basics of accountancy

1. Finance: it is the activity of management of money, and also it is related to inflow and out flow of funds.

2. Financial management; it is the process of planning and controlling of firms financial resources. Financial management is an administrative area or set of administrative functions relating to management of cash and credit and finance of the firm.

3. Objectives of financial management;

4. Profit maximization; it is the process of the actions that increases profit should be adopted and the actions which decreases profit should be avoided. Simply it is the maximizing of rupee income of the firm.

5. Wealth maximization; it means maximizing the NPV of the course of the action. Net present value is the difference between gross present value of benefits of the action and the amount of the investment require to achieve those benefits.

6. Functions of finance;
7. Investment decision: it relates to proper expenditure on current and fixed assets. It mainly involves in use of funds for purchasing various assets like plant, machinery, equipment, material etc..

I. Capital budgeting; efficient employment of current funds in the fixed assets to get there turn by using fixed assets for a forcible future. Capital budgeting process involves in the planning the availability of funds and controlling allocation of expenditure of long term investment funds.

ii. Risk and uncertainty; the second element of capital budgeting decisions is analysis of risk and uncertainty the benefits from the investment proposal is extend into the future, their accrual is uncertain.


8. Cost; companies can raise capital from different sources each source has a cost. Cost of capital; the minimum required rate of return expected by the investor from his investment. It is also known as the cut-off, hurdle, minimum required rate.
i. Process of capital budgeting; project generation—project evaluation—project selection-project execution.

b. Evaluation methods or techniques;

i. payback period; number of years require to recover the investment. It is calculated by dividing the original investment |annual cash flows. Fewer years acceptable.


ii. Accounting rate of return; it is calculated by dividing the average income after tax avg investment. Avg investment is equal to original investment plus salvage value. High ARR is acceptable and low ARR is avoidable.


iii. NPV: It is the difference between present value of cash out flows and present value of cash inflows. Present value of cash inflows exceeds present value of cash out flows or zero. Positive NPV is acceptable and negative NPV is rejectable.
c. Profitability index; it is the modification of NPV. According to this present value of earnings of one project cannot be compare with the present value of earnings of another project unless the investments of the projects are same size. It is calculated by dividing the present value of cash inflows |initial cash out lay.
i. Internal rate of return (IRR); it is the discount rate which equates the present value of cash inflows with the cost of the project. Here NPV is zero. this is method is also called tield method.

d. Salvage value; value of the plant or equipment after usage life.


9. RISK; a deviation from the expected return.

10. Future cost ; future cost of capital refers to the expected cost of funds to be raised to finance of a project

a. Historical cost; represents in the cost incurred in the past in acquiring funds.

11. Component cost; cost of each component of fund is designated as component cost or specific cost.
components are debentures, equity’s, preference shares ,etc.


12. Combined cost of capital; when component costs combined to determine the overall cost of capital it is called as combined cost of capital.


13. Explicit cost; explicit cost of capital is the IRR of a cash flow a financing opportunity.

14. Implicit cost of capital; opportunity cost is technically termed as implicit cost. It is the rate of return another investments available to the firm or share holders.

15. Measurement cost of capital;


16. Cost of debt; it is equal to the interest rate on debt. The percentage of amount payable on debt at the end of year. It is calculated by dividing the interest and principal.


17. Cost of preference; dividend paid to preference share holders is called as preference cost of capital. It is calculated by dividing the preferred dividend and value of preference shares.


18. Cost of retained earnings; it is the return which the equity share holders expect. It is equal to the opportunity cost.


19. Cost of equity; it is the ratio of current earnings per share to the market price per share. In other words it is the P\E ratio.


20. Weighted average cost of capital; the cost of each component of capital is divided by the relative proportion of that type of funds in the capital structure it is called as weighted average cost of capital. It is the average of cost of each component or source of funds employed by the firm.


21. WORKING CAPITAL; it is concerned with mgmt of the current assets. Minimum, level of current assets maintained by the firm to meet its on going needs. Or current needs.


22. Gross working capital; it is the sum of current assets.


23. Net working capital; it is the difference between current assets and current liabilities.


24. Determinants of working capital; nature of business, production cycle, business cycle, credit policy, dividend policy,


25. Solvency; it is the firms continuous ability to meet its maturing obligations.


26. INVENTORY MGMT; inventory means raw material, work in progress, finished goods and stores and spares.


a. It means maintain the optimum level of inventory for the effective running of business.
b. ABC analysis; A is the largest investment, B is the medium investment and C is the small investment.


27. E.O.Q; economic order quantity
28. Ordering cost; it is the cost involved in placing of an order and securing the results, it depends on number of orders placed and no; of items ordered at a time.


29. Carrying cost; this is the cost involved in holding of inventory known as possession cost.


30. Depletion cost ; this is the cost involved in failing to meet the demand. It is also known as shortage cost.


31. AVG stock =max level+min level \ 2


32. Danger level ; it is the level slightly led than the minimum level when stock reaches danger level the store keeper make special efforts to get fresh supplies.
33. Minimum level or buffer or safety stock; this is the level below which the stock of an item should not fall.


34. Maximum level; this is the level beyond which should not be maintained.


35. Cash; it is the term which covers coins ,currency, cheques held by the firm and balance in bank account.


36. Cash mgmt; it is also one area of working capital mgmt. it considers the liquidity and profitability. The mgmt maintains adequate cash balance and not excess amount.


37. Motives for holding cash;

38. transaction motive; it refers to the holding of cash to meet routine requirements of \the firm.


39. Precautionary motive; need to hold the cash for the purpose of to meet the un predictable obligations and abnormal requirements.


40. Speculative motive; it refers to the holding the cash for investing in profit making opportunities’ as and when they arise.


41. Cash budget; it is the comparison of estimated cash income and cash disbursement over a specified period of time.


42. Cash receivable; it is the debt owed to the firm by its customers arising from sale of good or service in the ordinary course of business.


43. Credit policy; it is refers to those decision variables that influence the amount of trade credit the investment in receivables.


44. Optimum credit policy; it is the tradeoff between liquidity and profitability.


45. Financing decision. It is concerned with the determination of the optimum financing mix. It is the combination of capital structure and cost of capital.


a. Capital structure; it determines the relation between various long term forms of financing such as debenture, long term debt, preference, equity, and including retained earnings.


46. Cost of capital; it is the total cost of obtaining keeping the long term cap[ital, debenture, long term debt, preference, equity,


47. FINANCIAL REQUIREMENTS :


i. LONG TERM FINANCE; it is raised for the purpose of meeting the fixed capital requirements of the business. These are two types
ii. External source; owner or share capital, debt or borrowed capital.
b. owners or share capital; l the firm raised capital by selling the shares to public it is called share capital. The buyers of shares are called shareholders and legal owners of the company.


c. Equity shares; the shares which doesn’t enjoy preferential rights but enjoys owner ship rights is called equity shares. Dividend to equity holders after the pref holders. It is also known as the common shares.
i. Classification of equity shares:
48. Blue chip shares : shares of well known and established companies called are called blue chip. It must show consistent growth over the years.
49. Defensive shares, these shares tend to fall less in a bear market when compared with other shares.
50. Growth shares; growth shares represents the shares of fast growing companies.
51. Active shares ; active shares those in which there are frequent and day to day dealings. These shares must be bought and sold at least three times a week.
52. Alpha shares; alpha shares are those which are most frequently traded in the market. These are also
called as specified or cleared shares.
53. Sweat equity; these shares refer to those shares which are issued to employees and workers who contributes for the development of company.
a. Pref shares ; the shares which enjoys the preferential rights as to dividend and repayment of capital in the time of winding is called pref shares
54. Debentures; debenture is an debt instrument in writing given by a company acknowledging the liability for the total amount received.
a. Bearer debenture; these type of debentures transferable by simple delivery and anyone who possess them is entitled to interest.
b. Registered debts; this type of debts transfer will take only on execution of a transfer deed. Interest payable to the person whose name is registered with the company.
c. Mortgage debts; mortgage debentures are secured by a charge on the assets of a firm. It has the pref at the time of liquidation.
d. Naked or simple debts; un secured debts are called simple debts.
e. Redeemable debts; some debts are to be repaid after the expiry of a specified period these are
called redeemable’
f. Ir-redeemable4 debts ; some debts are not repayable these are called is -redeemable debts.
g. Convertible debts ; some debts are possible to convert into equity shares these are called
convertible.
55. Time value of money; it means that the worth of the rupee received today is different from the rupee
received tomorrow. Or in the future.
56. Optimum capital structure; it is optimum when the firm has a combination of equity and debt so that the wealth of the firm is maximum.
57. Break even point; it is the level at which at firms EBIT is just sufficient to cover interest and pref dividend.
58. Treasury management; it is defined as the efficient management of liquidity and financial risk in business.
59. Marketable securities; surplus cash can be invested in short term investments in order to earn interest.
60. Share premium; the issue price of shares over their face value.
61. Accumulated depreciation; the total to date of the periodic depreciation charges on depreciable assets.
62. Marginal cost; it is the additional cost involved in additional unit production of a product. It is also called
as variable cost.
63. Absorption costing; the cost which includes appropriate share of both variable and fixed cost.
64. Appropriation; it is the application of profit towards reserves and dividends,
65. Charge ; it is an obligation to secure an indebtness.
66. Cash dividend; the payment of dividend in cash.
67. Capitalization; it is the sum of par value of stocks and bonds outstanding.
68. Over capitalization; when a business is unable to earn fair rate on its out standing securities.
69. Under capitalization; when a business is able to earn fair rate or over rate on its outstanding securities.
70. Capital gearing; it refers to the relationship between equity and long term debt.
71. Budgeting; it is the detailed pre plan of operations for some specific period in future. It is the pre plan of revenues and expenses .and action In futures.
72. Budgetary control; it is the system of management control and accounting in which all operations are forecasted and for as possible planned a head and the actual results compare with the for casted and planned ones.
73. Cash budget; it is a summary statement of firms expected cash inflow and out flow over a specified time periods.
74. Master budget; a summery of budget schedules in capsule from made for the purpose of presenting one report highlights of the budget forecast.
75. Fixed budget; it is budget which is designed to remain unchanged irrespective of the level of activity actually attained.
76.
77. Opportunity cost; the cost associated without doing something.
78. Bankrupt; a statement in which a firm is unable to meets its obligations and hence it is assets the surrendered to the court for administration.
79. Annual report; a report issued by company annually to its share holders it contains financial statements, P&L account , balance sheet.
80. Financial analysis; it is the process of interpreting the past, present and future financial condition of a
company.
81. Credit risk; it refers to the probability that a borrower could default on a commitment to repay the bond loans.
82. Inflation risk; it reflects the changes in the purchasing power of cash flows resulting from the fixed security.
83. Liquid risk;
it is also called market risk it refers to the ease with which bonds could be traded in the
market.
84. Market capitalization; it means number of shares issued multiplied with market price per share.
85. Meaning of load; it is the factor that is applied to the NAV of scheme to arrive at the price.
86. Hedging; it means minimizes the risk.
87. Standard cost; it is the system under which cost of the product is determined in advance on certain predetermined standards.
88. Cost; the amount of expenditure incurred on a given thing.
89. Cost centre; it is the location of person or item of equipment for which cost may be ascertained and used for the purpose of cost control.
90. Profit centre; a centre whose performance is measured in terms of both the expense incurs and revenue it earns.
91. Cost accounting; it is concerned with recording, classifying, summarizing, costs for determination of cost of products or services planning , controlling, and reducing such costs and furnishing the information the management for decision making.
92. Elements of costing; 1 lobour,2 material, 3.expense, 4 overheads.
93. Prime costs; it consists of direct labour, direct material, direct expenses. It is also known as basic or flat cost,
94. Factory cost; it comprises prime cost , in additional factory overheads which include all indirect material, labour, expenses, incurred in factory.
95. Cost of production; office and administration expenses are added to factory cost , office cost is arrived at.
96. Total cost; selling and distribution expenses are added to total cost of production tom get the total cost, or cost of sales.
97. Cost unit; a unit of quantity of product , service or time in relation to which cost may be ascertained to expressed.
98. Methods of costing; 1. Job costing, 2. Contract, 3.process, 4.batchcosting.
99. Techniques of costing; 1,marginal, 2,direct, 3. Absorption, 4. Uniform.
Contingency; a condition or situation the ultimate out come of which gain or loss will be known as determined on as the occurrence or non occurrence or one or more un certain events.
Deficiency; the excess of liability over assets of an enterprise at a given date is called deficiency.
Deficit; the debit balance of the P&L account is called deficit.
Surplus; credit balance of the P&L account after providing for dividend reserves and appropriation is called surplus.
Difference between funds flow statement and cash flow statement; a cash flow statement is concerned only
with the change in the cash position , while funds flow analysis is concerned with the change in working
capital position between two balance sheets.
Funds flow statement and income statement; funds flow statement matches funds raised and funds
applied. during a particular period. Income statement discloses the result of the business at the end of the
period.



