purchase
$100,000 in order to own 100 shares. Whereas, if each share was worth $10 each, investors only
need to pay $1,000 to own 100 shares.
Reverse Takeover RTO:
A type of merger used by private companies to become publicly traded without resorting to an
initial public offering. Initially, the private company buys enough shares to control a publicly
traded company. At this point, the private company's shareholder uses their shares in the private
company to exchange for shares in the public company. At this point, the private company has
effectively become a publicly traded one.A reverse takeover can also refer to situation where a
smaller company acquires a larger company.
With this type of merger, the private company does not need to pay the expensive fees associated
with arranging an initial public offering. The problem, however, is the company does not
acquired any additional funds through the merger and it must have enough funds to complete the
transaction on its own.
Deep-Discounted bonds:
Page 41
1. A bond that sells at a significant discount from par value.

2. A bond that is selling at a discount from par value and has a coupon rate significantly less
than the prevailing rates of fixed-income securities with a similar risk profile.
3. Typically, a deep-discount bond will have a market price of 20% or more below its face
value. These bonds are perceived to be riskier than similar bonds and are thus priced
accordingly.
4. These low-coupon bonds are typically long term and issued with call provisions.
Investors are attracted to these discounted bonds because of their high return or minimal
chance of being called before maturity.
Merger:
The combining of two or more companies, generally by offering the stockholders of
one company securities in the acquiring company in exchange for the surrender of their stock.
Basically, when two companies become one. This decision is usually mutual between both firms.
Factoring:
Factoring is a financial service designed to help firms to arrange their receivable better.
Under a typical factoring arrangement a factor collects the accounts on due dates, effects
payments to the firm on these dates and also assumes the credit risks associated with the
collection of the accounts.
Sometimes the factor provides an advance against the values of receivable taken over by it. In
such cases factoring serves as a source of short-term finance for the firm.
Capital budgeting : The process of determining whether or not projects such as building a new
plant or investing in a long-term venture are worthwhile. Also known as "investment appraisal".
Popular methods of capital budgeting include net present value (NPV), internal rate of return
(IRR), discounted cash flow (DCF) and payback period.
Bankruptcy: The state of a person or firm unable to repay debts. If the bankrupt entity is a
firm, the ownership of the firm's assets is transferred from the stockholders to the bondholders.
Shareholders are the last people to get paid if a company goes bankrupt. Secure creditors always
get first grabs at the proceeds from liquidation.
Diversification: A risk-management technique that mixes a wide variety of investments
within a portfolio. The rationale behind this technique contends that a portfolio of different kinds
of investments will, on average, yield higher returns and pose a lower risk than any individual
investment found within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio so that the
positive performance of some investments will neutralize the negative performance of others.
Therefore, the benefits of diversification will hold only if the securities in the portfolio are not
perfectly correlated.
Page 42
Annual report: : A corporation's annual statement of financial operations. Annual reports

include a balance sheet, income statement, auditor's report, and a description of the company's
operations.
This is usually a sleek, colorful, high gloss publication. Make sure to look beyond the marketing
and dig into the numbers. This is the best way to discover the direction of the company. The 10K is the version of the annual report which gets submitted to the SEC. It contains more detailed
financial information.
Annual general meeting : A mandatory yearly meeting of shareholders that allows
stakeholders to stay informed and involved with company decisions and workings. This yearly
meeting is the single event whereby shareholders are able to gather and ask the board of directors
questions pertaining to corporate health and strategy. Proper notice must be given to shareholders
with regards to meeting times and agenda.
Subsidiary company: A company whose voting stock is more than 50% controlled by another
company, usually referred to as the parent company.
As long as the parent company has more than 50% of the voting stock in the subsidiary, it has
control. In the case of a foreign subsidiary, the company under which the subsidiary
is incorporated must adhere to the laws of the country in which the subsidiary operates, although
the parent company still carries the foreign subsidiary's financials on its books (consolidated
financial statements)
Price Earning Ratio:
A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as:
For example, if a company is currently trading at $43 a share and earnings over the last 12
months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the
estimates of earnings expected in the next four quarters (projected or forward P/E). A third
variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Also sometimes known as "price multiple" or "earnings multiple".
In general, a high P/E suggests that investors are expecting higher earnings growth in the future
compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story
by itself. It's usually more useful to compare the P/E ratios of one company to other companies
in the same industry, to the market in general or against the company's own historical P/E. It
would not be useful for investors using the P/E ratio as a basis for their investment to compare
the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has
much different growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows how much investors are
willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of
20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.
Page 43
It is important that investors note an important problem that arises with the P/E measure, and to
avoid basing a decision on this measure alone. The denominator (earnings) is based on an
accounting measure of earnings that is susceptible to forms of manipulation, making the quality
of the P/E only as good as the quality of the underlying earnings number.
Return on Investments: A performance measure used to evaluate the efficiency of
an investment or to compare the efficiency of a number of different investments. To calculate
ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is
expressed as a percentage or a ratio.
Return on investment is a very popular metric because of its versatility and simplicity. That is, if
an investment does not have a positive ROI, or if there are other opportunities with a higher ROI,
then the investment should be not be undertaken.
Keep in mind that the calculation for return on investment can be modified to suit the situation -it
all depends on what you include as returns and costs. The term in the broadest sense just attempts
to measure the profitability of an investment and, as such, there is no one "right" calculation. For
example, a marketer may compare two different products by dividing the revenue that each
product has generated by its respective expenses. A financial analyst, however, may compare the
same two products using an entirely different ROI calculation, perhaps by dividing the net
income of an investment by the total value of all resources that have been employed to make and
sell the product.
This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's
purposes, and the result can be expressed in many different ways. When using this metric, make
sure you understand what inputs are being used.
Debt to Equity Ratio: A measure of a company's financial leverage calculated by dividing its
total liabilities by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets.
Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the
calculation.
If a lot of debt is used to finance increased operations (high debt to equity), the company could
potentially generate more earnings than it would have without this outside financing. If this were
to increase earnings by a greater amount than the debt cost (interest), then the shareholders
benefit as more earnings are being spread among the same amount of shareholders. However, the
cost of this debt financing may outweigh the return that the company generates on the debt
through investment and business activities and become too much for the company to handle.
This can lead to bankruptcy, which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For example,
capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2,
while personal computer companies have a debt/equity of under 0.5.
Page 44
Market Capitalization:
A measure of a company's total value. It is estimated by determining the cost of buying an entire
business in its current state. Often referred to as "market cap", it is the total dollar value of all
outstanding shares. It is calculated by multiplying the number of shares outstanding by the
current market price of one share.
Derivatives: In finance, a security whose price is dependent upon or derived from one or more
underlying assets. The derivative itself is merely a contract between two or more parties.
Its value is determined by fluctuations in the underlying asset. The most common underlying
assets include stocks bonds, commodities, currencies, interest rates and market indexes. Most
derivatives are characterized by high leverage.
Zero based budget: Method of budgeting in which all expenditures must be justified each new
period, as opposed to only explaining the amounts requested in excess of the previous period's
funding.
For example, if an organization used ZBB, each department would have to justify its funding
every year. That is, funding would have a base at zero. A department would have to show why
its funding efficiently helps the organization toward its goals.
ZBB is especially encouraged for Government budgets because expenditures can easily run out
of control if it is automatically assumed what was spent last year must be spent this year.
Assets under Management (AUM)
In general, the market value of assets an investment company manages on behalf of investors
There are widely differing views on what the term means. Some financial institutions include
bank deposits, mutual funds and institutional money in their calculations. Others limit it to funds
under discretionary management where the client delegates responsibility to the company.
Profitability Ratios
A class of financial metrics that are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of time. For
most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a
previous period is indicative that the company is doing well.
Some examples of profitability ratios are profit margin, return on assets and return on equity. It is
important to note that a little bit of background knowledge is necessary in order to make relevant
comparisons when analyzing these ratios
For instances, some industries experience seasonality in their operations. The retail industry, for
example, typically experiences higher revenues and earnings for the Christmas season.
Therefore, it would not be too useful to compare a retailer's 4th quarter profit margin with its 1st
quarter profit margin. On the other hand, comparing a retailer's 4th quarter profit margin with
the profit margin from the same period a year before would be far more informative
Return On Assets (ROA)
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An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to
how efficient management is at using its assets to generate earnings. Calculated by dividing a
company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this
is referred to as "return on investment".
Note: Some investors add interest expense back into net income when performing this
calculation because they'd like to use operating returns before cost of borrowing.
ROA tells you what earnings were generated from invested capital (assets). ROA for public
companies can vary substantially and will be highly dependent on the industry. This is why when
using ROA as a comparative measure, it is best to compare it against a company's previous ROA
numbers or the ROA of a similar company
The assets of the company are comprised of both debt and equity. Both of these types of financing
are used to fund the operations of the company. The ROA figure gives investors an idea of how
effectively the company is converting the money it has to invest into net income. The higher the
ROA number, the better, because the company is earning more money on less investment. For
example, if one company has a net income of $1 million and total assets of $5 million, its ROA
is 20%; however, if another company earns the same amount but has total assets of $10
million, it has an ROA of 10%. Based on this example, the first company is better at converting
its investment into profit. When you really think about it, management's most important job is to
make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of
money at a problem, but very few managers excel at making large profits with little investment.
Return On Capital Employed (ROCE)
A ratio that indicates the efficiency and profitability of a company's capital investments.
Calculated as:
ROCE should always be higher than the rate at which the company borrows, otherwise any
increase in borrowing will reduce shareholders' earnings.
A variation of this ratio is return on average capital employed (ROACE), which takes the
average of opening and closing capital employed for the time period.
Return On Equity (ROE)
A measure of a corporation's profitability that reveals how much profit a company generates with
the money shareholders have invested.
Calculated as:
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Also known as Return on Net worth (RONW).