Meaning of ratio; ratios are expressed in mathematical terms between figures which are connected with each
other in same manner. Ratio shows the relationship between two mathematical expressions or variables.
Ratio analysis; it is the study of relationship among the various financial factors in business, it measures
the probability. Efficiency , and financial soundness of a business.
Classification of ratios;
Liquidity ratio ; these are concern with short term solvency of the firm or its ability to meet financial
obligations on their due dates.
• Leverage ratio; it is concerned with the stake of the owners in the business in relation to out side
borrowings or long term solvency.
Activity ratios; these are the ratios which shows the relationship between sales and assets.
Profitability ratios; these are concerned with the profitability of the firm.
. Current ratio=current assets \ current liabilities . 2:1.
. Quick ratio;= current assets – stock and preliminary exp \ current liabilities. 1:1.
. Absolute liquid ratio;= cash + marketable securities \ quick liabilities. 5:1.
. Stock to working ratio= closing stock *100 \ working capital. 75to100%.
. Proprietary to net worth ratio; proprietor or share holders fund \ total assets less fictitious assets.
1:3.
. Debt equity ratio;= outsiders funds \ proprietary funds.
. Net worth debt ratio= net worth \ debt.
. Capital gearing= equity= reserves & surplus \ pref = long term debts.
. Fixed to current assets= fixed assets \ current assets.
. Fixed to net worth= fixed assets(after depreciation) \ net worth.
. Debt ratio= total liabilities \ total assets.
. Equity ratio= equity= reserves &surplus-fictitious assets \ net worth= debentures.
. Pref capital ratio= pref capital \ net worth= debts.
. Debentures ratio= debentures \ net worth= debentures.
. Solvency ratio= total liabilities \ total assets.
. Fixed assets ratio= fixed assets \ longterm funds.
. Gross profit ratio.= gross profit \ sales.
. Net profit ratio= net profit \ sales.
. Operating profit= operating profit \ sales.
. Interest coverage ratio= EBIT \ fixed interest charges.
. Dividend payout ratio; dividend per share \ earnings per share.
. Dividend yield ratio= dividend per share \ market price per share.
. Earnings per share= PAT \ no; of equity shares.
. Price earnings ratio= market price per share \ earnings per share,
. Earning yield ratio= EPS \ MPS.
. Capital turnover = sales or cost of goods sold \ net capital employed.
. Working capital turnover = sales \ net working capitals.
. Return on investment= EBIT \ total long term fund employed.
. Return on equity= PAT- pref dividend \ equity+reserves-fictitious assets.
. Return on capital= operating profit after tax but before interest \ net capital employed.



Funds flow analysis


Funds flow analysis; it is designed to highlight changes in financial condition of a business concern between two points of
time. It is the report which summarizes the events taking place between the two accounting periods . it enables management
,share holders, investors, creditors, and other interested in the interested in the interested.
Funds flow statement
sources of funds application of funds
Issue of shares, redemption of redeemable pref shares
issue of debentures, redemption of debentures
long term borrowings, payment of other long term loans
sale of fixed assets, purchase of fixed assets
operating profit payments of dividends, taxes, etc
decrease in working capital increase in working capital
Current assets; stock in trade or inventory, debtors, payments in advance or prepaid expenses, stores, bills receivable,
cash at bank, cash in hand, work in progress.
Current liabilities; trade creditors, accrued or outstanding expenses, , bills payable, income tax payable, dividends declared,
bank over draft.
CURRENT ASSETS CURRENT LIABILITIES
Calculation of funds from operations.
. stock in trade or
inventory, debtors,
. payments in advance or
prepaid expenses,
. stores, bills receivable,
. cash at bank, cash in
hand,
. work in progress.
. trade creditors,
. accrued or out standing
expenses, ,
. bills payable,
. income tax payable,
. dividends declared,
. bank over draft.
calculation of funds from operations.
NET PROFIT
Add; non operating expenses
Depreciation
Loss on sale of machine
Goodwill or preliminary expenses, written off.
Provision for tax proposed dividend.
Loss on sale of fixed asset.
Less; non operating income such as dividend received or accrued rent.
Profit on sale of land or fixed asset.
Profit on re valuation of fixed assets.


FUNDS FROM OPERATIONS
Ageing schedule; in a aging schedule the receivables’ are classified according to their age.
Bridge finance; it refers to the loans taken by the company normally from commercial banks for short term
pending disbursement of loans sanctioned by the financial institutions.

Net income approach; according to this approach the capital structure decision is relevant to the valuation of
firm . in other words a change in the capital structure (financial leverage) will lead to a corresponding change in
the overall cost of capital as well as total value of the firm.

Net operating income approach; it is assumed that the cost of equity increases linearly with leverage. as a result
the weighted average cost of capital remains constant and the total value of the firm also remains constant as
leverage is changed.

International finance; it is the branch of international economics that studies the dynamics of exchange rates,
foreign investment, and how these affect the international trade. It also studies international projects ,
international investments and capital flows and trade deficits. It includes study of futures options and currency
swaps.
Investment banking; it is the particular form of banking which finances capital requirements of an enterprises. It
performs IPO’s , private placement and bond offerings , acts as broker and carries through mergers and
acquisitions. It don’t accepts deposits and grant loans like a commercial banks. Small firms providing services of
investment banking is called boutiques.

Patents; it is the right to exclude others from making, using, offering, for sale or selling the invention thought
out the country or abroad.
Copy rights; it is 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. It is the
permission to publish copy right material.
Trade mark; a grant made by a government that confers upon the creator of an invention the sole right to make ,
use, and sell, that invention for a set period of time.
i. Financial concepts; 1.financial assets, 2.financial intermediaries, 3.financial markets,
4.financial instruments.
FINACIAL ASSETS
FINANCIAL
INSTRUMENTS INTERMEDIARIES
FINANCIAL MARKETS
Financial assets; the assets which are used for production or consumption or for further creation of assets. Is
called financial assets.
b. Marketable assets; the assets which can be easily transferred from one person to another person
without much hindrance. Ex; shares, govt securities, bonds of public sector. mutual funds, bearer
debts and uti units.
c. Non- marketable assets; the assets which cannot be easily transferred from one person to
another person is called Non- marketable assets. Ex; bank deposits, p,f, lic schemes,
100. financial intermediaries; the organizations which intermediate and facilitate financial transactions of both
individual and corporate customers is called intermediaries.
a. Capital market intermediaries; the intermediaries who provide long term funds to both individual
and corporate customers is called Capital market intermediaries.
101. money market intermediaries; the intermediaries who provide short term funds to both individual and
corporate customers is called money market intermediaries.
102. Capital markets;
a. Primary markets; the capital market which allows the new issues or new financial claims is called
as primary market. Or new issue market. It deals only public issues to public first time.
103. Public issue; it is the method of offering a new fixed number of shares at a stated price to the general
public and institutions through prospects is called public issue.
104. Rights issue; it id the issue method offered by a company to the existing share holders in a particular
proportion to their owner ship.
105. Private placement; it is the way of selling securities privately to a small group of investors is called pvt
placement.
106. Issue house; he is the stock broker purchase securities at a negotiated price and re sell at a higher
price.
107. Secondary market; it is a market for secondary sale of securities. The market which allows the regular
buying and selling of securities which already issued in primary market is called secondary market. 23
regional stock exchanges and two national stock exchanges. those are N.S.E and O.T.C.E.I.
108. Listing ; the securities are admitted for trading on a recognized stock exchange.
109. Group A shares; these shares represents large and well established companies having a broad investor
base.
110. Group B1 shares; shares can be moved from A 2 B and vice versa, these r two types B&b1, B1 shares are
the well traded scrips and they have weekly settlement.
111. Group C securities ; only odd lots and permitted securities . a number of shares that less than the market
lot is called the odd lot.
112. Mort gages market;
it is the market which supply mortgage loan mainly to individual customers. It is the
loan against the security of immovable property like real estate.
113. Money market; it is the market which deals the providing of short term loans with a maturity period of
upto one year it is purely for short term funds.
a.
Call money market; it is only extremely for short period loans with maturity of one day to fourteen
days.
b.
Treasury bills market; it is the promissory note or finance bill issued by the government with
short term maturity. Re payment is guaranteed BY THE GOVT.
114. MMMF( Money Market Mutual Funds)
:
It is the open ended Mutual Funds it deals with only short term
debt instruments. they mobilize savings from small investors and invest in short term instruments like
treasury bills , CD’s commercial papers etc.
115. Commercial papers; it is the bill of exchange ,in the case of credit ales the seller may draw a bill of
exchange on the buyer.
116. FOREIGN EXCHANGE MARKET;
it is the process of converting home currencies into foreign currencies
vice-versa.
117. REPO’s ;it is the transaction in which two parties agree to sell and re purchase the same security is
known as ready forward contract, or repo or buy back deal.
118. Repo;
it stands for re-purchase . a participant acquire immediate funds by selling securities and
simultaneously agrees to the re –purchase of the same or similar security after a specified period of time
at a specified price.
119. Reverse repo;
it stands for reverse re purchase. In this transaction a party buy a security from another
party with a commitment to sell it back at a specified time ,at specified price.
120. Broker
;
he is the commission agent who transacts in the business in securities on behalf of his clients,
who are non members of recognized stock exchange. He is the intermediary between buyer and seller.
121. Jobbers;
he is the professional independent broker who deals in securities on his own behalf. He
purchase and sells securities on his own ,to earn margin.
122. Taraniwala; he is the active member in the Bombay stock exchange. He is very similar to jobber,
123. Open order;
it is an order to buy or sell without fixing any time limit or price limit on the execution of the
order.
124. Stop loss order;
it is an order to sell as soon as the price falls upto particular level or to buy when the
prices rises upto a specified level.
125. Badla and short selling
;
badla it is the transaction it facilitates the short selling. Short sellers are those
who sell shares without owning them. It creates scope for investment.
126. Speculator; the person in the market who is intention to gain by betting on the prices of stocks;
127. Bulls\ tejiwalas;
these are the brokers of stock exchange who are optimistic of the rise in the price of
securities.
128. Bears\mandiwalas; these are the brokers of stock exchange who are always pessimistic and they except
fall in the prices of securities.
129. Arbitragers; these are the brokers in market who buy securities in one market and sells in another
market to take advantage from the price differences of same scrip.
130. Price rigging ; enhances the price of the share by market participants illegally is called price rigging.
131. Buy back of shares;
companies buy back their own shares in order to arresting heavy fluctuations in the
prices of shares and adjusting the demand and supply of the shares.
132. Depository; it is the location or centre of keeping securities of the share holders in a electronic form.
Through the de materialization.
133. De materialization; it is the process of converting the physical form of securities into de materialized
form.
134. Re materialization; converting the de mat form into physical form.
135. FINMANCIAL SERVICES; it means mobilizing and allocating, savings into investment. It is also called as
the financial intermediation.
136. Fund based ; underwriting of or investment in shares, debts, bonds. Etc. leasing , hire purchase, venture
capital etc.
137. Non fund based;
this can be also called as fee based activity. Managing capital issues ,pre issue, post
issue etc,
138. Credit card;
it is the card or mechanism which enables the card holders to purchase the goods, travel,
dine in hotel, without making immediate payments.
139. Smart card;
it is the new generation card. It is an electronic purse embedded with micro chip which will
store a monetary value.
140. Debit card;
it is also like a credit card , the debit card holder can present the card to the merchant, sign
sales slip and forget about it. The purchase amount is automatically deducted or debited to the card
holder.
141. A.T.M card;
automatic teller machine it is the card which helps the card holder to withdraw cash from
bank even when they are closed.
142. Credit rating ; credit ratings are the opinions those are exclusively designed for the purpose of grading
bonds according to their investment qualities. Based on the past performance of the firm , it is not a
recommendation to buy or sell.
143. CRISIL credit rating information services of India limited. On jan1 1988,
144. ICRA; investment information and credit rating agency of India ltd. On 16 Jan 1991.
145. CARE; credit analysis and research institute.1993.
146. Duff Phelps credit rating India limited.
147. Factoring ; factoring is a service of financial nature involving the conversion of credit bills into cash. It
covers entire trade debts of the trader. The institution is called factor.
148. Forfeiting; it is the non resource purchase by a bank or any financial institution of receivables arising
from an export of goods and services.
149. Mutual funds; the institution which collects savings from small investors, invest them in govt and other
securities to earn incomes and dividends ,besides capital gains.
150. Close ended funds; in close ended funds the corpus of the fund and its duration is prefixed. Along with
the corpus of the fund the Number of units are also determined in advance.,
151. Open ended funds; these are pure up to close ended funds. Under this scheme the size of the fund or
the period of the fund is not pre determined.
152. Balanced fund ; it is nothing but combination of income –cum –growth fund.
153. Income funds;
the aims of income funds at generating and distributing regular income to the members
on periodical basis. Index funds; the fund manager takes a view on companies that are expected to
perform well and invests companies.
154.
155. Growth funds; growth funds concentrates only on long run gains or capital appreciation.
156. Market risk; there are certain risks associated with every kind of investment on shares is called market
risk.
157. Sponsor; the company which sets the MF is called sponsor.
158. Trustee; trustees are the experience people who are the responsibility of the safe guard of the interest of
investors.
159. Asset mgmt company;
actually it manages the funds of the various schemes. AMC employs a large
number of professionals.
160. NAV; (Net Asset Value)
the nav is nothing but the market price of each unit of a particular scheme to all
the assets of the scheme , it is also called as the intrinsic value. The value of one unit of investment is
called NAV.
161. Fund vs. share; investment on equity share represents invest of a particular company. Investment on an
unit of a fund represents investment in the part of the shares of a large number of companies.
162. custodian; these are the financial intermediaries provide services like safe keeping shares debts and
charges interest . particularly to foreign investors
163. Venture capital; it is the form of equity finance specially designed for funding high risk and high reward
projects. It is equity and equity related investment in a growth oriented ,small and medium business to
enable the investors to accomplish corporate goals.
164. Seed capital financing ; this is an early stage financing ,this stage involves primarily R&D financing
165. Start up finance; capital need to finance the product development initial marketing and establishment of
product facilities.
166. Follow on finance; it is called second finance or later stage finance.
167. Expansion finance; it is used to increase production capacity, and market and product development.
168. Replacement finance; It is later stage finance it is also called money out del. For the purchase of existing
shares from an entrepreneur in order to reduce their holdings in un listed company.
169. Turn around finance; it is provided to sustain the current operations of an enterprise.
170. Exit; it is the last stage to realize the investment so as to make a profit or minimize losses.
171. Mgmt buy outs ; its means existing entrepreneurs transfer the controlling interest to another
entrepreneurs,
172. Mgmt buy ins; Take over the success full track record entrepreneurs in to the business is called
management buy-ins.
173. Financial engineering;
it is the design development and implementation of innovative financial
instruments and the formulation of creative solutions to problems in finance.
174. Merchant banking;
merchant banker is the financial intermediary who helps to transfer capital from
those who possess it and those who need it.
175. Project counseling portfolio mgmt , under writing of shares and debts,
176. Leasing; it is agreement between two parties or two firms one firm acquires a right to make use of
another’s capital asset like machinery or equipment on prescribed fee. The fee is called rental charge.
177. Securitization;
a financial company converts its ill-liquid , non-negotiable and high value financial assets
into small value securities which are made tradable and transferable is called securitization.
178. Lines of credit; it is the arrangement of a financing institution\ bank of one country with another
institution\ bank\agent to support the export of goods services.
179. Global depositor receipts: It is the dollar denominated instrument traded on a stock exchange in Europe
Or USA or both . It represents certain no of underlying equity shares.
180. Gilt funds; It is invest only in securities that are issued by the govt.
181. American depository receipts: This type receipts issued by a company in USA such receipts are to be is
in accordance with the provision stipulated by the securities exchange commence of USA like so in India.
182. Euro issues: It means that the issue is listed on a European stock exchange. The subscription comes
from any part of the world except India.
183. Inter corporate deposits: Company can borrow funds for a short period for example six month or less
from another company is called ICD.
184. Public deposits: It is very important source of short term and medium term finance the companies can
accept PD’s from its members of the public and share holders it has maturity period of six months and two
years.
185. Book building; it is the process where by the company seeks bids from prospective investors for
public offering.
186. IPO; the shares are issued for the first time to the public as opposed to secondary market.
187. GDP; gross domestic product; market value of goods and services produced by the labour, property in a
country, regardless of nationality.
188. GNP; gross national product; it is the total value of gods and services produced by a certain nationality.
189. Privatization; the sale to pvt investors of govt owned equity in nationalized industries or commercial
enterprises. In other words transfer of ownership from govt to pvt corporations.
190. Globalization; it is the tendency of business ,technologies, or philosophies, to spread thought the world
or process of making this happen.
191. Liberalization; liberalization refers to a relaxation of previous govt restrictions , usually in areas of social
or economic policy.
192. Free float market capitalization; it is defined as that proportion of total shares issued by the company
which are readily available for trading in the market.
193. Index ; it is a statistical measure of change in an economy or securities market.
194. ADR; it is the negotiable certificate issued by U.S bank representing a specific number of shares of a
foreign stock traded on a US stock exchange.
DERIVATIVE; DERIVATIVE IS A PRODUCT WHOSE VALUE IS DERIVED FROM THE VALUE ONE OR MORE
BASIC VARIABLES. IN A CONTRACTUAL MANNER.. The underlining asset can be equity , forex, commodity or any other asset.
Products of derivatives;
Forwards; it is the customized contract between two or more entities to buy or sell a particular underlying asset
on a specific date in the future at a pre determined price.
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. These are the special types of forward contracts traded in standardized exchange.
Options; option is the right but not an obligation to buy or sell a given quantity of underlining asset at a given
price on a given date.
Warrants; options generally have lives up to one year, longer dated options are called warrants. And are
generally traded over the counter market.
Leaps; leaps means long term equity anticipation securities, these are also options having a maturity of three
years.
Baskets; these are the options on portfolio of underlying assets. Equity index options are form of basket
options.
Swaps; These are the private agreements between two parties to exchange cash flows in the future according
to a pre arranged formula.
Interest rate swaps; here interest related cash flows between the parties in the same currency.
Currency swaps; here both principal; and interest between parties
.Parties in the derivatives market;
Hedgers; hedgers face risk associated with the price of an asset. They use futures and options markets to
reduce or eliminate risk.
Speculators; speculators wish to bet on future movements in the price of an asset, these two markets can give
them an extra leverage. They can increase both potential gains and potential losses.
Arbitrageurs; these are the people in business to take advantage of a discrepancy between prices in two
different markets.
Participants and functions;
Self clearing member; SCM clears and settles trades executed by him only either on his own account or on
account of his clients.
Trading member clearing member.; TM-CM is a CM who is also a TM he clear and settle his own proprietary
trades and clients trades .
Professional clearing member; PCM is a CM who is not a TM .banks and custodians could become a PCM and
clears a and settles for TMs.
INDEX CONSTRUCTIOPN;
INDEX= CURRENT MARKET CAPITALISATION \ BASE MARKET CAPITALISATION * BASE VALUE.
Current market capitalization; sum of(current market price * outstanding shares) all securities in the index
Base market capitalization; sum of(market price *issue price) of all securities as on base date.
Index funds; an index fund is a fund that tries to replicate the index returns.
Spot price; the price at which an assets trades in the spot market;
Future price; the price at which the futures contract trades in the futures market.
Contract cycle; the period over which a contract trades.
Expiry date; it is the date specified in the future contract . this is the last day on which contract will be traded.
Contract size; the amount of asset that has to be deliver under one contract. The contract size in NSE futures
is 200 nifties.
Basis; it is the difference between future price and spot price. In normal market basis will be positive.
Cost of carry ; the relationship between future price and spot price. His measures the storage cost plus the
interest.
Initial margin; the amount that must be deposited in the margin account at the time of entering in a futures
contract .
Market –to-market; in the futures contract at the end of each trading day the margin account is adjusted to
reflect the investors gain or loss depending upon the futures closing price.
Maintenance margin; this is somewhat lower than initial margin it is set to ensures the balance in the
margin account never becomes negative.
Stock options ; these are the options on individual account
Buyer of an option; the person who pays the option premium to the another person in order to get the righjt but
not an obligation tom exercise his option.
Writer of an option; the person who sell the right to the another person by receiving some money as a
premium.
Call option; it is the right but not an obligation to option holder to buy an asset by a certain date at a certain
price.
Put option; it is the right but not an obligation to option holder to sell an asset by a certain date at a certain
price
Option price \ premium; it is the price which option buyer pays to option seller in order to hold the right.
Put call parity relation; a relation between the price of the put , the price of all the call , the price of the
underlying security , and the present value of the exercise price.
Expiration date; the date specified in the options contract is known as the expiration date,
Strike price; the price specified on the option contract is known as strike price. Or exercise price.
American options ; these3 are the options that can be exercised at any time upto the expiration date.
European options.. these3 are the options that can be exercised only on the expiration date it self.
At the money options; ATM’s; it is an option that would lead zero cash flow if it were exercised. Here current
index equals the strike price.
In the money; ITM’s; it is an option that would lead to a positive cash flow to the holder if it were
exercised immediately.
Out of the money ; OTM; it is an option that would lead negative cash flow to the option holder if it were
exercised immediately. Her e spot price is greater than strike price
Intrinsic value of an option; option can be broken into two ways one is intrinsic value another one is time value
Time value of an option; It is the difference between its premium and its intrinsic value.
Accounting; it is the art of recording classifying summarizing in and interpret results in a significant manner.
Book keeping ; chronological recording of business transactions n the set of books in a significant and
systematic manner.
Branches of accounting;
Financial accounting; the purpose of FA is ascertain the financial results in its operations at the end of the
period . those are the P&L acc, balance sheet.
Cost accounting; the purpose of cost accounting is ascertain the cost of product or operation or project.,
Management accounting; the purpose of mgmt accounting is to help the mgmt in the area of decision making
and evaluate the impact of decisions and actions.
Inflation accounting ; adjusting the value of assets and profit in light of changes in the price level.
Human resource accounting; the purpose of HRAC is seeks the report and emphasize the importance of
human resources in a company earning process and total assets.
Functions of accounting; designing work—recording work—summarizing work—analysis—and
interpretation—reporting – preparation of budget—taxation work—auditing.
Users of accounting information;
Internal users; managers and management ., external users=;investors ,creditors, workers, customers, public
researches.
Debit; the receiving aspect is termed as debit.
Credit; the giving aspect is termed as credit.
Concepts of accounting;
Business entity concept; according to this concept business is distinct from the owner who owns it. It is an
organization of persons to accomplish an economic goal. It is separate with its own identity.
Going concern concept; according to this concept business will continue for a long time and it will not be
dissolved in the forces able future .
Money measurement concept; business has different transactions we do not record them in terms of KG’s,
liters . meters, quintals. We record them in common denominator to see them homogeneous and meaningful,
money does this function it’s the common denominator.
Duel concept; it contains each transaction has two fold effect, receiving of benefit and giving of benefit. There
for every debit there must be corresponding credit, every giver is also a receiver , every receiver is also a giver.
Accounting period concept; every firm should need some period to know the profit or loss in the business . it
may be financial year or calendar year most of the companies follows April to march.
Matching concept; according to this concept expenses incurred in an accounting period should be matched
with the revenues recognized in the period.
Accrual concept; any increases in owners’ equity is called revenue, any decreases in owners’ equity is called
expense, as per this concept it recognizes all the revenue and expenses as they are earned or incurred .
Realization concept; realization is the process of converting non cash resources and rights into money.
According to this concept revenue should only be brought into account when it is actually realized.
CONVENTIONS OF ACCOUNTING.
Conservatism; it refers early recognition of un favorable events and situations . it follows always recognize all
loses and anticipate gains it mainly involves understanding gains and values and overstating loses and
liabilities.
Consistency; it relates to method of measurement in accounting. Accounting principles are not changing period
to period . it always sees to not changing the principles , procedures and standards.
Full disclosure; it deals with full disclosure of financial statements and balance sheets and full information to
the individuals and institutions those who need them.
Materiality; according to this convention the trader records t important facts about commercial activities . un
necessary and un imp information should be ignored.
Systems of book keeping;
Single entry system; it is the incomplete recording of business data . in single entry system only cash
transactions recorded .in case of credit only personnel acc is written.
Double entry systems; double entry is the full form of accounting., receiving of giving and cash and credit
transaction recorded it is the systematic way to presenting and maintaining accounting standards.
Personal account; it deals with account of persons , names , of firms , companies or institutions.
. Debit the receiver
. Credit the giver
Real account; it deals with account of properties or assets . ex; machinery.
. Debit what comes in
. credit what goes out.
Nominal account; it is relating to expenses, loses and incomes and gains.
. Debit all expenses and loses,
. credit incomes and gains
PERSONEL ACCOUNT
REAL ACCOUNT NOMINAL ACCOUNT
Accounting cycle;
GOLDEN RULES
Recording transactions; (preparation of journal& ledger)
Classifying; ( preparation of subsidiary)
Summarizing; ( preparation of final accounts.)
Interpreting results; ( preparation of funds flow statement.)
Journal; it means chronological recording of the business transactions in a systematic manner.
Narration; narration means brief explanation of entries.
Ledger ; ledger is the set of accounts. It contains various accounts like personal, real, and nominal.
Ledger folio; it means reference to the number page of acc in the ledger.
Posting; transferring the debit and credit items from journal to their respective acc in the ledger.
Trial balance; it is the statement containing the various ledger balances on a particular date . the purpose of
T.B is measuring the arithmetical accuracy of ledger’s account.
Transaction; the buying and selling of goo d or service between two or more persons is called
transaction.
Debtor; the person who receives the benefit without giving money or money worth’s good is called debtor.
Creditor; the person who gives the benefit without receiving money or money worth’s good is called
creditor.
Account; it is the statement of the various dealings which occur between a customer and the firm.
Purchase; these are the goods bought by the trader in order to sell them to his customers.
Sales; these are goods sold out. They are known as business turnover.
Invoice; it is the sellers statement giving the particulars such as the quantity, price per unit , total amount
payable and deductions. Etc.
Voucher; it is written document in support of a transaction. It is the proof that particular transaction has
takes place for the value stated in the voucher.
Current assets; assets which are held essentially for a short period and are meant converting into cash.
Liquid assets; assets which can be converted into cash immediately without incurring loss.
Capital; the amount invested by the owner or proprietor for running the business.
Drawings; cash or goods taken by owner of the business for his personal use.
Discount; an allowance or deduction allowed from an amount due is a discount . discount allowed is expense
and received is income.
Entry; part of a transaction recorded in a journal or posted in a ledger.
Income; money received by a business from its commercial activities.
Over heads; these are the in direct costs involved in running business ex; rent, insurance, petrol, wages.
Provisions; one or more accounts set up to account for expected future payments
Assets ; the valuable things owned by the business are known as an assets .
Fixed assets; the assets acquired in the business for long term purpose is called fixed assets. Ex; L&B,
P&M, vehicles and furniture.
Liquid assets; these assets also known as circulating, fluctuating, or current assets. These assets can be
converted into cash as early as possible.
Fictitious assets; the assets which do not have physical form is called fictitious assets . they do not have real
value. Ex; loan on issue of shares, preliminary expenses.
Intangible assets; the assets which does not have physical existence. Good will, patents, trademarks, are
examples.
Wasting assets; wasting assets are those assets which are consumed through being worked or used. Mines
Capital ; the amount invested by the owner or proprietor for running the business.
Fixed capital; the amount invested in acquiring fixed assets is called fixed capital.
Working capital; it is the part of capital available with the firm for day to day working of the business.
Liabilities; liabilities are the obligations or debts payable the enterprise in future in the form of money or
goods.
Fixed liabilities; long term payable liabilities are called fixed liabilities.