The ROE is useful for comparing the profitability of a company to that of other firms in the same
industry.
There are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the formula above by
subtracting preferred dividends from net income and subtracting preferred equity from
shareholders' equity, giving the following: return on common equity (ROCE) = net income preferred dividends / common equity.
2. Return on equity may also be calculated by dividing net income by average shareholders'
equity. Average shareholders' equity is calculated by adding the shareholders' equity at the
beginning of a period to the shareholders' equity at period's end and dividing the result by two.
3. Investors may also calculate the change in ROE for a period by first using the shareholders'
equity figure from the beginning of a period as a denominator to determine the
beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to
determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to
determine the change in profitability over the period.
Revenue Per Occupied Room (RevPOR
An industry metric used to evaluate companies in the hotel and lodging industries. RevPOR is
used in conjunction with, or in place of, the more standard revenue per available room (RevPAR)
statistic. RevPAR is calculated by taking the RevPOR value and multiplying it by the occupancy
rate.
RevPOR may also be expressed as "total RevPOR", which includes not only the room rate itself,
but also any extra services such as room service, laundry services and in-room movie viewing,
among others.
For many hotel operators, the total revenue received per room can be much more than the per-day
"boilerplate" rate, and is a more full expression of how much the company is receiving per
customer. RevPOR is used by analysts to determine the total revenue and profit potential of a
company; occupancy rates will rise and fall with the general and local economy, but RevPOR is
a metric that stands independent of how full the hotel is at any point in time.
Capital Expenditure (CAPEX)
Funds used by a company to acquire or upgrade physical assets such as property, industrial
buildings or equipment. This type of outlay is made by companies to maintain or increase
the scope of their operations. These expenditures can include everything from repairing a roof to
building a brand new factory.
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The amount of capital expenditures a company is likely to have depends on the industry it
occupies. Some of the most capital intensive industries include oil, telecom and utilities.
In terms of accounting, an expense is considered to be a capital expenditure when the asset is
a newly purchased capital asset or an investment that improves the useful life of an existing
capital asset. If an expense is a capital expenditure, it needs to be capitalized; this requires the
company to spread the cost of the expenditure over the useful life of the asset. If, however, the
expense is one that maintains the asset at its current condition, the cost is deducted fully in the
year of the expense.
Capital Reserve:
A type of account on a municipality's or company's balance sheet that is reserved for long-term
capital investment projects or any other large and anticipated expense(s) that will be incurred in
the future. This type of reserve fund is set aside to ensure that the company or municipality has
adequate funding to at least partially finance the project.
Contributions to the capital reserve account can be made from government subsidies, donated
funds, or can be set aside from the firm's or municipalities regular revenue-generating operations.
Once recorded on the reporting entity's balance sheet, these funds are only to be spent on the
capital expenditure projects for which they were initially intended, excluding any unforeseen
circumstances
Reserve Fund:
An account set aside by an individual or business to meet any unexpected costs that may arise in
the future as well as the future costs of upkeep. In most cases, the fund is simply a savings
account or another highly liquid asset, as it is impossible to predict when an unexpected cost may
arise. However, if the fund is set up to meet the costs of scheduled upgrades, less liquid assets
may be used.
An individual, for example, may put money into a reserve account to save money in case of
unexpected unemployment. A business, such as one dealing with rental properties, will put some
rental income into a fund used to pay for any unexpected repairs to the properties.
Condominiums often will set up reserve funds in which condo owners pay a set monthly amount
to maintain the quality of the condominium
Enterprise Value (EV):
A measure of a company's value, often used as an alternative to straightforward market
capitalization. EV is calculated as market cap plus debt, minority interest and preferred shares,
minus total cash and cash equivalents.
Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer
would have to take on the company's debt, but would pocket its cash. EV differs significantly
from simple market capitalization in several ways, and many consider it to be a more accurate
representation of a firm's value. The value of a firm's debt, for example, would need to be paid
by the buyer when taking over a company, and thus EV provides a much more accurate takeover
valuation because it includes debt in its value calculation.
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Embedded Value:
A common valuation measure used outside North America, particularly in the insurance industry.
It is calculated by adding the adjusted net asset value and the present value of future profits of a
firm. The present value of future profits considers the potential profits that shareholders will
receive in the future, while adjusted net asset value considers the funds belonging to shareholders
that have been accumulated in the past.
Embedded value is a conservative valuation method, as it excludes certain aspects of goodwill

from its calculation of a company's worth. Goodwill includes intangible assets that increase the
value of a company beyond its assets minus liabilities, such as strong management, good location
and a happy workforce. Furthermore, to add to its conservatism, the EV calculation of a firm
does not allow for any increase in future business.
Net Asset Value (NAV)
1 A mutual fund's price per share or exchange-traded fund's per-share value. In both cases, the
per-share dollar amount of the fund is derived by dividing the total value of all the securities in
its portfolio, less any liabilities, by the number of fund shares outstanding.
2. In terms of corporate valuations, the value of assets less liabilities equals net asset value, or
"book value".
1. In the context of mutual funds, net asset value per share is computed once a day based on the
closing market prices of the securities in the fund's portfolio. All mutual fund buy and sell orders
are processed at the NAV of the trade date; however, investors must wait until the until the
following
day
to
get
the
trade
price.
Mutual funds pay out (distribute) virtually all of their income and capital gains. As a result,
changes NAV are not the best gauge of mutual fund performance, which is best measured by
their
annual
total
return.
Because exchange-traded funds and closed-end funds trade like stocks, their shares trade at
market value, which can be a dollar value above (trading at a premium) or below (trading at a
discount) their net asset values.
Book Value:
1. The value at which an asset is carried on a balance sheet. In other words, the cost of an asset
minus accumulated depreciation.
The net asset value of a company, calculated by total assets minus intangible assets (patents,
goodwill) and liabilities.
The initial outlay for an investment. This number may be net or gross of expenses such as
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trading costs, sales taxes, service charges and so on.

In the U.K., book value is known as "net asset value".
2. Book value is the accounting value of a firm. It has two main uses:
1.) It is the total value of the company's assets that shareholders would theoretically receive if a
company were liquidated.
2.) By being compared to the company's market value, the book value can indicate whether a
stock is under- or overpriced.
3.) In personal finance, the book value of an investment is the price paid for a security or debt
investment. When a stock is sold, the selling price less the book value is the capital gain (or loss)
from the investment.
Initial Public Offering (IPO):
The first sale of stock by a private company to the public. IPOs are often issued by smaller,
younger companies seeking capital to expand, but can also be done by large privately-owned
companies
looking
to
become
publicly
traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine
what type of security to issue (common or preferred), best offering price and time to bring it to
market.
Also referred to as a "public offering".
IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock
will do on its initial day of trading and in the near future since there is often little historical data
with which to analyze the company. Also, most IPOs are of companies going through a
transitory growth period, and they are therefore subject to additional uncertainty regarding their
future value
Leverage Ratio:
1. Any ratio used to calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet financial obligations.
There are several different ratios, but the main factors looked at include debt, equity,
assets and interest expenses.
2. A ratio used to measure a company's mix of operating costs, giving an idea of how
changes in output will affect operating income. Fixed and variable costs are the two types
of operating costs; depending on the company and the industry, the mix will differ.
Debt Ratio:
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A ratio that indicates what proportion of debt a company has relative to its assets. The measure
gives an idea to the leverage of the company along with the potential risks the company faces in
terms of its debt-load.
A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a
debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction
with other measures of financial health, the debt ratio can help investors determine a company's
level of risk.
Debt/Equity Ratio:
A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is
using to finance its assets.
Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the
calculation.
A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest
expense.
.
The debt/equity ratio also depends on the industry in which the company operates. For example,
capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2,
while personal computer companies have a debt/equity of under 0.5.
Debt-To-Capital Ratio
A measurement of a company's financial leverage, calculated as the company's debt divided by
its total capital. Debt includes all short-term and long-term obligations. Total capital includes
the company's debt and shareholders' equity, which includes common stock, preferred stock,
minority
interest and
net debt.
Calculated as:
Operating Ratio
A ratio that shows the efficiency of management by comparing operating expense to net sales:
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The smaller the ratio, the greater the organization's ability to generate profit if revenues decrease.
When using this ratio, however, investors should be aware that it doesn't take into account debt
repayment or expansion.
Net Sales
The amount of sales generated by a company after the deduction of returns, allowances for
damaged or missing goods and any discounts allowed. The sales number reported on a
company's financial statements is a net sales number, reflecting these deductions..
Asset Turnover