Current liabilities; the liabilities payable within one year period is called current liabilities.
Contingent liabilities; these are not the real liabilities, can only decide whether it Is a really liability or not. Due
to their un certainty.
Proprietor; proprietor is the person who owns the business.
Solvent; one who is able to ones debts is called solvent.
Payments; payments for the purchase of goods or services are called expenses.
Reserve; the amount transferred from profits or other surplus and designed to meet contingencies.
Losses; it is to be distinguished from expense.
Gross profit; the difference between the selling price and cost of goods sold .
Net profit; difference between gross profit and all expenses is called net profit.
Profit & loss account; it is prepared by the business man in order to ascertain the profit or loss from the
business.
Balance sheet; it is the statement of assets and liabilities prepared with the view to measure the exact financial
position of a business pf a particular period.

Subsidiary book; it is the convenient device to record the smaller account transactions or subsidiary journals.
Purchase book; records credit purchases only
Sales book; records only credit sales.
Purchase returns; record the particulars of goods returned to the supplier.
Sales return book; record the particulars of goods returns by customer.
Bill receivable book; record the all bills and promissory notes received.

Bills payable book; this is used to record all bills or promissory notes accepted.

Journal proper;; it is used to record all transactions that cannot be recorded in any of the subsidiary book . ex
purchase returns, sales returns.

Trade discount; it is given or received at the time of selling or purchasing of the goods it is deducted from the
selling price of the good , every purchaser is entitled to get the trade discount at the time of purchase allowed
by the manufacturer or whole seller.
Cash discount; it is the incentive given to debtors for making prompt payment of the amount due, because
early payment to the creditors . allowed by the creditor.
Cash book; cash book is the book which fulfill the functions of both a ledger account and journal. It is the
principle book as well as subsidiary book record both credit and cash transactions.
Simple cash book; only cash transactions records.
Double or two column cash book; it is the cash book with two columns both debit and credit side one for
discount , one for bank or cash. Dr side allowed discount, Cr side received discount.

all of them or any one acted by all.
Goodwill; goodwill is the anticipated earnings of a firm . it is the additional value of the firm decides the future
profits and value.
Branch; a large business concern split its business into certain divisions , every division is called branch.
Department; dept is the physical part of rest of the business and it is not separated geographically but it is
treated as a separate profit centre.
Company; company is voluntary association of certain persons with capital divided into numerous
transferrable shares formed to carry out a common purpose.
. Characteristics ;
. It is the legal entity, by its own identity.
. Liability of persons is limited up to fair value of shares.
. It has perpetual succession.


. Shares of company freely transferable. Except in case of pvt company.
Private company; the company which has restricts the right to transfer of its shares. Members limit to pvt
company is 50 minimum members are 2 , at least 2 directors, at the end of the company name pvt ltd is
Compulsory.
Public limited;; which are not pvt companies are called public company. The public company should have
minimum 7 members and no l limit. The company shares are freely transferable . at least 3 directors.
Prospects; it is the document which describes the all details of a company is called prospectus. It is regarding
to issue of shares, debentures.
Stock;; the fully paid up shares of a company is called stocks. It cannot be issued only fully paid shares
converted into stocks.
Shares;; the capital of a company can be divided into different units with definite values called shares.
Cumulative pref shares; if firm does not earn adequate profit in any year the dividend tom these shares may
become arrears , those arrears will carried forward to subsequent years it is called cum pref shares.
Dividend; dividend is the portion of earnings , which is applicable to share among share holders . annual
general meeting declares dividend.
Interium dividend; the dividend which is declared between two annual general meetings is called dividend.
Preliminary expenses; the expenses which are incurred in the time of formation of a company is called
preliminary expenses. Shown in Assets side .
Capital profits; the profits which are not earned during the normal course of the business is called capital profits
. ex; profit on sale of fixed asset, profit prior to incorporation.
Trading account; the account which ascertains the gross profit or loss as a result of buying & selling goods.
Capital; it is the force which is used in the production of goods & services for further production of assets.
capital is the tree which produces fruits.
Capital expenditure; it is the out flow of funds to acquire an asset that will benefit the business more than one
year, the amount spent on purchase of fixed assets is called capital expenditure.
Receipt; it is the inflow of money into business.
Payment; it is the out flow of money in to out sides.
Revenue; it is the aggregate exchange value received from goods and services provided to customers.
Revenue expenditure; it is the out flow of money to meet the running expenses of a firm. It will benefit for
current period only.
Revenue income; the income received by only sale of the goods and services to customers.
Opening stock; it is the value of goods brought from the previous year into current year.
Direct expenses; the expenses which are directly related to production and purchase of raw material.
Octroy duty; it is the local tax payable to the municipality on purchase of goods.
Closing stock; it is the value of goods unsold at the end of the trading period.
Bad debts; some debtors failed to pay their debt to the creditors . in some cases those may be un recoverable
those un recoverable debts are called bad debts.
Adjustments; the entries which are passed to incorporate these adjustments into final account is called
adjustments.
Depreciation; it is the periodical reduction in the total value of fixed asset . by wear & tear, lapse of time.
Amortization ; the written off an in tangible assets is called amortization.
Depreciation methods;
. Fixed \ equal \ installment \ strait line method.
. Diminishing \ reducing \ written down method. At fixed percentage calculated every year.
. Annuity method.
. Sinking fund method; according to this method annual depreciation is considered as a source of
providing the replacement of cost of asset.
Audit; audit is the check and enquiry of the accounting books of a company by an auditor those should be
certified by the ICAI.
Value of share;= possible rate of return \ normal rate of return * paid up value of shares.
Possible rate of return; profit available for dividend \ total paid up equity capital.
Rate of earnings ; actual profit earned \ total capital employed.
P\E ratio; 100 \ normal rate of return.
P\E; market price per share \ earnings per share.
Expected return; expected profit \ equity capital.
Value per share; expected rate \ normal rate *paid up value of shares.
Profits prior to in corporation; a company sometimes purchase s a running business from a date prior to its in
corporation such profits are called profits prior to incorporation.
Under writing; the person or institution under writes a public issue of shares or debentures are called
underwriters . they promise to subscribe particular number of shares or particular price.
Amalgamation; it is the process of two or more companies carrying on similar business to go into liquidation
and a new company is formed to take over their business.
Absorption; it is the process of an existing company takes over the business of one or more existing
companies is called absorption.
Letter of credit; a formal document issued by the bank on behalf of customer stating the conditions under
which the bank will honors the commitments of the customer.
LIBOR; the London interbank offering rate.
Merger; acquisition of two or more firms into one firm. A merger may involves absorption or consolidation..
Horizontal merger; a merger between two or more firms engaged in the same line of activity.
Re- construction; it means re construction of a companies financial structure. It may takes place either with or
without liquidation.
External reconstruction; when a new company is formed with the same name in order to take over the
business of an existing company.
Internal construction; it means the reduction of capital to cancel any paid up share capital which is lost by
available assets.
Holding companies; the which acquires the total or majority of shares in order to control the other company
management is called holding company.
Subsidiary company; the company which is controlled by the holding company is called subsidiary company.
Minority interest; when some of the shares of the subsidiary company are hold by out siders their interest
known as minority interest.
Consolidated balance sheet; the purpose of preparation of consolidated balance sheet is the investment of
holding company in the subsidiary company are replaced by net assets.
Liquidation; the business affairs or operations of a company or wound up law and its property is administered
for the benefit of its creditors and members.
In solvency; excess of liabilities over its assets is called insolvency . he cannot able to paid his debts is called
insolvency. Individuals, Hindu un divided families.
Orders of payment;
. Liquidators remuneration
. Creditors, debenture holders
. Pref creditors
. Un secured creditors
. Equity share holders.
Insurance; it is the fully or partially coverage to the policy holder , if any un certain thing happening.
GIC; marine, fire , accident.
Claim; any amount payable by the insurance company to the policy holder.
Banking; it is accepting for the purpose of lending or investment of deposits of money firm the public re
payable on demand or other wise and with drawn by cheque or draft or order.
Credit note; when the customer returns the goods get credit for the value of goods returned . a credit
note is sent to him intimating that his account has been credited with the value of goods returned.
Debit note; when goods are returned to the supplier , a debit note is sent to him indicating that his account has
been debited with the amount mentioned in the debit note.
Petty cash book; it is the book maintained by the business to record petty cash expenses such as postage,
cartage, stationary.
Promissory note; it is an instrument in writing containing an un conditional undertaking signed by the maker
,to pay certain sum of money only or to the order of certain person or to the bearer of the instrument.
Cheque; a bill of exchange drawn on specified banker and payable on demand.
Stale cheque; a stale cheque means not valid of cheque that means more than six months the cheque is not
valid.
Differed revenue expenditure; it is an expenditure which is incurred during accounting period but it is
applicable to further period also. Ex; heavy advertisement.
Accrued income; accrued income means income which has been earned by the business during the accounting
period , which has not been due and therefore has not been received.
Outstanding income; outstanding income means income which has become earned by the business during
the accounting year but which has not so far been received by the firm.
Depletion; the reduction on natural resources is called depletion, like coals , mines, oil wells etc.
Dilapidations; the term dilapidations to damage done to a building or other property during tenancy.
Capital employed; it is the sum of share capital+reserves&surplus+long term loans+non business
assets+fictitious assets.
Joint venture; it is an association two or more persons who combined for execution of a specific transaction
and divide the profit or loss according to their agreed ratio.
Capital reserve ; the reserve which transferred from capital gains are called capital reserve.
General reserve; the reserve which is transferred from general profits is called general reserve.
Free cash; the cash not for any specific purpose free from any encumbrance like surplus cash.
Capital receipts; these may be defined as non – recurring receipts from the owner of the business or lends
the money creating a liability either of them.
Revenue receipts; these may be defined as a recurring receipt against sale of goods in the normal course of
business and which generally the result of the trading account
Formation of a company; 1. Formation, 2. In corporation, 3. Commencement of business.
Authorized share capital; it is the maximum amount of the share capital which the company can raise for the
time being.
Issued capital; it is the part of authorized capital which has been allotted to the public for subscription.
Subscribed capital; it is then part of the issued capital which has been allotted to the public.
Called up capital; it is the portion of subscribed capital which has been called up by the company.
Paid up capital; it is the portion of the called up capital against which payment has been received.
Cash profit ; it is the profit occurred from the cash sales.
Secret reserves; the reserves which does not appear in the face of balance sheet is called secret reserves.
Such a situation net assets position of the business is stronger than that disclosed by the balance sheet.
Un disclosed reserve; sometimes a reserve is created but its identity is merged with some other account or
group of account that the existence of the reserve is not known such reserve is called un disclosed reserve.
ABC analysis; it is the selective approach to inventory control.
Accounting rate of return; the rate of return on an investment defined as accounting profit divided by book
value of investment.
Accruals ; liabilities which represents expenses that have been incurred but not yet paid. Wages and taxes are
the most common accruals.
Annuity; a stream of uniform periodic cash flows.
Avg collection period; the ratio of receivables to average credit sales per day.
Beta; a risk measure based on how the returns on a given security in the market.
Bill of exchange; general term for a note demanding on payment.
Basis points; one hundred of one percent.
Blue Chip Company; a large, stable, well established company.
efficient port folio; the portfolio that has the lower risk (Standard deviation) for given level of expected return.
Euro bond ; a bond that is marketed internationally.
Euro dollar; a dollar deposit outside the US.
Financial mode ; a model that specifies the relationship between the various financial variables.
Financial risk ; the risk which arises from the use of debt capital.
Financial system; It is the set of markets and institutions to facilitate the exchange of assets and risks.
Financial leverage; the percentage change in EPS as a result of one percent change in EBIT.
Operating leverage; the percentage change in EBIT as a result of one percent change in sales.
Total leverage; the percentage change in EPS as a result of one percent change in sales
.Diversification; investment in more than one risky asset with the primary objective of risk reduction.
Collateral; the assets which serves as security for a loan.
Commercial banks; the financial intermediaries that take deposits and make loans.
Compound interest; interest payable on interest is called compound interest.
Contribution; the difference between revenue and variable cost.
Credit period; the length of time customers are allowed for their credit purchases.
Credit policy ; the firms regarding to credit standards, cash discount , credit period and collection
procedures.
Mortgage; a pledge of specific property offered as security as a loan.
Nominal interest rates; the interest rate expressed in money terms.
Off balance sheet financing; financing that does not figure on the balance sheet of the firm.
Perpetuity; a perpetual annuity.
Portfolio; a combination of assets.
Portfolio theory; the theory delimitation of efficient portfolios and selection of optimal portfolios.
Post –audit; comparison of the actual results with expected results of an investment project.
Profit margin; the ratio of profit to sales.
Proprietorship; A business firm owned by a single individual.

fundamentals of accounting

BASICS

Meaning of Accounting: According to American Accounting Association Accounting is “the process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts”.


Users of Accounts: Generally 2 types. 1. Internal management.
2. External users or Outsiders- Investors, Employees, Lenders, Customers,
Government and other agencies, Public.



Sub-fields of Accounting:


 Book-keeping: It covers procedural aspects of accounting work and embraces record keeping function.

 Financial accounting: It covers the preparation and interpretation of financial statements.

 Management accounting: It covers the generation of accounting information for management decisions.

 Social responsibility accounting: It covers the accounting of social costs incurred by the enterprise.

Fundamental Accounting equation:
Assets = Capital+ Liabilities.
Capital = Assets - Liabilities.

Accounting elements: The elements directly related to the measurement of financial position i.e., for the preparation of balance sheet are Assets, Liabilities and Equity. The elements directly related to the measurements of performance in the profit & loss account are income and expenses.



Four phases of accounting process:


 Journalisation of transactions
 Ledger positioning and balancing
 Preparation of trail balance
 Preparation of final accounts.


Book keeping: It is an activity, related to the recording of financial data, relating to business operations in an orderly manner. The main purpose of accounting for business is to as certain profit or loss for the accounting period.
Accounting: It is an activity of analasis and interpretation of the book-keeping records.

Journal: Recording each transaction of the business.

Ledger: It is a book where similar transactions relating to a person or thing are recorded.

Types: Debtors ledger
Creditor’s ledger
General ledger

Concepts: Concepts are necessary assumptions and conditions upon which accounting is based.

 Business entity concept: In accounting, business is treated as separate entity from its owners.While recording the transactions in books, it should be noted that business and owners are separate entities.In the transactions of business, personal transactions of the owners should not be mixed.