The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales
in dollars by assets in dollars.
Formula:
Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the
higher the number the better. It also indicates pricing strategy: companies with low profit
margins tend to have high asset turnover, while those with high profit margins have low asset
turnover.
Fundamental Analysis
A method of evaluating a security by attempting to measure its intrinsic value by examining
related economic, financial and other qualitative and quantitative factors. Fundamental analysts
attempt to study everything that can affect the security's value, including macroeconomic factors
(like the overall economy and industry conditions) and individually specific factors (like the
financial condition and management of companies).
The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price in hopes of figuring out what sort of position to take
with that security (underpriced = buy, overpriced = sell or short).
This method of security analysis is considered to be the opposite of technical analysis.
Fundamental analysis is about using real data to evaluate a security's value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for just
about any type of security.
For example, an investor can perform fundamental analysis on a bond's value by looking at
economic factors, such as interest rates and the overall state of the economy, and information
about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this
method uses revenues, earnings, future growth, return on equity, profit margins and other data to
determine a company's underlying value and potential for future growth. In terms of
stocks, fundamental analysis focuses on the financial statements of a the company being
evaluated.
One of the most famous and successful users of fundamental analysis is the Oracle of Omaha,
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Warren Buffett, who has been well known for successfully employing fundamental analysis to
pick securities. His abilities have turned him into a billionaire.
Types Of EPS :
Gertrude Stein said, "A rose is a rose is a rose," but the same cannot be said about earnings per
share (EPS).
While the math may be simple, there are many varieties of EPS being used these days, and
investors must understand what each one represents if they're to make informed investment
decisions. For example, the EPS announced by the company may differ significantly from what
is reported in the financial statements and in the headlines. As a result, a stock may appear overor undervalued depending on the EPS being used. This article will define some of the varieties of
EPS and discuss their pros and cons.
By definition, EPS is net income divided by the number of shares outstanding; however, both the
numerator and denominator can change depending on how you define "earnings" and "shares
outstanding". Because there are so many ways to define earnings, we will first tackle shares
outstanding.
Shares Outstanding :
Shares outstanding can be classified as either primary (primary EPS) or fully diluted (diluted
EPS).
Primary EPS is calculated using the number of shares that have been issued and held by
investors. These are the shares that are currently in the market and can be traded.
Diluted EPS entails a complex calculation that determines how many shares would be
outstanding if all exercisable warrants, options, etc. were converted into shares at a point in time,
generally the end of a quarter. We prefer diluted EPS because it is a more conservative number
that calculates EPS as if all possible shares were issued and outstanding. The number of diluted
shares can change as share prices fluctuate (as options fall into/out of the money), but generally
the Street assumes the number is fixed as stated in the 10-Q or 10-K.
Companies report both primary and diluted EPS, and the focus is generally on diluted EPS, but
investors should not assume this is always the case. Sometimes, diluted and primary EPS are the
same because the company does not have any "in-the-money" options, warrants or convertible
bonds outstanding. Companies can discuss either, so investors need to be sure which is being
used.
Earnings
As has been evident in recent headlines, EPS can be whatever the company wants it to be,
depending on assumptions and accounting policies. Corporate spin-doctors focus media attention
on the number the company wants in the news, which may or may not be the EPS reported in
documents filed with the Securities & Exchange Commission (SEC). Based on a set of
assumptions, a company can report a high EPS, which reduces the P/E multiple and makes the
stock look undervalued. The EPS reported in the 10Q, however, can result in a much lower EPS
and an overvalued stock on a P/E basis. This is why it is critical for investors to read carefully
and know what type of earnings is being used in the EPS calculation.
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We will focus on five types of EPS and define them in the context of the type of "earnings"
being used.
Reported EPS (or GAAP EPS) :
We define reported EPS as the number derived from generally accepted accounting principles
(GAAP), which are reported in SEC filings. The company derives these earnings according to
the accounting guidelines used. (Note: A discussion of how a company can manipulate EPS
under GAAP is beyond the scope of this article, but investors should remember that it is possible.
Our focus is on how earnings can be distorted even if there is no intent to manipulate results.)
A company's reported earnings can be distorted by GAAP. For example, a one-time gain from
the sale of machinery or a subsidiary could be considered as operating income under GAAP and
cause EPS to spike. Also, a company could classify a large lump of normal operating expenses as
an "unusual charge" which can boost EPS because the "unusual charge" is excluded from
calculations. Investors need to read the footnotes in order to decide what factors should be
included in "normal" earnings and make adjustments in their own calculations.
Ongoing EPS :
This EPS is calculated based upon normalized or ongoing net income and excludes anything that
is an unusual one-time event. The goal is to find the stream of earnings from core operations
which can be used to forecast future EPS. This can mean excluding a large one-time gain from
the sale of equipment as well as an unusual expense. Attempts to determine an EPS using this
methodology is also called "pro forma" EPS.
Pro Forma EPS :
The words "pro forma" indicate that assumptions were used to derive whatever number is being
discussed. Different from reported EPS, pro forma EPS generally excludes some
expenses/income that were used in calculating reported earnings. For example, if a company sold
a large division, it could, in reporting historical results, exclude the expenses and revenues
associated with that unit. This allows for more of an "apples-to-apples" comparison.
Another example of pro forma is a company choosing to exclude some expenses because
management feels that the expenses are non-recurring and distort the company's "true" earnings.
Non-recurring expenses, however, seem to appear with increasing regularity these days. This
raises questions as to whether management knows what it is doing or is trying to build a "rainy
day fund" to smooth EPS.
Headline EPS :
The headline EPS is the EPS number that is highlighted in the company's press release and
picked up in the media. Sometimes it is the pro forma number, but it could also be an EPS
number that has been calculated by the analyst/pundit that is discussing the company. Generally,
soundbites do not provide enough information to determine which EPS number is being used.
Cash EPS :
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Cash EPS is operating cash flow (not EBITDA) divided by diluted shares outstanding. We think
cash EPS is more important than other EPS numbers because it is a "purer" number. Cash EPS is
better because operating cash flow cannot be manipulated as easily as net income and represents
real cash earned, calculated by including changes in key asset categories such as receivables and
inventories. For example, a company with reported EPS of $0.50 and cash EPS of $1.00 is
preferable to a firm with reported EPS of $1.00 and cash EPS of $0.50. Although there are many
factors to consider in evaluating these two hypothetical stocks, the company with cash is
generally in better financial shape.
Other EPS numbers have overshadowed cash EPS, but we expect it to get more attention because
of the new GAAP rule (FAS 142), which allows companies to stop amortizing goodwill.
Companies may start talking about "cash EPS" in order to differentiate between pre-FAS 142
and post-FAS 142 results; however, this version of "cash EPS" is more like EBITDA per share
and does not factor-in changes in receivables and inventory. Consequently, I think it is not as
good as operating-cash-flow EPS, but is better in certain cases than other forms of EPS.
The Bottom Line :
Caveat investor (investor beware)! There are many types of EPS being used, and investors need
to know what the EPS represents and determine if it is a valid representation of the company's
earnings. A stock may look like a great value because it has a low P/E, but that ratio may be
based on assumptions with which you may not agree
Net Debt
A metric that shows a company's overall debt situation by netting the value of a company's
liabilities and debts with its cash and other similar liquid assets.
Calculated as:
When investing in a company, one of the most important factors you need to consider is how
much debt the company is carrying. Here are some questions to ask yourself when analyzing a
company's debt: How much debt really exists? What kind of debt is it (long/short-term
maturities)? What is the debt for (repay or refinance old debts)? Can the company afford the debt
if it runs into financial trouble? And, finally, how does it compare to the debt levels of competing
companies?
Acid-Test Ratio:
A stringent test that indicates whether a firm has enough short-term assets to cover its immediate
liabilities without selling inventory. The acid-test ratio is far more strenuous than the working
capital ratio, primarily because the working capital ratio allows for the inclusion of inventory
assets.
Calculated by:
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Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at
with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital
ratio, it means current assets are highly dependent on inventory. Retail stores are examples of
this
type
of
business.
The term comes from the way gold miners would test whether their findings were real gold
nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when
submerged in acid, it was said to have passed the acid test. If a company's financial statements
pass the figurative acid test, this indicates its financial integrity.
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
the current ratio, the more capable the company is of paying its obligations. A ratio under 1
suggests that the company would be unable to pay off its obligations if they came due at that
point. While this shows the company is not in good financial health, it does not necessarily mean
that it will go bankrupt - as there are many ways to access financing - but it is definitely not a
good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to
turn its product into cash. Companies that have trouble getting paid on their receivables or have
long inventory turnover can run into liquidity problems because they are unable to alleviate their
obligations. Because business operations differ in each industry, it is always more
useful to compare companies within the same industry.
Discretionary Cash Flow:

Discretionary cash flow is any money left over once all possible capital projects with positive net
present values have been financed, and all mandatory payments have been paid. The capital can
be used to pay for other responsibilities such as giving out cash dividends to stockholders,
buying back common stock and paying off any outstanding debt.
How discretionary cash flow is distributed is the responsibility of management. They decide how
to use the funds to benefit the company the most. The way these funds are allocated can have
huge affects on the performance of the company, and as a result the evaluation of the
effectiveness of management.
Operating Cash Flow Ratio:

A measure of how well current liabilities are covered by the cash flow generated from a
company's
operations.
Formula:
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The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow
as opposed to income is sometimes a better indication of liquidity simply because, as we
know, cash is how bills are normally paid off.
Operating Cash Flow (OCF)
The cash generated from the operations of a company, generally defined as revenues less all
operating expenses, but calculated through a series of adjustments to net income. The OCF can
be found on the statement of cash flows.
Also known as "cash flow provided by operations" or "cash flow from operating activities".
One method of calculated OCF is:
Operating cash flow is the cash that a company generates through running its business.
It's arguably a better measure of a business's profits than earnings because a company can show
positive net earnings (on the income statement) and still not be able to pay its debts. It's cash
flow that pays the bills!
You can also use OCF as a check on the quality of a company's earnings. If a firm reports record
earnings but negative cash, it may be using aggressive accounting techniques.
Operating Income
The amount of profit realized from a business's own operations, but excluding operating
expenses (such as cost of goods sold) and depreciation from gross income.
Also referred to as "operating profit" or "recurring profit".
Calculated as:
Operating income would not include items such as investments in other firms, taxes or interest
expenses. In addition, nonrecurring items such as cash paid for a lawsuit settlement are often not
included.
Operating income is required to calculate operating margin, which describes a company's
operating efficiency.
Operating Expense
A category of expenditure that a business incurs as a result of performing its normal business
operations. One of the typical responsibilities that management must contend with is
determining how low operating expenses can be reduced without significantly affecting the
firm's
ability
to
compete
with
its
competitors.
Also known as "OPEX"
For example, the payment of employees' wages and funds allocated toward research and
development are operating expenses. In the absence of raising prices or finding new markets or
product channels in order to raise profits, some businesses attempt to increase the bottom line
purely
by
cutting
expenses.
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While laying off employees and reducing product quality can initially boost earnings and may
even be necessary in cases where a company has lost its competitiveness, there are only so
many operating expenses that management can cut before the quality of business operations is
damaged.
Operating Profit
The amount of profit earned from a firm's normal core business operations. This value does not
include any profit earned from the firm's investments (such as earnings resulting from firms that
the company has partial interest in) and the effects of interest and taxes.
Also known as "earnings before interest and tax (EBIT)".
Calculated as:
For example, suppose ABC Printing Company earned $50 million from its core printing related
operations, $10 million from its 40% stake in XYZ Corp and $3.5 million from interest earned
from its money market and bank accounts. Also, the company spent $10 million in production
related costs as well.
Overall the company's operating profit is: $40 million, calculated as the $50 million operating
revenues million minus the $10 million in production costs. The other $10 million and $3.5
million in earnings are not included in operating income, since they are investment income.
Earnings:
The amount of profits that a company produces during a specific period, which is usually defined
as a quarter (three calendar months) or a year. Earnings typically refer to after-tax
net income.Ultimately, a business's earnings are the main determinant of its share price,
because earnings and the circumstances relating to them can indicate whether the business will
be profitable and successful in the long run.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
An indicator of a company's financial performance which is calculated as follows:
EBITDA
can be used to analyze and compare profitability between companies and industries because it
eliminates the effects of financing and accounting decisions. However, this is a non-GAAP
measure that allows a greater amount of discretion as to what is (and is not) included in
the calculation. This also means that companies often change the items included in their
EBITDA calculation from one reporting period to the next.
EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to
indicate the ability of a company to service debt. As time passed, it became popular in industries
with expensive assets that had to be written down over long periods of time. EBITDA is now
commonly quoted by many companies, especially in the tech sector - even when it isn't
warranted.
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A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to
evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund
working capital and the replacement of old equipment, which can be significant. Consequently,
EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using
this metric, it's key that investors also focus on other performance measures to make sure the
company is not trying to hide something with EBITDA.
Amortization
1. The paying off of debt in regular installments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually over the asset's
life). More specifically, this method measures the consumption of the value of intangible
assets, such as a patent or a copyright.
Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the
patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each
year
as
an
amortization
expense.
While amortization and depreciation are often used interchangeably, technically this is an
incorrect practice because amortization refers to intangible assets and depreciation
refers to tangible assets.
Depreciation
1. In accounting, an expense recorded to allocate a tangible asset's cost over its useful
life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing
reported earnings.
2. A decrease in the value of a particular currency relative to other currencies.
1. Depreciation is used in accounting to try to match the expense of an asset to the income that
the asset helps the company earn. For example, if a company buys a piece of equipment for $1
million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every
accounting year, the company will expense $100,000 (assuming straight-line
depreciation), which will be matched with the money that the equipment helps to make each
year.
2. Examples of currency depreciation are the infamous Russian ruble crisis in 1998, which saw
the ruble lose 25% of its value in one day.
Earnings Before Interest, Taxes, Depreciation, Depletion, Amortization and Exploration
Expenses (EBITDAX)
An indicator of a company's financial performance calculated as:
= Revenue - Expenses (excluding tax, interest, depreciation, depletion, amortization and
exploration expenses)
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EBITDAX is used when reporting earnings for oil and mineral exploration companies. It
excludes costly exploration expenses and gives the true EBITDA of the firm.
This is especially useful when a company wants to acquire another company. The EBITDAX
would cover any loan payments needed to finance the takeover.
Goodwill
An account that can be found in the assets portion of a company's balance sheet. Goodwill can
often arise when one company is purchased by another company. In an acquisition, the amount
paid for the company over book value usually accounts for the target firm's intangible assets.
Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset
such as buildings and equipment. Goodwill typically reflects the value of intangible assets such
as a strong brand name, good customer relations, good employee relations and any patents or
proprietary technology
Badwill
The negative effect felt by a company when shareholders and the investment community find out
that is has done something that is not in accordance with good business practices. Although
typically not expressed in a dollar amount, badwill can play out in the form of decreased
revenue, loss of clients or suppliers, loss of market share and federal indictments for any crimes
committed.
There are several cases in which badwill caused a severe downturn in company stock, such as
Tyco, Adelphia, Martha Stewart, Enron and Worldcom. In each new bull market, we are likely
to see the same offenses committed by new people. This phenomenon has caused a rise in
"socially conscious" investing, where companies promoting badwill are excluded as a matter of
policy.
Nonrecurring Charge
An expense occurring only once on a company's financial statement.
An extraordinary item is an example of a nonrecurring charge.
Also known as "nonrecurring item".
Non-Cash Charge
A charge off, made by a company against earnings, that does not require an initial outlay of cash.
Non-cash charges are typically against the depreciation, amortization, and depletion accounts on
a company's balance sheet. Companies take these charges against earnings due to extraordinary
circumstances such as accounting policy changes or significant depreciation of asset's market
value.
Any sort of charge will usually result in lower earnings in the period when the charge was made.
Sometimes also referred to as a write down.
Write-Down
Reducing the book value of an asset because it is overvalued compared to the market value.
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This is usually reflected in the company's income statement as an expense, thereby reducing net
income.
Write-Off
A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies
are able to write off certain expenses that are required to run the business, or have been incurred
in the operation of the business and detract from retained revenues.
For example, if you spend money on dinner to take out a client, that meal is a possible write-off
towards your income because you presumably discussed business opportunities during the
dinner. Suppose, for another example, you made a sale on credit to a customer, but two weeks
later the client's business declared bankruptcy and became completely unable to pay off the
credit account with you. This uncollectible debt would then be written off by your company and
recorded as an expense by accountants.
Write-Up
An increase made to the book value of an asset because it is undervalued compared to market
values.
A write-up will increase a company's accounting book value without any expenditures. For
example, if an economy experiences significant inflation, a production company may decide to
write up its inventory to better match the market price.
Equity Method
An accounting technique used by firms to assess the profits earned by their investments in other
companies. The firm reports the income earned on the investment on its income statement and
the reported value is based on the firm's share of the company assets. The reported profit
is proportional to the size of the equity investment. This is the standard technique used when one
company has significant influence over another.
When a company holds approximately 20-25% or more of another company's stock, it is
considered to have significant control, which signifies the power that a company can exert over
another company. This power includes representation on the board of directors, partaking in
company policy development and the interchanging of managerial personnel. If a firm owns 25%
of a company with a $1 million net income, that firm would report earnings of $250,000.
Generally Accepted Accounting Principles (GAAP)
The common set of accounting principles, standards and procedures that companies use to
compile their financial statements. GAAP are a combination of authoritative standards (set by
policy boards) and simply the commonly accepted ways of recording and reporting accounting
information.
GAAP are imposed on companies so that investors have a minimum level of consistency in the
financial statements they use when analyzing companies for investment purposes. GAAP cover
such things as revenue recognition, balance sheet item classification and outstanding share
measurements. Companies are expected to follow GAAP rules when reporting their financial
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data via financial statements. If a financial statement is not prepared using GAAP principles, be
very wary!
That said, keep in mind that GAAP is only a set of standards. There is plenty of room within
GAAP for unscrupulous accountants to distort figures. So, even when a company uses GAAP,
you still need to scrutinize its financial statements.
This is an excellent way to buy shares in a foreign company while realizing any dividends and
capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks
for the underlying shares in another country. For example, dividend payments in euros would be
converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with
the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq.
The relationship between all the stakeholders in a company. This includes the shareholders,
directors, and management of a company, as defined by the corporate charter, bylaws, formal
policy and rule of law.
Ethical companies are said to have excellent corporate governance.
Securitization:
Securitization is a structured finance process in which assets, receivables or financial instruments
are acquired, classified into pools, and offered as collateral for third-party investment.[1] It
involves the selling of financial instruments which are backed by the cash flow or value of the
underlying assets.[2]
Securitization typically applies to assets that are illiquid (i.e. cannot easily be sold). It is common
in the real estate industry, where it is applied to pools of leased property, and in the lending
industry, where it is applied to lenders' claims on mortgages, home equity loans, student loans
and other debts.
Securitization utilizes a special purpose vehicle (SPV) (alternatively known as a special purpose
entity [SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and
thereby obtain lower interest rates from potential lenders. A credit derivative is also generally
used to change the credit quality of the underlying portfolio so that it will be acceptable to the
final investors.]
Corporate governance:
Corporate governance is the set of processes, customs, policies, laws and institutions affecting
the way in which a corporation is directed, administered or controlled. Corporate governance
also includes the relationships among the many players involved (the stakeholders) and the goals
for which the corporation is governed. The principal players are the shareholders, management
and the board of directors. Other stakeholders include employees, suppliers, customers, banks
and other lenders, regulators, the environment and the community at large.
Recently there has been considerable interest in the corporate governance practices of modern
corporations, particularly since the high-profile collapses of a number of large U.S. firms such as
Enron Corporation and Worldcom.
Board members and those with a responsibility for corporate governance are increasingly using
the services of external providers to conduct anti-corruption auditing, due diligence and training.
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Definition
The term corporate governance has come to mean two things.
The processes by which all companies are directed and controlled.
A field in economics, which studies the many issues arising from the separation of
ownership and control.[1]
Relevant rules include applicable laws of the land as well as internal rules of a corporation.
Relationships include those between all related parties, the most important of which are the
owners, managers, directors of the board, regulatory authorities and to a lesser extent employees
and the community at large. Systems and processes deal with matters such as delegation of
authority.
The corporate governance structure specifies the rules and procedures for making decisions on
corporate affairs. It also provides the structure through which the company objectives are set, as
well as the means of attaining and monitoring the performance of those objectives.
Corporate governance is used to monitor whether outcomes are in accordance with plans and to
motivate the organization to be more fully informed in order to maintain or alter organizational
activity. Corporate governance is the mechanism by which individuals are motivated to align
their actual behaviors with the overall participants
The concept in accounting of recognizing expenses in the same accounting period when the
related revenues are recognized
The concept in accounting of recognizing expenses in the same accounting period when the
related revenues are recognized
Wasting asset: An asset which has a limited life and therefore decreases in value over time,
such as an option which is out of the money.
Wasting assets are held for too long, they will ultimately lose all their value. Derivatives such as
options are thought of as wasting assets since they have fixed expiration dates and lose value as
the time gap until expiration narrows. An asset which has a limited life and therefore decreases
in value over time, such as an option which is out of the money.
Marginal Cost (MC)
The marginal cost of an additional unit of output is the cost of the additional inputs needed to
produce that output. More formally, the marginal cost is the derivative of total production costs
with respect to the level of output.Marginal cost and average cost can differ greatly. For
example, suppose it costs $1000 to produce 100 units and $1020 to produce 101 units. The
average cost per unit is $10, but the marginal cost of the 101st unit is $20 Marginal costs are
defined as the change in total costs resulting from a one unit change in output. They are the
variable costs associated with increasing output in the short run. A change in marginal costs
might come about for example because of a change in the prices of essential raw materials or an
increase in the wage rate paid to part-time employees.
PerpetualSuccession:
A company does not die or cease to exist unless it is specifically wound up or the task for which
it was formed has been completed. Membership of a company may keep on changing from time
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to time but that does not affect life of the company. Death or insolvency of member does not
affect the existence of the company.
SeparateLegalEntity:
On incorporation under law, a company becomes a separate legal entity as compared to its
members. The company is different and distinct from its members in law. It has its own name
and its own seal, its assets and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, and borrowing money, having a bank account,
employing people, entering into contracts and suing and being sued separately.
LimitedLiability:
The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the uncalled
money due on shares held by him when called upon to pay and nothing more, even if liabilities
of the company far exceeds its assets. On the other hand, partners of a partnership firm have
unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm,
the creditors can force the partners to make good the deficit from their personal assets. This
cannot be done in case of a company once the members have paid all their dues towards the
shares held by them in the company.
Types of Companies
1.Public Company means a company which not a private company.
2.Private Company means a company which by its articles of association :a. Restricts the right of members to transfer its shares
b. Limits the number of its members to fifty. In determining this number of 50,
employee-members and ex-employee members are not to be considered.
c. Prohibits an invitation to the public to subscribe to any shares in or the debentures
of the company.
1.
2.
3.
4.
5.
6.
7.
8.
If a private company contravenes any of the aforesaid three provisions, it ceases to be private
company and loses all the exemptions and privileges which a private company is entitled.
Following are some of the privileges and exemptions of a private limited company:Minimum number is members is 2 (7 in case of public companies)
Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of
prospectus has been delivered to the Registrar of Companies does not apply.
Restriction contained in Section 81 related to the rights issues of share capital do not apply. A
special resolution to issue shares to non-members is not required in case of a private company.
Restriction contained in Section 149 on commencement of business by a company does not
apply. A private company does not need a separate certificate of commencement of business.
Provisions of Section 165 relating to statutory meeting and submission of statutory report does
not apply.
One (if 7 or less members are present) or two members (if more than 7 members are present )
present in person at a meeting of the company can demand a poll.
In case of a private company which not a subsidiary of a public limited company or in the case
of a private company of which the entire paid up share capital is held by the one or more body
corporates incorporated outside India, no person other than the member of the company
concerned shall be entitled to inspect or obtain the copies of profit and loss account of that
company.
Minimum number of directors is only two. (3 in case of a public company)
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Profit Maximization Vs Wealth Maximization:

Frequently, maximization of profits is regarded as the proper objective of the firm, but it is not as
inclusive a goal as that of maximizing stockholder wealth. For one thing, total profits are not as
important as earnings per stock. A firm could always raise total profits by issuing stock and
using the proceeds to invest in Treasury bills. Even maximization of earnings per stock,
however, is not a fully appropriate objective, partly because it does not specify the timing or
duration of expected returns. Is the investment project that will produce a $100,000 return 5
years from now more valuable than the project that will produce annual returns of $15,000 in
each of the next 5 years? An answer to this question depends upon the time value of money. Few
existing stockholders would think favorably of a project that promised its first return in 100
years, no matter how large this return. We must take into account the time pattern of returns in
our analysis.
Another shortcoming of the objective of maximizing earnings per stock is that it does not
consider the risk or uncertainty of the prospective earnings stream. Some investment projects are
far more risky than others. As a result, the prospective stream of earnings per stock would be
more uncertain if these projects were undertaken. In addition, a company will be more or less
risky depending upon the amount of debt in relation to equity in its capital structure. This
financial risk is another uncertainty in the minds of investors when they judge the firm in the
marketplace. Finally, earnings per stock objective do not take into account any dividend the
company might pay.
For the reasons given, an objective of maximizing earnings per stock may not be the same as
maximizing market price per stock. The market price of a firm's stock represents the value that
market participants place on the firm.
Especially For Interview
1
Dematerialization vs. Rematerialization
Dematerialization----The move from physical certificates to electronic book keeping. Actual