For example: - Insurance premium of the owner etc...


 Going concern concept: Accounts are recorded and assumed that the business will continue for a long time. It is useful for assessment of goodwill.


 Consistency concept: It means that same accounting policies are followed from one period to another.

 Accrual concept: It means that financial statements are prepared on merchantile system only.


Types of Accounts: Basically accounts are three types,



 Personal account: Accounts which show transactions with persons are called personal account. It includes accounts in the name of persons, firms, companies.


In this: Debit the reciver
Credit the giver.


For example: - Naresh a/c, Naresh&co a/c etc…

 Real account: Accounts relating to assets is known as real accounts. A separate account is maintained for each asset owned by the business.
In this: Debit what comes in
Credit what goes out
For example: - Cash a/c, Machinary a/c etc…


 Nominal account: Accounts relating to expenses, losses, incomes and gains are known as nominal account.
In this: Debit expenses and loses
Credit incomes and gains


For example: - Wages a/c, Salaries a/c, commission recived a/c, etc.


Accounting conventions: The term convention denotes customs or traditions which guide the accountant while preparing the accounting statements.



 Convention of consistency: Accounting rules, practices should not change from one year to another.

For example: - If Depreciation on fixed assets is provided on straight line method. It should be done year after year.


 Convention of Full disclosure: All accounting statements should be honestly prepared and full disclosure of all important information should be made. All information which is important to assets, creditors, investors should be disclosued in account statements.


Trial Balance: A trail balance is a list of all the balances standing on the ledger accounts and cash book of a concern at any given date.The purpose of the trail balance is to establish accuracy of the books of accounts.


Trading a/c: The first step of the preparation of final account is the preparation of trading account. It is prepared to know the gross margin or trading results of the business.


Profit or loss a/c: It is prepared to know the net profit. The expenditure recording in this a/c is indirect nature.


Balance sheet: It is a statement prepared with a view to measure the exact financial position of the firm or business on a fixed date.



Outstanding Expenses: These expenses are related to the current year but they are not yet paid before the last date of the financial year.

Prepaid Expenses: There are several items of expenses which are paid in advance in the normal course of business operations.

Income and expenditure a/c: In this only the current period incomes and expenditures are taken into consideration while preparing this a/c.


Royalty: It is a periodical payment based on the output or sales for use of a certain asset.


For example: - Mines, Copyrights, Patent.



Hirepurchase: It is an agreement between two parties. The buyer acquires possession of the goods immediately and agrees to pay the total hire purchase price in instalments.

Hire purchase price = Cash price + Interest.

Lease: A contractual arrangement whereby the lessor grants the lessee the right to use an asset in return for periodic lease rental payments.


Double entry: Every transaction consists of two aspects

1. The receving aspect
2. The giving aspect.


The recording of two aspect effort of each transaction is called ‘double entry’.
The principle of double entry is, for every debit there must be an equal and a corresponding credit and vice versa.


BRS: When the cash book and the passbook are compared, some times we found that the balances are not matching. BRS is preparaed to explain these differences.


Capital Transactions: The transactions which provide benefits to the business unit for more than one year is known as “capital Transactions”.
Revenue Transactions: The transactions which provide benefits to a business unit for one accounting period only are known as “Revenue Transactions”.


Deffered Revenue Expenditure: The expenditure which is of revenue nature but its benefit will be for a very long period is called deffered revenue expenditure.



Ex: Advertisement expenses

A part of such expenditure is shown in P&L a/c and remaining amount is shown on the assests side of B/S.

Capital Receipts: The receipts which rise not from the regular course of business are called “Capital receipts”.

Revenue Receipts: All recurring incomes which a business earns during normal cource of its activities.


Ex: Sale of good, Discount Received, Commission Received.

Reserve Capital: It refers to that portion of uncalled share capital which shall not be able to call up except for the purpose of company being wound up.


Fixed Assets: Fixed assets, also called noncurrent assets, are assets that are expected to produce benefits for more than one year. These assets may be tangible or intangible. Tangible fixed assets include items such as land, buildings, plant, machinery, etc… Intangible fixed assets include items such as patents, copyrights, trademarks, and goodwill.


Current Assets: Assets which normally get converted into cash during the operating cycle of the firm. Ex: Cash, inventory, receivables.


Fictitious assets: They are not represented by anything tangible or concrete.
Ex: Goodwill, deffered revenue expenditure, etc…

Contingent Assets: It is an existence whose value, ownership and existence will depend on occurance or non-occurance of specific act.


Fixed Liabilities: These are those liabilities which are payable only on the termination of the business such as capital which is liability to the owner.


Longterm Liabilities: These liabilities which are not payable with in the next accounting period but will be payable with in next 5 to 10 years are called longterm liabilities. Ex: Debentures.


Current Liabilities: These liabilities which are payable out of current assets with in the accounting period. Ex: Creditors, bills payable, etc…


Contingent Liabilities: A contingent liability is one, which is not an actual liability but which will become an actual one on the happening of some event which is uncertain. These are staded on balance sheet by way of a note.

Ex: Claims against company, Liability of a case pending in the court.


Bad Debts: Some of the debtors do not pay their debts. Such debt if unrecoverable is called bad debt. Bad debt is a business expense and it is debited to P&L account.


Capital Gains/losses: Gains/losses arising from the sale of assets.

Fixed Cost: These are the costs which remains constant at all levels of production. They do not tend to increase or decrease with the changes in volume of production.


Variable Cost: These costs tend to vary with the volume of output. Any increase in the volume of production results in an increase in the variable cost and vice-versa.


Semi-Variable Cost: These costs are partly fixed and partly variable in relation to output.


Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations, processess or products. This differs from marginal costing where fixed costs are excluded.


Operating Costing: It is used in the case of concerns rendering services like transport. Ex: Supply of water, retail trade, etc...


Costing: Cost accounting is the recording classifying the expenditure for the determination of the costs of products.For thepurpuses of control of the costs.


Rectification of Errors: Errors that occur while preparing accounting statements are rectified by replacing it by the correct one.


Errors like: Errors of posting, Errors of accounting etc…
Absorbtion: When a company purchases the business of another existing company that is called absorbtion.



Mergers: A merger refers to a combination of two or more companies into one company.


Variance Analysis: The deviations between standard costs, profits or sales and actual costs. Profits or sales are known as variances.

Types of variances

1: Material Variances
2: Labour Variances
3: Cost Variances
4: Sales or Profit Variances


General Reserves: These reserves which are not created for any specific purpose and are available for any future contingency or expansion of the business.

Specific Reserves: These reserves which are created for a specific purpose and can be utilized only for that purpose.

Ex: Dividend Equilisation Reserve
Debenture Redemption Reserve


Provisions: There are many risks and uncertainities in business. In order to protect from risks and uncertainities, it is necessary to provisions and reserves in every business.


Reserve: Reserves are amounts appropriated out of profits which are not intended to meet any liability, contingency, commitment in the value of assets known to exist at the date of the B/S.

Creation of the reserve is to increase the workingcapital in the business and strengthen its financial position. Some times it is invested to purchase out side securities then it is called reserve fund.


Types:

1: Capital Reserve: It is created out of capital profits like premium on the issue of shares, profits and sale of assets, etc…This reserve is not available to distribute as dividend among shareholders.


2: Revenue Reserve: Any Reserve which is available for distribution as dividend to the shareholders is called Revenue Reserve.


Provisions V/S Reserves:


1. Provisions are created for some specific object and it must be utilised for that object for which it is created.

Reserve is created for any future liability or loss.
2. Provision is made because of legal necessity but creating a Reserve is a matter of financial strength.

3. Provision must be charged to profit and loss a/c before calculating the net profit or loss but Reserve can be made only when there is profit.

4. Provisions reduce the net profit and are not invested in outside securities Reserve amount can invested in outside securities.



Goodwill: It is the value of repetition of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry.


Methods: Average profits method
Super profits method
Capitalisatioin method




Depreciation: It is a perminant continuing and gradual shrinkage in the book value of a fixed asset.

Methods:

1. Fixed Instalment method or Straight line method
Dep. = Cost price – Scrap value/Estimated life of asset.

2. Diminishing Balance method: Under this metod, depreciation is calculated at a certain percentage each year on the balance of the asset, which is bought forward from the previous year.

3. Annuity method: Under this method amount spent on the purchase of an asset is regarded as an investment which is assumed to earn interest at a certain rate. Every year the asset a/c is debited with the amount of interest and credited with the amount of depreciation.

EOQ: The quantity of material to be ordered at one time is known EOQ. It is fixed where minimum cost of ordering and carryiny stock.
Key Factor: The factor which sets a limit to the activity is known as key factor which influence budgets.


Key Factor = Contribution/Profitability
Profitability =Contribution/Key Factor



Sinking Fund: It is created to have ready money after a particular period either for the replacement of an asset or for the repayment of a liability. Every year some amount is charged from the P&L a/c and is invested in outside securities with the idea, that at the end of the stipulated period, money will be equal to the amount of an asset.



Revaluation Account: It records the effect of revaluation of assets and liabilities. It is prepared to determine the net profit or loss on revaluation. It is prepared at the time of reconsititution of partnership or retirement or death of partner.


Realisation Account: It records the realisation of various assets and payments of various liabilities. It is prepared to determine the net P&L on realisation.


Leverage: - It arises from the presence of fixed cost in a firm capitalstructure.

Generally leverage refers to a relationship between two interrelated variables.
These leverages are classified into three types.


1. Operating leverage

2. Financial Leverage.

3. Combined leverage or total leverage.

1. Operating Leverage: It arises from fixed operating costs (fixed costs other than the financing costs) such as depreciation, shares, advertising expenditures and property taxes.

When a firm has fixed operatingcosts, a change in 1% in sales results in a change of more than 1% in EBIT
%change in EBIT
% change in sales

The operaying leverage at any level of sales is called degree.

Degree of operatingLeverage= Contribution/EBIT

Significance: It tells the impact of changes in sales on operating income.
If operating leverage is high it automatically means that the break- even point would also be reached at a highlevel of sales.


2. Financial Leverage: It arises from the use of fixed financing costs such as interest. When a firm has fixed cost financing. A change in 1% in E.B.I.T results in a change of more than 1% in earnings per share.
F.L =% change in EPS / % change in EBIT


Degree of Financial leverage= EBIT/ Profit before Tax (EBT) Significance: It is double edged sword. A high F.L means high fixed financial costs and high financial risks.


3. Combined Leverage: It is useful for to know about the overall risk or total risk of the firm. i.e, operating risk as well as financial risk.
C.L= O.L*F.L = %Change in EPS / % Change in Sales
Degree of C.L =Contribution / EBT

A high O.L and a high F.L combination is very risky. A high O.L and a low F.L indiacate that the management is careful since the higher amount of risk involved in high operating leverage has been sought to be balanced by low F.L
A more preferable situation would be to have a low O.L and a F.L.

Working Capital: There are two types of working capital: gross working capital and net working capital. Gross working capital is the total of current assets. Net working capital is the difference between the total of current assets and the total of current liabilities.

Working Capital Cycle:


It refers to the length of time between the firms paying cash for materials, etc.., entering into the production process/ stock and the inflow of cash from debtors (sales)


Cash Raw meterials WIP Stock
Labour overhead
Debtors

Capital Budgeting: Process of analyzing, appraising, deciding investment on long term projects is known as capital budgeting.
Methods of Capital Budgeting:


1. Traditional Methods
Payback period method
Average rate of return (ARR)


2. Discounted Cash Flow Methods or Sophisticated methods Net present value (NPV)
Internal rate of return (IRR)
Profitability index



Pay back period: Required time to reach actual investment is known as payback period.
= Investment / Cash flow
ARR: It means the average annual yield on the project.
= avg. income / avg. investment
Or
= (Sum of income / no. of years) / (Total investment + Scrap value) / 2)



NPV: The best method for the evaluation of an investment proposal is the NPV or discounted cash flow technique. This metod takes into account the time value of money.

The sum of the present values of all the cash inflows less the sum of the present value of all the cash outflows associated with the proposal.


NPV = Sum of present value of future cash flows – Investment


IRR: It is that rate at which the sum total of cash inflows aftrer discounting equals to the discounted cash outflows. The internal rate of return of a project is the discount rate which makes net present value of the project equal to zero.


Profitability Index: One of the methods comparing such proposals is to workout what is known as the ‘Desirability Factor’ or ‘Profitability Index’.
In general terms a project is acceptable if its profitability index value is greater than 1.


Derivatives: A derivative is a security whose price ultimately depends on that of another asset.


Derivative means a contact of an agreement.

Types of Derivatives:
1. Forward Contracts

2. Futures

3. Options

4. Swaps.

1. Forward Contracts: - It is a private contract between two parties.

An agreement between two parties to exchange an asset for a price that is specified todays. These are settled at end of contract.

2. Future contracts: - It is an Agreement to buy or sell an asset it is at a certain time in the future for a certain price. Futures will be traded in exchanges only.These is settled daily.

Futures are four types:

1. Commodity Futures: Wheat, Soyo, Tea, Corn etc..,.

2. Financial Futures: Treasury bills, Debentures, Equity Shares, bonds, etc..,

3. Currency Futures: Major convertible Currencies like Dollars, Founds, Yens,
and Euros.
4. Index Futures: Underline assets are famous stock market indicies. NewYork Stock Exchange.

3. Options: An option gives its Owner the right to buy or sell an Underlying asset on or before a given date at a fixed price.

There can be as may different option contracts as the number of items to buy or sell they are,

Stock options, Commodity options, Foreign exchange options and interest rate options are traded on and off organized exchanges across the globe.
Options belong to a broader class of assets called Contingent claims.
The option to buy is a call option.The option to sell is a PutOption.
The option holder is the buyer of the option and the option writer is the seller of the option.


The fixed price at which the option holder can buy or sell the underlying asset is called the exercise price or Striking price.

A European option can be excercised only on the expiration date where as an American option can be excercised on or before the expiration date.
Options traded on an exchange are called exchange traded option and options not traded on an exchange are called over-the-counter optios.
When stock price (S1) <= Exercise price (E1) the call is said to be out of money and is worthless.

When S1>E1 the call is said to be in the money and its value is S1-E1.



4. Swaps: Swaps are private agreements between two companies to exchange casflows in the future according to a prearranged formula.
So this can be regarded as portfolios of forward contracts.


Types of swaps:

1: Interest rate Swaps
2: Currency Swaps.


1. Interest rate Swaps: The most common type of interest rate swap is ‘Plain Venilla ‘.

Normal life of swap is 2 to 15 Years.


It is a transaction involving an exchange of one stream of interest obligations for another. Typically, it results in an exchange of ficed rate interest payments for floating rate interest payments.

2. Currency Swaps: - Another type of Swap is known as Currency as Currency Swap. This involves exchanging principal amount and fixed rates interest payments on a loan in one currency for principal and fixed rate interest payments on an approximately equalant loan in another currency. Like interest rate swaps currency swars can be motivated by comparative advantage.

Warrants: Options generally have lives of upto one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called warrants and are generally traded over- the- counter.



American Depository Receipts (ADR): It is a dollar denominated negotiable instruments or certificate. It represents non-US companies publicly traded equity. It was devised into late 1920’s. To help American investors to invest in overseas securities and to assist non –US companies wishing to have their stock traded in the American markets. These are listed in American stock market or exchanges.


Global DepositoryReceipts (GDR): GDR’s are essentially those instruments which posseses the certain number of underline shares in the custodial domestic bank of the company i.e., GDR is a negotiable instrument in the form of depository receipt or certificate created by the overseas depository bank out side India and issued to non-resident investors against the issue of ordinary share or foreign currency convertible bonds of the issuing company. GDR’s are entitled to dividends and voting rights since the date of its issue.


Capital account and Current account: The capital account of international purchase or sale of assets. The assets include any form which wealth may be held. Money held as cash or in the form of bank deposits, shares, debentures, debt instruments, real estate, land, antiques, etc…


current account records all income related flows. These flows could arise on account of trade in goods and services and transfer payment among countries. A net outflow after taking all entries in current account is a current account deficit. Govt. expenditure and tax revenues do not fall in the current account.
Dividend Yield: It gives the relationship between the current price of a stock and the dividend paid by its issuing company during the last 12 months. It is caliculated by aggregating past year’s dividend and dividing it by the current stock price.


Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield is considered to be evidence that a stock is under priced, where as a low dividend yield is considered evidence that a stock is over priced.


Bridge Financing: It refers to loans taken by a company normally from commercial banks for a short period, pending disbursement of loans sanctioned by financial institutions. Generally, the rate of interest on bridge finance is higher as compared with term loans.

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Shares and Mutual Funds


Company: Sec.3 (1) of the Companys act, 1956 defines a ‘company’. Company means a company formed and registered under this Act or existing company”.


Public Company: A corporate body other than a private company. In the public company, there is no upperlimit on the number of share holders and no restriction on transfer of shares.

Private Company: A corporate entity in which limits the number of its members to 50. Does not invite public to subscribe to its capital and restricts the member’s right to transfer shares.


Liquidity: A firm’s liquidity refers to its ability to meet its obligations in the short run. An asset’s liquidity refers to how quickly it can he sold at a reasonable price.


Cost of Capital: The minimum rate of the firm must earn on its investments in order to satisfy the expectations of investors who provide the funds to the firm.


Capital Structure: The composition of a firm’s financing consisting of equity, preference, and debt.


Annual Report: The report issued annually by a company to its shareholders. It primarily contains financial statements. In addition, it represents the management’s view of the operations of the previous year and the prospects for future.


Proxy: The authorization given by one person to another to vote on his behalf in the shareholders meeting.


Joint Venture: It is a temporary partenership and comes to an end after the compleation of a particular venture. No limit in its.


Insolvency: In case a debtor is not in a position to pay his debts in full, a petition can be filled by the debtor himself or by any creditors to get the debtor declared as an insolvent.


Long Term Debt: The debt which is payable after one year is known as long term debt.


Short Term Debt: The debt which is payable with in one year is known as short term debt.


Amortisation: This term is used in two senses 1. Repayment of loan over a period of time 2.Write-off of an expenditure (like issue cost of shares) over a period of time.


Arbitrage: A simultaneous purchase and sale of security or currency in different markets to derive benefit from price differential.


Stock: The Stock of a company when fully paid they may be converted into stock.


Share Premium: Excess of issue price over the face value is called as share premium.


Equity Capital: It represents ownership capital, as equity shareholders collectively own the company. They enjoy the rewards and bear the risks of ownership. They will have the voting rights.


Authorized Capital: The amount of capital that a company can potentially issue, as per its memorandum, represents the authorized capital.
Issued Capital: The amount offered by the company to the investors.


Subscribed capital: The part of issued capital which has been subscribed to by the investors


Paid-up Capital: The actual amount paid up by the investors.
Typically the issued, subscribed, paid-up capitals are the same.
Par Value: The par value of an equity share is the value stated in the memorandum and written on the share scrip. The par value of equity share is generally Rs.10 or Rs.100.


Issued price: It is the price at which the equity share is issued often, the issue price is higher than the Par Value


Book Value: The book value of an equity share is
= Paid – up equity Capital + Reserve and Surplus / No. Of outstanding shares equity


Market Value (M.V): The Market Value of an equity share is the price at which it is traded in the market.


Preference Capital: It represents a hybrid form of financing it par takes some characteristics of equity and some attributes of debentures. It resembles equity in the following ways

Preference dividend is payable only out of distributable profits.
1. Preference dividend is not an obligatory payment.
2. Preference dividend is not a tax –deductible payment.
Preference capital is similar to debentures in several ways.
1. The dividend rate of Preference Capital is fixed.
2. Preference Capital is redeemable in nature.
3. Preference Shareholders do not normally enjoy the right to vote.


Debenture: For large publicly traded firms. These are viable alternative to term loans. Skin to promissory note, debentures is instruments for raising long term debt. Debenture holders are creditors of company.


Stock Split: The dividing of a company’s existing stock into multiple stocks. When the Par Value of share is reduced and the number of share is increased.


Calls-in-Arrears: It means that amount which is not yet been paid by share holders till the last day for the payment.


Calls-in-advance: When a shareholder pays with an instalment in respect of call yet to make the amount so received is known as calls-in-advance. Calls-in-advance can be accepted by a company when it is authorized by the articles.


Forfeiture of share: It means the cancellation or allotment of unpaid shareholders.


Forfeiture and reissue of shares allotted on pro – rata basis in case of over subscription.

Prospectus: Inviting of the public for subscribing on shares or debentures of the company. It is issued by the public companies.
The amount must be subscribed with in 120 days from the date of prospects.


Simple Interest: It is the interest paid only on the principal amount borrowed. No interest is paid on the interest accured during the term of the loan.

Compound Interest: It means that, the interest will include interest caliculated on interest.

Time Value of Money: Money has time value. A rupee today is more valuable than a rupee a year hence. The relation between value of a rupee today and value of a rupee in future is known as “Time Value of Money”.



NAV: Net Asset Value of the fund is the cumulative market value of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units out standing. Buying and Selling into funds is done on the basis of NAV related prices. The NAV of a mutual fund are required to be published in news papers. The NAV of an open end scheme should be disclosed ona daily basis and the NAV of a closed end scheme should be disclosed atleast on a weekly basis.


Financial markets: The financial markets can broadly be divided into money and capital market.


 Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, banker’s acceptance, certificates of deposits, etc.


Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets.


Primary Market: It provides the channel for sale of new securities. Primary Market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation.



They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.


Secondary Market: It refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. Majority of the trading is done in the secondary market. It comprises of equity markets and the debt markets.

Difference between the primary market and the secondary market: In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.


SEBI and its role: The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto.


Portfolio: A portfolio is a combination of investment assets mixed and matched for the purpose of investor’s goal.


Market Capitalisation: The market value of a quoted company, which is caliculated by multiplying its current share price (market price) by the number of shares in issue, is called as market capitalization.


Book Building Process: It is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.