stock certificates are slowly being removed and retired from circulation in exchange for
electronic recording.
Rematerialization is a compiler optimization which saves time by recomputing a value instead
of loading it from memory. It is typically tightly integrated with register allocation, where it is
used as an alternative to spilling registers to memory.
2 Venture Capital-seed companies?
Venture Capital
Money made available for investment in innovative enterprises or research, especially in high
technology, in which both the risk of loss and the potential for profit may be considerable. Also
called risk capital.
3 Institutional investor?
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Institutional investor----A non-bank person or organization that trades securities in large

enough share quantities or dollar amounts that they qualify for preferential treatment and lower
commissions. Institutional investors face less protective regulations because it is assumed that
they are more knowledgeable and better able to protect themselves.
Foreign Institutional investor
An investor or investment fund that is from or registered in a country outside of the one in which
it is currently investing. Institutional investors include hedge funds, insurance companies,
pension funds and mutual funds.
Insider trading----The illegal buying or selling of securities on the basis of information that is
unavailable to the public.
A Reverse Takeover (RTO), also known as a back door listing, or a reverse merger, is a
financial transaction that results in a privately-held company becoming a publicly-held company
without going the traditional route of filing a prospectus and undertaking an initial public
offering (IPO). Rather, it is accomplished by the shareholders of the private company selling all
of their shares in the private company to the public company in exchange for shares of the public
company.
Stock split----The dividing of a company's existing stock into multiple shares. In a 2-for-1 split,
each stockholder receives an additional share for each share he or she holds. Refers to a
corporate action that increases the shares in a public company. The price of the shares are
adjusted such that the before and after market capitalization of the company remains the same
and dilution does not occur. Options and warrants are included.
For example, a company has 100 shares of stock each with a price of $50. The market
capitalization is 100 $50 = $5000. The company splits its stock "2-for-1". There are now 200
shares of stock and each shareholder holds twice as many shares. The price of each share has
been adjusted to $25. The market capitalization is 200 $25 = $5000, the same as before the
split.
Reverse stock split, or reverse split, is just the same but in reverse: a reduction in number of
shares and an accompanying increase in the share price. The ratio is also reversed: 1-for-2, or 1for-3.
7 Merchant banking
Merchant banking----A bank that deals mostly in (but is not limited to) international finance,
long-term loans for companies and underwriting. Merchant banks do not provide regular banking
services to the general public.
8 Can share holders offer its share price at premium during the IPO?
9 Who regulates/controls the price of the shares?
10 Form filed for Prospectus in SEC?
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Share warrant----A certificate, usually issued along with a bond or preferred stock, entitling the
holder to buy a specific amount of securities at a specific price, usually above the current market
price at the time of issuance, for an extended period, anywhere from a few years to forever. In
the case that the price of the security rises to above that of the warrant's exercise price, then the
investor can buy the security at the warrant's exercise price and resell it for a profit. Otherwise,
the warrant will simply expire or remain unused. Warrants are listed on options exchanges and
trade independently of the security with which it was issued. also called subscription warrant.
Share certificate - legal document that certifies ownership of a specific number of stock shares
(or fractions thereof) in a corporation.
Share Premium----The market value of shares in excess of their par value.
Proxy----A representative; an agent; a document appointing a representative.
A proxy is a person who is designated by another to represent that individual at a meeting or
before a public body. It also refers to the written authorization allowing one person to act on
behalf of another.
Foreign Institutional Investor - FII----An investor or investment fund that is from or
registered in a country outside of the one in which it is currently investing. Institutional investors
include hedge funds, insurance companies, pension funds and mutual funds.
Pooling of Interest----An accounting method, used in mergers and acquisitions, where the
balance sheet items of the two companies are simply added together.
Joint Venture----An association of two or more individuals or companies engaged in a solitary
business enterprise for profit without actual partnership or incorporation; also called a joint
adventure..
A Strategic Alliance is a mutually beneficial long-term formal relationship formed between
two or more parties to pursue a set of agreed upon goals or to meet a critical business need while
remaining independent organizations.
Partnership----An association of two or more persons engaged in a business enterprise in which
the profits and losses are shared proportionally.
Consignment----The delivery of goods to a carrier to be shipped to a designated person for sale.
A bailment of goods for sale.
A consignment is an arrangement resulting from a contract in which one person, the consignor,
either ships or entrusts goods to another, the consignee, for sale. If the goods are transported by a
carrier to the consignee, the name of the consignor appears on the bill of lading as the person
from whom the goods have been received for shipment. The consignee's name appears on it as
the person to whom delivery is to be made. The consignee acts as an agent on behalf of the
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consignor, a principal, in selling the goods and must take reasonable care of them while in his or
her possession. The consignor does not give up ownership of the goods until their sale.
Shell Company is a company that is incorporated but has no significant assets or operations.
Shell corporations are not in themselves illegal, and they may have legitimate business purposes.
However, they are a main component of underground economy, especially those based in tax
havens.
Blank check company - A company in a developmental stage that either doesn't have an
established business plan or has a business plan that revolves around a merger or acquisition with
another firm.
Reorganization----A process designed to revive a financially troubled or bankrupt firm. A
reorganization involves the restatement of assets and liabilities, as well as holding talks with
creditors in order to make arrangements for maintaining repayments.
Restructuring----A significant modification made to the debt, operations or structure of a
company. This type of corporate action is usually made when there are significant problems in a
company, which are causing some form of financial harm and putting the overall business in
jeopardy. The hope is that through restructuring, a company can eliminate financial harm and
improve the business.
23 Spin off Vs Split-Off
Spin off----An independent company created from an existing part of another company through
a divestiture, such as a sale or distribution of new shares.
Split-off----The process whereby a parent corporation organizes a subsidiary corporation to
which it transfers part of its assets in exchange for all of the subsidiary's capital stock, which is
subsequently transferred to the shareholders of the parent corporation in exchange for a portion
of their parent stock.
A split-off differs from a spin-off in that the shareholders in a split-off must relinquish their
shares of stock in the parent corporation in order to receive shares of the subsidiary corporation
whereas the shareholders in a spin-off need not do so.
Reverse split
Takeover----Acquiring control of a corporation, called a target, by stock purchase or exchange,
either hostile or friendly.
Takeover----The act or an instance of assuming control or management of or responsibility for
something, especially the seizure of power, as in a nation, political organization, or corporation.
Divestiture----The sale, liquidation, or spinoff of a corporate division or subsidiary.
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Disposition or sale of an asset by a company. A company will often divest an asset which is not
performing well, which is not vital to the company's core business, or which is worth more to a
potential buyer or as a separate entity than as part of the company
Corporate governance is the set of processes, customs, policies, laws and institutions affecting
the way a corporation is directed, administered or controlled. Corporate governance also includes
the relationships among the many players involved (the stakeholders) and the goals for which the
corporation is governed. The principal players are the shareholders, management and the board
of directors. Other stakeholders include employees, suppliers, customers, banks and other
lenders, regulators, the environment and the community at large.
Dividend A share of profits received by a stockholder or by a policyholder in a mutual
insurance society.
Prime rate :The lowest rate of interest on bank loans at a given time and place, offered to
preferred borrowers. Also called prime interest rate.
Convertible Debentures:
Any type of debenture that can be converted into some other security.
Certificate of Incorporation Vs Certificate of merger
AGM Vs EGM
AGM : A mandatory yearly meeting of shareholders that allows stakeholders to stay informed
and involved with company decisions and workings.
EGM: A meeting other than the annual general meeting between a company's shareholders,
executives and any other members. An EGM is usually called on short notice and deals with an
urgent matter.
.
Dissolution---- Act or process of dissolving; termination; winding up. In this sense it is
frequently used in the phrase dissolution of a partnership
The dissolution of a corporation is the termination of its existence as a legal entity.
Anti Dumping Vs Dumping
Dumping, selling goods at less than the normal price, usually as exports in international trade. It
may be done by a producer, a group of producers, or a nation. Dumping is usually done to drive
competitors off the market and secure a monopoly, or to hinder foreign competition. To
counterbalance international dumping, nations often resort to flexible tariffs. In international
trade, acute competition from foreign producers often leads to charges of dumping. A policy of
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dumping depends for its effectiveness on the possibility of maintaining separate domestic and
foreign markets, on monopolistic influences maintaining a high price in the home market, on
export bounties, or on low import duties in the foreign market. Dumping disturbs those markets
that receive dumped goods, and it may drive local producers out of business. Governments may
condone, or even sponsor, dumping in other markets for either political reasons or to achieve a
more favorable balance of payments.
Anti Dumping----Intended to discourage importation and sale of foreign-made goods at prices
substantially below domestic prices for the same items.
Chief Financial Officer CFO----This is the senior manager who is responsible for
overseeing the financial activities of an entire company. This includes signing checks,
monitoring cash flow, and financial planning.
Chief Executive Officer----The highest-ranking executive in a company or organization,
responsible for carrying out the policies of the board of directors on a day-to-day basis.
Hedging: In commerce, method by which traders use two counterbalancing investment
strategies so as to minimize any losses caused by price fluctuations.
It is generally used by traders on the commodities market. Typically, hedging involves a trader
contracting to buy or sell one particular good at the time of the contract and also to buy or sell
the same (or similar) commodity at a later date. In a simple example, a miller may buy wheat that
is to be converted into flour. At the same time, the miller will contract to sell an equal amount of
wheat, which the miller does not presently own, to another trader. The miller agrees to deliver
the second lot of wheat at the time the flour is ready for market and at the price current at the
time of the agreement. If the price of wheat declines during the period between the miller's
purchase of the grain and the flour's entrance onto the market, there will also be a resulting drop
in the price of flour. That loss must be sustained by the miller. However, since the miller has a
contract to sell wheat at the older, higher price, the miller makes up for this loss on the flour sale
by the gain on the wheat sale. Hedging is also employed by stock and bond traders, exportimport traders, and some manufacturers.
Red herring prospectus:
This is an initial prospectus to be submitted by a company which is planning to have an IPO.
This prospectus has to be filed with SEC. It contains all the information about the company
except for the offer price and the effective date, which aren't known at that time. There are
several additions and edits to this document before the final prospectus is released.
The reason it is called a Red herring is due to a section of the document colored in red which
explicitly states that the issuing company is not attempting to sell its shares before it has been
given official approval.
"Red Herring Prospectus" is a prospectus which does not have details of either price or number
of shares being offered or the amount of issue. This means that in case the price is not disclosed,
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the number of shares and the upper and lower price bands are disclosed. On the other hand, an
issuer can state the issue size and the number of shares are determined later.
Book Building
The process by which an underwriter attempts to determine at what price to offer an IPO based
on demand from institutional investors.
Shareholders and Stake Holders.
Shareholders----Any person, company, or other institution that owns at least 1 share in a
company. A shareholder may also be referred to as a stockholder.
Net Present Value - NPV ----The difference between the present value of cash inflows and the
present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an
investment or project.
The internal rate of return (IRR) is defined as the discount rate that gives a net present value
(NPV) of zero. The NPV is calculated from an annualized cash flow by discounting all future
amounts to the present.
The length of time required to recover the cost of an investment.
Franchise, Examples of Franchise
Vs Affiliate
Franchise----A privilege granted or sold, such as to use a name or to sell products or services. In
its simplest terms, a franchise is a license from the owner of a trademark or trade name
permitting another to sell a product or service under that name or mark. More broadly stated, a
franchise has evolved into an elaborate agreement under which the franchisee undertakes to
conduct a business or sell a product or service in accordance with methods and procedures
prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through
advertising, promotion, and other advisory services.
Royalty: A payment to an owner for the use of property, especially patents, copyrighted works,
franchises or natural resources.
Leasing Vs Hire Purchase
A lease or tenancy is an interest in personal property or real property given by a lessor to another
person (usually called the lessee or tenant) for a fixed period of time, and the lessee obtains
exclusive possession of the property in return for paying the lessor a fixed or determinable
consideration.
Hire Purchase----Purchase of a commodity on an installment plan.
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Debtors in Possession: A company that continues to operate while under the Chapter 11
bankruptcy process.
Mutual Funds (open ended Vs closed ended)
A fund, in the form of an investment company, in which shareholders combine their money to
invest in a variety of stocks, bonds, and money-market investments such as U.S. Treasury bills
and bank certificates of deposit.
Intellectual Property:
Intellectual property describes a wide variety of property created by musicians, authors, artists,
and inventors. The law of intellectual property typically encompasses the areas of copyright,
patent, and trademark law. It is designed to encourage the development of art, science, and
information by granting certainproperty rights to all artists, which include inventors in both the
arts and the sciences. These rights allow artists to protect themselves from infringement, or the
unauthorized use and misuse of their creations.
Copyright: The legal right granted to an author, composer, playwright, publisher, or
distributor to exclusive publication, production, sale, or distribution of a literary, musical,
dramatic, or artistic work.
Patent :A government license that gives the holder exclusive rights to a process, design, or new
invention for a designated period of time.
Trade mark :- A name, symbol, or other device identifying a product, officially registered and
legally restricted to the use of the owner or manufacturer.
Independent Director
Independent Director: In order for a director to qualify as an "independent director," the Board
must affirmatively determine that the director has no material relationship with Occidental
(either as a partner, stockholder or officer of an organization that has a relationship with
Occidental) that would preclude that nominee from being an independent director. For the
purpose of such determination, an "independent director" is a director who:
Has not been employed by Occidental within the last five years;
Has not been an employee or affiliate of any present or former internal or external auditor
of Occidental within the last three years;
Has not received more than $60,000 in direct compensation from Occidental, other than
director and committee fees, during the current fiscal year or any of the last three
completed fiscal years;
Has not been an executive officer or employee of a company that made payments to, or
received payments from, Occidental for property or services in an amount exceeding the
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greater of $1 million or 2 percent of such other company's consolidated gross revenues

during the current fiscal year or any of the last three completed fiscal years;
Audit Committee :An Audit Committee is an operating committee of a publicly-held company.

Committee members are normally drawn from members of the Company's board of directors. An
audit committee of a publicly traded company in the United States is composed of independent
or outside directors.
Quorum :In law, a quorum is the minimum number of members of a deliberative body
necessary to conduct the business of that group.
EPS :The portion of a company's profit allocated to each outstanding share of common stock.
EPS serves as an indicator of a company's profitability.
Net income-Dividends on preferred stocks/Average outstanding stocks
What are Liquid assets: Cash, or property immediately convertible to cash, such as securities,
notes, life insurance policies with cash surrender values, U.S. savings bonds, or an account
receivable.
Treasury Stock (shares buy back):Corporate stock that is issued, completely paid for, and
reacquired by the corporation at a later point in time. Treasury stock or shares may be purchased
by the corporation, or reacquired through donation, forfeiture, or some other method. It is then
regarded as the personal property of the corporation and part of its assets. The corporation can
sell the stock for cash or credit, for par value or market value, or upon any terms that it could be
sold by a stockholder. Shares that the corporation has not issued in spite of its authority to do so
are ordinarily not regarded as treasury shares but are merely unissued shares.
Public Company Vs Private Company: A company that has issued securities through an
initial public offering and which are traded on at least one stock exchange or over-the-counter
market.
Index (Stock index): A statistical indicator providing a representation of the value of the
securities which constitute it. Indices often serve as barometers for a given market or industry
and benchmarks against which financial or economic performance is measured.
Sensex :An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the benchmark
index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most
actively-traded stocks on the BSE. Initially compiled in 1986, the Sensex is the oldest stock
index in India.
BSE: The BSE SENSEX
(also known as the BSE 30) is a value-weighted index composed
of 30 scrips, with the base April 1979=100. The set of companies which make up the index has
been changed only a few times in the last 20 years. These companies account for around onefifth of the market capitalization of the BSE.
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Joint Stock Company Vs Joint venture

Joint Stock Company----A company which has some features of a corporation and some features
of a partnership. The company sells fully transferable stock, but all shareholders have unlimited
liability.
Joint Stock Company----A business whose capital is held in transferable shares of stock by its
joint owners.
Joint venture----A contractual agreement joining together two or more parties for the purpose of
executing a particular business undertaking. All parties agree to share in the profits and losses of
the enterprise.
Joint venture----An association of two or more individuals or companies engaged in a solitary
business enterprise for profit without actual partnership or incorporation; also called a joint
adventure.
Restructuring : A significant modification made to the debt, operations or structure of a
company. This type of corporate action is usually made when there are significant problems in a
company, which are causing some form of financial harm and putting the overall business in
jeopardy. The hope is that through restructuring, a company can eliminate financial harm and
improve the business.
Disinvestment:
The action of an organization or government selling or liquidating an asset or subsidiary. Also
known as "divestiture". A reduction in capital expenditure, or the decision of a company not to
replenish depleted capital goods
Underwriter:
1. A person or firm engaged in the insurance business.
2. An insurance agent who assesses the risk of enrolling an applicant for coverage or a policy.
3. One that guarantees the purchase of a full issue of stocks or bonds.
A company or other entity that administers the public issuance and distribution of securities from
a corporation or other issuing body. An underwriter works closely with the issuing body to
determine the offering price of the securities, buys them from the issuer and sells them to
investors via the underwriter's distribution network.
Insurance Vs Reinsurance:
Insurance----A contract whereby, for a specified consideration, one party undertakes to
compensate the other for a loss relating to a particular subject as a result of the occurrence of
designated hazards.
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Reinsurance----The contract made between an insurance company and a third party to protect the
insurance company from losses. The contract provides for the third party to pay for the loss
sustained by the insurance company when the company makes a payment on the original
contract.
Preferred Stock:
A preferred stock, also known as a preferred share or simply a preferred, is a share of stock
carrying additional rights above and beyond those conferred by common stock.
Rights
Unlike common stock, preferred stock usually has several rights attached to it.
----The core right is that of preference in dividends. Before a dividend can be declared on the
common shares, any dividend obligation to the preferred shares must be satisfied.
----The dividend rights are often cumulative, such that if the dividend is not paid it accumulates
in arrears.
----Preferred stock has a par value or liquidation value associated with it. This represents the
amount of capital that was contributed to the corporation when the shares were first issued.
----Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its
par or liquidation value. This claim is senior to that of common stock, which has only a residual
claim.
----Almost all preferred shares have a fixed dividend amount. The dividend is usually specified
as a percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6%
Series A preferred.
----Variable preferreds are rare exceptions: their changing dividends depend on prevailing
interest rates, or varying as a percentage of net income.
----Some preferred shares have special voting rights to approve certain extraordinary events
(such as the issuance of new shares or the approval of the acquisition of the company) or to elect
directors, but most preferred shares provide no voting rights associated with them.
----Usually preferred shares contain protective provisions which prevent the issuance of new
preferred shares with a senior claim. This results in corporations often having several series of
preferred shares that have a subordinate relationship.
GDP :The total market value of all the goods and services produced within the borders of a
nation during a specified period.
Option and its Types
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Option----A privilege, for which a person has paid money that grants that person the right to
purchase or sell certain commodities or certain specified securities at any time within an agreed
period for a fixed price.
OTC Over-the-Counter : Over-The-Counter, method of buying and selling securities outside

the organized stock exchange.
NASDAQ (National Association of securities Dealers Automated Quotation system)
Nasdaq Stock Market, Inc. (Nasdaq) is a provider of securities listing, trading and information
products and services.
Negotiable Instrument: A commercial paper, such as a check or promissory note, that
contains the signature of the maker or drawer; an unconditional promise or order to pay a certain
sum in cash that is payable either upon demand or at a specifically designated time to the order
of a designated person or to its bearer.
Negotiable instrument, bill of exchange, check, promissory note, or other written contract for
payment that may serve as a substitute for money.
1. The promise or order to pay must be unconditional;
2. The payment must be in a specific sum of money, although interest may be added to the sum;
3. The payment must be made on demand or at a definite time;
4. The instrument must be payable to bearer or to order.
NOW (Negotiable Order of Withdrawal)
In the United States, a Negotiable Order of Withdrawal account (NOW account) is a deposit
account that pays interest, on which checks may be written. Authorized on a national scale in
1981, these accounts typically pay a relatively small return, although some banks offer highinterest NOW accounts in order to attract depositors. Unless your interest rate is high, the
balances in NOW accounts should be kept at the minimum necessary to provide needed funds
without incurring service charges.
Merchant bank----A bank that deals mostly in (but is not limited to) international finance, longterm loans for companies and underwriting. Merchant banks do not provide regular banking
services to the general public.
Going Private
A company "goes private" when it reduces the number of its shareholders to fewer than 300 and
is no longer required to file reports with the SEC.
A number of transactions can result in a company going private, including:
Another company or individual makes a tender offer to buy all or most of the companys
publicly held shares;
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The company merges with or sells the companys assets to another company; or
The company can declare a reverse stock split that not only reduces the number of shares
but also reduces the number of shareholders. In this type of reverse stock split, the
company typically gives shareholders a single new share in exchange for a block10,
100, or even 1,000 sharesof the old shares. If a shareholder does not have a sufficient
number of old shares to exchange for new shares, the company will usually pay the
shareholder cash based on the current market price of the companys stock.
While SEC rules don't prevent companies from going private, they do require companies to
provide information to shareholders about the transaction that caused the company to go private.
The company may have to file a merger proxy statement or a tender offer document with the
SEC. In addition, if the transaction is initiated by an affiliate (an insider) of the company, Rule
13e-3 of the Securities Exchange Act of 1934 requires the affiliate to file a Schedule 13E-3 with
the SEC.
Going private transactions require shareholders to make difficult decisions. To protect
shareholders, some states have adopted corporate takeover statutes that provide shareholders
with dissenter's rights. These statutes provide shareholders the opportunity to sell their shares on
the terms offered, to challenge the transaction in court, or to hold on to the shares. Once the
transaction is concluded, remaining shareholders may find it very difficult to sell their retained
shares because of a limited trading market.
Futures : -Contracts that promise to purchase or sell standard commodities at a forthcoming
date and at a fixed price. This type of contract is an extremely speculative transaction and
ordinarily involves such standard goods as rice or soybeans. Profit and loss are based upon
promises to deliveras opposed to possession ofthe actual commodities.
Exit Strategy:
1. The method by which a venture capitalist or business owner intends to get out of an
investment that he or she has made in the past. In other words, the exit strategy is a way of
"cashing out" an investment. Examples include an initial public offering (IPO) or being bought
out by a larger player in the industry. Also referred to as a "harvest strategy" or "liquidity event".
2. In the context of an active trader, a plan as to when a trade will be closed out.
Monopoly :Exclusive control by one group of the means of producing or selling a commodity
or service
MRTP Monopoly & Restrictive Trade Practices Act
Inflation : A persistent increase in the level of consumer prices or a persistent decline in the
purchasing power of money, caused by an increase in available currency and credit beyond the
proportion of available goods and services.
A Patent is a set of exclusive rights granted by a state to a person (the patentee, usually the
inventor) for a fixed period of time in exchange for the regulated, public disclosure of certain
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details of a device, method, process or composition of matter (substance) (known as an