Cut off Price: In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut off price”. This is decided by the issuer and LM after considering the book and investors’ appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price.

Bluechip Stock: Stock of a recognized, well established and financially sound company.

Penny Stock: Penny stocks are any stock that trades at very low prices, but subject to extremely high risk.


Debentures: Companies raise substantial amount of longterm funds through the issue of debentures. The amount to be raised by way of loan from the public is divided into small units called debentures. Debenture may be defined as written instrument acknowledging a debt issued under the seal of company containing provisions regarding the payment of interest, repayment of principal sum, and charge on the assets of the company etc…


Large Cap / Big Cap: Companies having a large market capitalization


For example, In US companies with market capitalization between $10 billion and $20 billion, and in the Indian context companies market capitalization of above Rs. 1000 crore are considered large caps.

Mid Cap: Companies having a mid sized market capitalization, for example, In US companies with market capitalization between $2 billion and $10 billion, and in the Indian context companies market capitalization between Rs. 500 crore to Rs. 1000 crore are considered mid caps.

Small Cap: Refers to stocks with a relatively small market capitalization, i.e. lessthan $2 billion in US or lessthan Rs.500 crore in India.
Holding Company: A holding company is one which controls one or more companies either by holding shares in that company or companies are having power to appoint the directors of those company.
The company controlled by holding company is known as the Subsidary Company.


Consolidated Balance Sheet: It is the b/s of the holding company and its subsidiary company taken together.


Partnership act 1932: Partnership means an association between two or more persons who agree to carry the business and to share profits and losses arising from it. 20 members in ordinary trade and 10 in banking business.


IPO: First time when a company announces its shares to the public is called as an IPO. (Intial Public Offer)


A Further public offering (FPO): It is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.


Rights Issue (RI): It is when a listed company which proposes to issue fresh securities to its shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue.


Preferential Issue: It is an issue of shares or of convertible securities by listed companies to a select group of persons under sec.81 of the Indian companies act, 1956 which is neither a rights issue nor a public issue.This is a faster way for a company to raise equity capital.


Index: An index shows how specified portfolios of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upward or downwards.


Dematerialisation: It is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his depository participant.


Bull and Bear Market: Bull market is where the prices go up and Bear market where the prices come down.

Exchange Rate: It is a rate at which the currencies are bought and sold.


FOREX: The Foreign Exchange Market is the place where currencies are traded. The overall FOREX markets is the largest, most liquid market in the world with an average traded value that exceeds $ 1.9 trillion per day and includes all of the currencies in the world.It is open 24 hours a day, five days a week.
Mutual Fund: A mutual fund is a pool of money, collected from investors, and invested according to certain investment objectives.


Asset Management Company (AMC): A company set up under Indian company’s act, 1956 primarily for performing as the investment manager of mutual funds. It makes investment decisions and manages mutual funds in accordance with the scheme objectives, deed of trust and provisions of the investment management agreement.


Back-End Load: A kind of sales charge incurred when investors redeem or sell shares of a fund.


Front-End Load: A kind of sales charge that is paid before any amount gets invested into the mutual fund.


Off Shore Funds: The funds setup abroad to channalise foreign investment in the domestic capital markets.


Under Writer: The organization that acts as the distributor of mutual funds share to broker or dealers and investors.


Registrar: The institution that maintains a registry of shareholders of a fund and their share ownership. Normally the registrar also distributes dividends and provides periodic statements to shareholders.


Trustee: A person or a group of persons having an overall supervisory authority over the fund managers.


Bid (or Redemption) Price: In newspaper listings, the pre-share price that a fund will pay its shareholders when they sell back shares of a fund, usually the same as the net asset value of the fund.


Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.


Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.


Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.



Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:


Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.


Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.


Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.


Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.


Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.


Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.


There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

Earning per share (EPS): It is a financial ratio that gives the information regarding earing available to each equity share. It is very important financial ratio for assessing the state of market price of share. The EPS statement is applicable to the enterprise whose equity shares are listed in stock exchange.

Types of EPS:

1. Basic EPS ( with normal shares)
2. Diluted EPS (with normal shares and convertible shares)

EPS Statement :

Sales ****
Less: variable cost ****
Contribution ***
Less: Fixed cost ****

EBIT *****
Less: Interest ***
EBT ****
Less: Tax ****
Earnimgs ****
Less: preference dividend ****
Earnings available to equity
Share holders (A) *****

EPS=A/ No of outstanding Shares
EBIT and Operating Income are same


The higher the EPS, the better is the performance of the company.
Cash Flow Statement: It is a statement which shows inflows (receipts) and outflows (payments) of cash and its equivalents in an enterprise during a specified period of time. According to the revised accounting standard 3, an enterprise prepares a cash flow statement and should present it for each period for which financial statements are presented.



Funds Flow Statement: Fund means the net working capital. Funds flow statement is a statement which lists first all the sources of funds and then all the applications of funds that have taken place in a business enterprise during the particular period of time for which the statement has been prepared. The statement finally shows the net increase or net decrease in the working capital that has taken place over the period of time.


Float: The difference between the available balance and the ledger balance is referred to as the float.


Collection Float: The amount of cheque deposited by the firm in the bank but not cleared.


Payment Float: The amount of cheques issued by the firm but not paid for by the bank.


Operating Cycle: The operating cycle of a firm begins with the acquisition of raw material and ends with the collection of receivables.


Marginal Costing:

Sales – VaribleCost=FixedCost ± Profit/Loss
Contribution= Sales –VaribleCost
Contribution= FixedCost ± Profit/Loss
P / V Ratio= (Contribution / Sales)*100
Per 1 unit information is given,
P / V Ratio = (Contribution per Unit / Sales per Unit)*100
Two years information is given,
P / V Ratio= (Change in Profit / Change in Sales) * 100
Through Sales, P / V Ratio
Contribution =Sales * P / v Ratio
Through P / V Ratio, Contribution
Sales = Contribution / P / VRatio

Break Even Point (B.E.P)
IN Value = (Fixed Cost) / (P / v Ratio) OR (Fixed Cost / Contribution) * Sales
In Units = Fixed Cost / Contribution OR Fixed Cost / (SalesPrice per Unit – V.C per Unit)
Margin of Safety = Total Sales – Sales at B.E.P (OR) Profit / PV Ratio
Sales at desired profit (in units)
= FixedCost+ DesiredProfit / Contribution per Unit
Sales at desired profit (in Value)
= FixedCost+ DesiredProfit / PV ratio (OR) Contribution / PV Ratio

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RATIOANALYSIS

A ratio analysis is a mathematical expression. It is the quantitative relation between two. It is the technique of interpretation of financial statements with the help of meaningful ratios. Ratios may be used for comparison in any of the following ways.
 Comparison of a firm its own performance in the past.
 Comparison of a firm with the another firm in the industry
 Comparison of a firm with the industry as a whole

TYPES OF RATIOS

 Liquidity ratio
 Activity ratio
 Leverage ratio
 profitability ratio

1. Liquidity ratio: These are ratios which measure the short term financial position of a firm.


i. Current ratio: It is also called as working capital ratio. The current ratio measures the ability of the firm to meet its currnt liabilities-current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities.
Ideal ratio is 2:1.


ii. Quick or Acid test Ratio: It tells about the firm’s liquidity position. It is a fairly stringent measure of liquidity.


=Quick assets/Current Liabilities
Ideal ratio is 1:1
Quick Assets =Current Assets – Stock - Prepaid Expenses
iii. Absolute Liquid Ratio:
A.L.A/C.L
AL assets=Cash + Bank + Marketable Securities.

2. Activity Ratios or Current Assets management or Efficiency Ratios:
These ratios measure the efficiency or effectiveness of the firm in managing its resources or assets

 Stock or Inventory Turnover Ratio: It indicates the number of times the stock has turned over into sales in a year. A stock turn over ratio of ‘8’ is considered ideal. A high stock turn over ratio indicates that the stocks are fast moving and get converted into sales quickly.

= Cost of goods Sold/ Avg. Inventory


 Debtors Turnover Ratio: It expresses the relationship between debtors and sales.
=Credit Sales /Average Debtors

 Creditors Turnover Ratio: It expresses the relationship between creditors and purchases.
=Credit Purchases /Average Creditors

 Fixed Assets Turnover Ratio: A high fixed asset turn over ratio indicates better utilization of the firm fixed assets. A ratio of around 5 is considered ideal.


= Net Sales / Fixed Assets
 Working Capital Turnover Ratio: A high working capital turn over ratio indicates efficiency utilization of the firm’s funds.
=CGS/Working Capital
=W.C=C.A – C.L.

3. Leverage Ratio: These ratios are mainly calculated to know the long term solvency position of the company.

 Debt Equity Ratio: The debt-equity ratio shows the relative contributions of creditors and owners.

= outsiders fund/Share holders fund

Ideal ratios 2:1

 Proprietary ratio or Equity ratio: It expresses the relationship between networth and total assets. A high proprietary ratio is indicativeof strong financial position of the business.

=Share holders funds/Total Assets

= (Equity Capital +Preference capital +Reserves – Fictitious assets) / Total Assets

 Fixed Assets to net worth Ratio: This ratio indicates the mode of financing the fixed assets. The ideal ratio is 0.67
=Fixed Assets (After Depreciation.)/Shareholder Fund

4. Profitability Ratios: Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment.

 Return on Capital Employed or Return on Investment (ROI): This ratio reveals the earning capacity of the capital employed in the business.
=PBIT /Capital Employed

 Return on Proprietors Fund / Earning Ratio: Earn on Net Worth
=Net Profit (After tax)/Proprietors Fund

 Return on Ordinary shareholders Equity or Return on Equity Capital: It expresses the return earned by the equity shareholders on their investment.


=Net Profit after tax and Dividend / Proprietors fund or Paid up equity Capital
 Price Earning Ratio: It expresses the relationship between marketprice of share on a company and the earnings per share of that company.
=MPS (Market Price per Share) / EPS
 Earning Price Ratio/ Earning Yield:
= EPS / MPS
 EPS= Net Profit (After tax and Interest) / No. Of Outstanding Shares.



 Dividend Yield ratio: It expresses the relationship between dividend earned per share to earnings per share.


= Dividend per share (DPS) / Market value per share
 Dividend pay-out ratio: It is the ratio of dividend per share to earning per share.


= DPS / EPS
DPS: It is the amount of the dividend payable to the holder of one equity share. =Dividend paid to ordinary shareholders / No. of ordinary shares

C.G.S=Sales- G.P
G.P= Sales – C.G.S
G.P.Ratio =G.P/Net sales*100
Net Sales= Gross Sales – Return inward- Cash discount allowed
Net profit ratio=Net Profit/ Net Sales*100
Operating Profit ratio=O.P/Net Sales*100
Interest Coverage Ratio= Net Profit (Before Tax & Interest) / Fixed Interest Classes
Return on Investment (ROI): It reveals the earning capacity of the capital employed in the business. It is calculated as,


EBIT/Capital employed.
The return on capital employed should be more than the cost of capital employed.
Capital employed =EquityCapital+Preference sharecapital+Reserves+Longterm loans and Debentures - Fictitious Assets – Non OperatingAssets