invention) which is new, inventive, and useful or industrially applicable.
A Copyright is a law that gives the creator of a document, musical piece, book, etc. the right to
their creation and the control of its distribution. This protects the creators ability to sell their
work. Once copyrighted, a work can only be copied at the creator's disposal. By having
copyright laws, our government is encouraging the formation of new ideas and concepts by
securing the creator's reward for their hard work and great consumption of time.
Red herring prospectus :This is an initial prospectus to be submitted by a company which is
planning to have an IPO. It contains all the information about the company except for the offer
price and the effective date, which aren't known at that time. There are several additions and
edits to this document before the final prospectus is released.
The reason it is called a Red herring is due to a section of the document colored in red which
explicitly states that the issuing company is not attempting to sell its shares before it has been
given official approval by the SEC.
Book Building is a process of fixing the share price based on the demand at various price
levels.
CRISIL----Credit Rating Information Services of India Limited
Portfolio Management
The science of making decisions about investment mix and policy.
SEDAR :System for Electronic Document Analysis and Retrieval
EDGAR : Electronic Data Gathering Analysis and Retrieval
Spread: Difference between bid and offer prices; also, difference between high and low prices
of a particular security over a given period.
BID: An offer or proposal made by an investor or broker to buy a security.
Offer: A proposal or offer made by an investor or broker to sell a security.
Write essay on any one of the following
1) Women reservation bill
2) Globalization
3) Effect of movies on youth
4) Education system in India
5) Role of the media in the society
6) Can the film stars become good administrators?
7) Importance of small states
8) Impact of western culture on Indian culture
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9) Most unforgettable/favorite movement

10) Role model
11) Is Hyderabad a hi-tech city?
12) BPO and KPO
13) Economic crisis
14) Write about your role model
Revenue:
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 companys act 1956.
Kinds of companies:
Charted companies: East India company
Statutory companies: RBI, IFC
Registered companies: Incorporated under companys act 1956.
Difference between Private limited company and Public limited company:
1. Minimum number of its members Private: (2), Public (7)
2. Maximum number of its members Private: (50), Public: unlimited
3. Issue of prospects: a private company cannot invite public to subscribe to its shares or
debentures by issue of prospects. Public company must issue the prospects.
4. Transfer of shares: restrict to private company, freely transferable to public company.
5. Number of Directors: Private (2), Public (5)
6. Use of the word Limited
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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 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:
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Value less than its face value

Share discount account Dr
Discount on the issue of share account Dr
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)
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To promote fair dealing. To provide a degree of protection

To regulate and develop a code of conduct, register and working of stock brokers
Provision: Preparatory action of measure, money kept aside for a specific work
Reserve: Some amount of profit kept aside to meet contingent expenses, put aside for future purpose
Minority interest: The ownership interest in a company held by the person other than the parent
company and
Its subsidiary undertakings
General reserve:It can be used for any purpose including distribution of dividend
Capital reserve: For specific purpose
Dividend: Shareholders will expect some return from their investments by them in the share capital
Are generally paid in cash Dividend declared by the board of directors in the AGM (annual general
meeting)
Interim dividend: Dividend declared for 6 months is called interim dividend
Final dividend: Declared at the end of the financial year
Theories: Relevance: Walters model, Gardens model, Bird in a hand argument

Irrelevance: Modigliani and Millers Hypothesis
Marginal cost: Aggregate amount of variable cost
Variable cost: One which various directly with changes in the level of output over a defined period of
time
Fixed cost: One which is not affected by changes in the level of out put over a defined period of time
Semi-variable cost: Which does not vary proportionally but simultaneously cannot remain stationary at
all times
Ex: Depreciation, repairs
Partnership: A business relationship where two or more persons carry on a business with a
view to make a profit.
Joint-venture: A foreign company joins hands with local company for local interest to carry out
a single project pr a limited number of projects, in specific period of time.
Non-recurring items in P & L account (Profit and loss account): Sale of investments
Non-cash expenditure in P & L account: Depreciation
Depletion: Used of oil wells, mines or deposits for depreciation
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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 assetsRaise money by selling shares of the fund
to the public (income fund, growth fund)
Trade discount: Which is not shown in the books
Cash discount: 50% out of MRP like that
Trade credit: To the credit that a customer gets from supplier of goods in the normal course
Duties of Finance Manager: Raising of funds, allocation of funds, profit planning,
understanding capital markets
Chairman: One of the person elected by the directors in the board of directors meeting.
Who is the Director: one of the shareholders becomes director
CEO: chief executive officer, top officer in the company in the executive 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
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Difference between Corporation and Company:

Company: an institution created to conduct business He only invest in large well established
company
He can start the company in his garage
Policies: prudent, materiality, consistency
Assumptions: continuing, consistency, accrual (revenue and cost)
Proxy: it includes every proxy consensus and authorization with in the meaning of section
14 (a) of the act (representative)
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
companys or mutual funds share at the end of each fiscal year (balance sheet, income statement,
cash flow statement and description of company operations, auditors report, summary of
operations, chairmans speech) contain in annual report.
Quarterly report: (10 Q) Un audited document required by the SEC of all us public companies
reporting the financial results for the quarter and noting any significant changes and events in the
quarter (financial statements, discussion from the management, list of material events)
Merger: two or more companies combine into one company they may form a new company
Absorption: two or more companies combine into an existing company
Consolidation: is a combination of 2 or more companies into a new 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
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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
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Venture capital:
Funds made available for startup firms small business with exceptional
growth potential
Capital: cash or goods used to generate income
Capital budgeting: Firms decision to invest its current funds most effectively in the long-term
assets in anticipation of an expected flow of benefits over a series of years
Blue chip: Stock of large, national company with a solid record of stable earnings and/or
dividend growth and reputation for high quality management, (first class equity shares)
Board of directors:
Individuals elected by a corporations shareholders to over the
management of the company

Strategic alliance: An agreement between two or more individuals to achieve a common goal
Stock split To attract the potential investors changing the shareholders equity announcing two
or one split of common stock to reduce the face value of the share (pare value)
Securitization: The process of aggregating similar investment such as loan mortgage into
negotiable securities,
SENSEX: An index composed of 30 largest and most actively trading stock companies in BSE,
NSE
Cost of capital: Minimum acceptable rate of return that a firm must earn on its investments for
the market value.
Short selling: Trader sells the shares with a small profit a short period by gaining limited
returns in a short period.
ABC analysis: Statistical tool used over inventory that a firm should not excuse some degree of
control over its items which are most costly as compared to less costly items.
EOQ: (economic order quantity)
Refers to the order size that will result in the lowest total of orders and carrying of an item of an
inventory.
Leverage: Meeting a fixed cost or paying a fixed return for employing resources or funds,
Describe the firms ability to use fixed cost assets or funds to magnify the returns to its owners.
Operating leverage: Defined as tendency of operating profit to vary disproportionately with
sales
High operating leverage fixed cost more than the variable cost
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Degree of operating leverage: % of change in EBIT/ %change in sales

EBIT: earning before interest and tax, Contribution: sales variable cost
Financial leverage: Defines as tendency of the residual income to vary disproportionately with
operating profit
Degree of financial leverage: %change in EPS/ %change in EBIT
EPS: earnings per share, PBT: profit before tax
Combination of operating and financial leverage: %Change in EPS/ % change in sales
Discounted cash flow technique: time value of money concept NPV, IRR, PI
Bankruptcy: becoming insolvent
IRR: Is that the rate of which the sum of discounted cash inflow equals the sum of discounted
cash outflow. Where NPV is 0
Shareholder: one who owns share of stock in a corporate or mutual funds
Liquidate: To convert into cash (or) to sell all of a company assets pay outstanding debts and
distribute the remaining to shareholders and then go out of business.
Savings account: A deposit account at a bank or savings and loan which pays interest but
cannot be withdrawn by check writing
Transaction: An agreement between a buyer and a seller to exchange an asset for payment
Credit: the borrowing capacity of an individual or company
Accounts payable: Money which is owned to vendors for products and services purchased on
credit
Accounts receivables: Money which is owned to a company by a customer for products and
services provided on credit.
Broker: An individual or firm acting as intermediary between a buyer and seller, usually
charging a commission.
Dual trading: The practice by a broker of acting as an agent and simultaneously acting as a
dealer (buying and selling of ones own account)
Loan-value ratio: The amount borrowed dividend by the appraised value of the collateral
(securities) in %
Common-stock ratio: A companys common stock divided by its total capitalization
Tax: A fee charged (levied) by a government on a product, income or activity
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If tax is levied directly a personal or corporation income its 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 corporations 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
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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 firms ability to pay debts as they mature
Solvency: refers to the firms ability to meet eventually all its long-term and short-term debt
Accounting system: A source of financial information of a firm should know the financial
implications of its operations
Treasurer: auditing cost control
Controller: planning and budgeting, inventory management, accounting
Finance: Is the conversion of accumulated funds to productive use

Finance aptly been called as science of money
Finance functions:
1. Investment decision
2. Dividend decision
3. Liquidity decision
4. Financing decision
Scope: finance, production and marketing
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Finance management: Is that managerial activity which is concerned with the planning and
controlling of the firms financial resources
Forfeiture of shares: when a shareholder fails to pay calls
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
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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
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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:
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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
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Profit & loss in the operations of the business during the accounting period
Cost accounting:
To analyze the expenditure
To ascertain the cost of various products manufacture by the company
Management accounting: To assist the management in taking rational policy decisions
Financial statements: It contains summarized information of the firms financial affairs
organized systematically
Financial statements are prepared from the accounting records maintained by the firm
Generally accepted accounting principles (GAAP) and procedures are followed to prepare those
statements
It presents firms financial situation to users
Preparation for the purpose of external reporting to owners investors and creditors
Objective: 1) For decision making To provide reliable financial information about economic
resources and obligations of business enterprise.2) For estimating the earnings potential of the
enterprise
Types of financial statements:
Income statement (P & L a/c):
Periodic statement FPO (for the period of)
It presents the summary of revenues, expenses and net income or net loss of a firm
Measure the firms profitability; it is a scoreboard for a period of time
Operating expenses:Office salary, wages, insurance, rent, rates, taxes, stationary, printing, post
office, repairs
Selling expenses:Sales man salary, traveling exp, advertising, discount paid, bad debts,
commission for sales
Distribution expenses:Sales traveling, wear housing rent, insurance
Financial expenses:Bank charges, bank commission, and bank overdraft interest, interest on
capital
Non-debiting expenses in P & L account:Drawings, income tax, life insurance
P & L account credit items:Interest received, discount received, rent received, and collection
of bad debts
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Balance sheet: Pointed statement

Portrays an exact picture of the financial position of the enterprise
About economic resources and obligations of a business entity and about it owners as a specific
date, it is a measure of the firms liquidity and solvency
What is business owns (assets) and owes (liability) the difference is capital or owners equity all
its contain in balance sheet
Uses: communicating to the users, for raising further capital
Statement of retained earnings:
It means the accumulated excess of earnings over losses and dividends the balance shown by the
income statement is transferred to the valance sheet through this statement after making
necessary appropriations
Statement of changes in financial position: (cash flow statement)
It is essential to identify the movement of working capital or cash in and out of the
business
Changes in the firms working capital
Changes in the firms cash position
Changes in the firms total financial position Income:
Increase in the net worth of the business arising out of business operations Cost of
goods sold:
Opening stock + purchases + direct expenses closing stock
Assets = liabilities + share holders equity
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:
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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 doesnt pay the bill amount to bank)
Owners equity: equal to net worth
Subsidiary books:
Special books:
Sales book purchase book
Returns book sales, purchases
Bills book payable receivables
Cashbook : General books: Opening entries adjusting and closing post entries, correcting
entries :
Personal accounts: Proprietors, suppliers, creditors
Artificial persons limited company a/c, insurance company a/c, government company a/c
Representative persons common title, salaries outstanding, rent prepaid
Real accounts: Tangible land, buildings, machinery
Intangible goodwill, patents, intellectual properties,
Nominal accounts:
Salaries, rent, commission, discount, insurance
Debit
credit
Personal accounts:
Is the receiver
Is the giver
Real accounts:
what comes in
what goes out
Nominal accounts:
all losses and exp
all gains
Ledger: is a set of accounts, ledger is the important book of the double entry 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
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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
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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
Over draft: The borrower is allowed to withdraw funds in excess of the balance in his current
account
Up to a certain specified limit during a stipulated period, interest charged on daily basis operates
the account through cheques
Cash credit: Borrower is allowed to withdraw funds from the bank up to the sanctioned credit
limit
Funds flow statement: (statement of sources and uses of funds)
The statement of changes in financial position prepared to determine only the sources and
application (or uses) of working capital between the dates of two balance sheets
Banks and financial institutions required it when a company approaches them for loans
1. Increase in assets is use of funds
2. Increase in liabilities and net worth (shareholders equity) is source of funds
3. Decrease in assets is source of funds
4. Decrease in liabilities and retained earnings is use of funds
Fund: Its a financial product, change in cash only, Change in working capital, change in
financial resources
Working capital: Fund required to run the day-to-day business activities cannot be
overemphasized
Finance provided to support the short-term assets of the business
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)
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
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Defective credit policy, stock collection period

Higher incident of bad debts, managerial inefficiency
Inadequate working capital:
Difficult to implement operating plan, operating inefficiency, Fixed assets are not efficiently
utilized, losses its reputation
Working capital cycle:
Acquiring raw materials resources
Manufacturing the products finished goods
Accounts receivables through sales if credit sales book debts
Use of working capital:
1. Adjusted net loss from operations
2. Purchase of non-current assets
3. Repayment of long-term debt
4. Redemption of redeemable preferred shares
5. Payment of cash dividend
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:
i.
Vertical analysis
ii.
Take sales as 100
iii.
Take total assets and total liabilities as 100
iv.
Trend analysis: (time series analysis)
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The direction of changes over a period of years . Applicable to the items of P & L a/c
Trends of sales and net income
Ratio analysis:
The relationship between two or more things.Benchmark for evaluating the financial position
and performance of a firm
To make large quantitative of financial data and to make qualitative judgment about the firms
financial performance
Standards of comparison:
Past ratios from the past reports, project ratios, competition ratios
Industry ratios ratios of the industry to which the firms belongs
Uses of ratio analysis:
I.
The ability of the firm to meet its current obligations
II.
Long-term solvency by borrowing funds
III.
The efficiency utilizing assets in generating sales revenue
IV.
Overall operating efficiency and performance of the firm
V.
Financial ratios as predicators of failure
Types: Liquidity, leverage, activity, and profitability
Liquidity ratios:
I.
Essential for a firm to be able to meet its obligations as they become due
II.
Measure the ability of the firm to meet its current obligations
III.
Firm should not suffer from lack of liquidity will result in a poor credit worthiness
IV.
Loss of creditors confident
V.
A very high degree of liquidity is also bad idle assets earn nothing
Current ratio: current assets/ current liabilities
1) Standard is 2 to 1 (or) 2:1
2) For measuring short-term solvency
3) It represents a margin of safety for creditors
Quick ratio: current assets inventories/ current liabilities
Standard is 1 to 1 (or) 1:1
Converted into cash without any loss of value
Cash is the most liquid asset
Inventories less liquidity fluctuate
Cash ratio: cash + marketable securities/ current liabilities
Internal measure: current assets inventory/ average daily operating expenses
Total operating expenses/360 . A firms ability to meet its regular cash expenses is internal
measure
Operating exp: Expenses + cost of goods sold + selling & administrative expenses + general
expenses depreciation
Net working capital (NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
Leverage ratios:
For bankers - firms current debt paying ability
For firms long-term financial strength
The firm has a legal obligation to pay interest to debt holders irrespective of the profit made or
loss incurred by the firm
Total debt ratio: Total debt/ total debt + net worth (or) TD/ NA
TD: Total debt, NA: Net assets
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For long term solvency of a firm

Capital employed = net assets (or) Shareholders equity + long term debt
Net worth = Shareholders equity
Debt equity ratio: External equity/ internal equity or TD/NW (net wroth)
A high ratio shows that claims of creditors are greater than those of 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
Debtors turnover ratio: credit sales/ average debtors (or) sales/ debtors
Average debtors: opening balance + closing balance/ 2
Collection period: 360/ debtors turnover
Average collection period measures the quality of debtors speed of their 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
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Net profit margin: Profit after tax (PAT)/ sales

It indicates management efficiency in manufacturing and administrative and selling the products
(or) EBIT (1 T)/ sales T: tax
Operating expenses ratio: operating expenses/ sales
For changes in the profit margin (EBIT)
A higher operating expenses ratio is unfavorable
Cost of goods sold ratio (CGS): CGS/ sales
Return on investment (ROI):
Return on total assets: EBIT (1 T)/ TA (or) EBIT/ TA
Return on net assets: EBIT (1 T)/ NA (or) EBIT/ NA
Return on equity (ROE): PAT/ NW
Earnings per share (EPS): PAT/ number of common shares outstanding
Dividend per share (DPS): earnings paid to shareholders/ no. Of ordinary shares out
Dividend payout ratio: DPS/ EPS
Dividend yield ratio: DPS/ market value of the share
Price earning ratio P/E ratio: market value of the shares/ EPS
Market value of book value: Market value/ book value
Other ratios:
Fixed assets ratio: Fixed assets/ long-term funds
Standard 0.67
This ratio should not be more than 1.
If less than 1 it shows that a part of the working capital has been financed through long-term
funds
Proprietary ratio: shareholders funds/ total tangible assets
Standard 0.05
Importance to creditors
High proprietary ratio will indicates relatively little danger to the creditors
Wasting assets;
Oil wells (lease) coal mines
Pre incorporation profit are transferred to capital reserve
Section 210 to 220 of the companies act 1956 legal position relating to the final accounts of joint
stock company
Section 210 preparation and presentation of final accounts
Section 211 balance sheet and P & L a/c
Profit and loss appropriation a/c
To transfer for reserves
By last years balance b/d
To income tax for previous year
By net profit for the year b/d
Not provided for
To interim dividend
By amount withdraw from general reserve or any other
To proposed dividend
By provision such as income tax
To surplus carried to B/S
By provision no longer required
Divisible profits: Dividend to shareholders
Transfer to reserve: Not exceed 10% of the PAT should not less than 2.5%
Interest on dividend: 23%
Creditors:
Are those persons who have already advanced some money or moneys worth to the business
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Conflicts of accounting principles:

Valuation of stock: some years market value
Some years cost, because of principle of conservatism
But the principle of consistency will controversy
Feasibility: Assets are recorded at cost less depreciation
Petty cash book:
Small amounts and high frequency Ex: payment of stationary, postage, telegrams, and carriage
Errors not disclosed by Trail Balance:
Omission in recording the transaction in the books of original entry debit and credit side both
Wrong recording in the original books
Posting to wrong account with correct amount and no correct side
Compensatory error: Forgetting to post
Error of principle
Errors disclosed by trail balance:
Error in casting of subsidiary books (make total)
Error in carrying forward the one page to another page
Error in posting to ledger
Error in balancing the amount
Preparation of debtors and creditors schedule
How to find out the errors:
Divide the difference by 2 and find out the equal figure appear in the trail 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:
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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
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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
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Payment side of the cashbook is undercast by 200 in case of favorable balance add to the
passbook
In case of un favorable balance reduce from the passbook
A cheque for Rs 100 paid to a party entered error in the cashbook the passbook balance is more
by 100
Sa cheque for 600 draws no 1 a/c wrongly charged by the bank to no 2 a/c
No 1 a/c pass book balance increase 600 reduce the pass book balance no 2
Manufacturing account:
It shows the expenditure in an activity or product it will transfer to trading account
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WELCOME TO THE FINANCE WORLD

a. personal a/c : Debit is the receiver and Credit is the giver

: Debit what comes in credit what goes out

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

53. Meaning of Company: A company is an association of many persons who contribute

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

2. Wealth maximization: Wealth maximization means the objective of a firm should be to

It offers long-term and medium term loans including foreign

113.International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

Average Equity Shareholders Funds

profits available for Equity shareholders

Dividend per share

Total Long-term Debt

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

cost of goods sold

Dividend per Equity Share

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

Earning per Equity share

The term capital employed has been given different meanings

Net Profit after Interest and Tax

Net profit before interest and tax

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

1) American Depository Receipt ADR: A negotiable certificate issued by a U.S. bank

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

its no. of members and prohibits to publish the prospectus

5 members in the case of a public company.

price with in a specified time period.

debenture or bonds of several companies.

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

6) What is exact difference b/w Accounts and finance?

purchases shares of foreign companies and deposits it on the account.

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

1. What are the exemptions from salary?

Audit Related Questions

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

American Stock Exchange

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

It is described as being accompanied by widespread pessimism. Investors

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

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

public, quasi-private banking system composed of (1) the presidentially-appointed Board of

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

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

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Annual report: : A corporation's annual statement of financial operations. Annual reports

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

Also known as Return on Net worth (RONW).

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Embedded value is a conservative valuation method, as it excludes certain aspects of goodwill

trading costs, sales taxes, service charges and so on.

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in

G.Krishna Assoc.Prof. -ICBM-SBE krishna@icbm.ac.in