Capital IQ

Revenue: Revenue is the value of out put supplied to customers Gross inflow of assets or the gross decrease in liabilities Operating revenue: Arising from the main operations or business (sale of products manufactured by a company) Non-operating revenue: Indirect to the main operations of the firm (sale of an old equipment similarly dividend and interest from temporary investments) Expenditure: The cost of earning revenue. When assets or consumed or liabilities are increased. Operating expenses: Relating to the main operations (manufacturing expenses) Non-operating expenses: Which are indirect to the main operations (legal expenses) Capital expenditure: Money spent to acquire physical assets, which are buildings, machinery, and land. Company: Is a voluntary and autonomous association of certain persons which capital divided into numerous transferable shares formed to carry out a particular purpose. Company formed and registered under the companys act 1956. Kinds of companies: Charted companies: East India company Statutory companies: RBI, IFC Registered companies: Incorporated under companys act 1956. Difference between Private limited company and Public limited company: 1. Minimum number of its members Private: (2), Public (7) 2. Maximum number of its members Private: (50), Public: unlimited 3. Issue of prospects: a private company cannot invite public to subscribe to its shares or debentures by issue of prospects. Public company must issue the prospects. 4. Transfer of shares: restrict to private company, freely transferable to public company. 5. Number of Directors: Private (2), Public (5) 6. Use of the word Limited 7. Restriction regarding managerial remuneration, public limited company not more than 11% of the net profit. 8. Legal formalities 9. Commencement of business Equity shares: Represent the ownership position in a company; equity shareholders will get dividend and repayment of capital after meeting the claims of preference shareholders. Equity shareholders have the voting right. Preference shares: Preference shareholders will get dividend and repayment of capital in the winding up of the company over the equity shareholders

Types: Cumulative preference shares, Non-cumulative preference shares Redeemable preference shares (usually non-redeemable) Participating and non-participating preference shares (on surplus profits) Debentures: Acknowledgement of debt, certificate issued by a company under its seal as an evidence of a debt due from the company Types: Naked or simple debentures (no security) Mortgage debentures (security) Redeemable, Irredeemable debentures Convertible, Non-convertible debentures Share premium: Value greater than its face value Bank account Dr To share application account (Being application money along with premium received) Share application account Dr To share capital account To share premium account (Share application money transferred to share capital account) Share allotment account Dr To share capital account To share premium account (The allotment money and share premium money due on shares) Bank account Dr To share allotment account (Share allotment money received) Share discount: Value less than its face value Share discount account Dr Discount on the issue of share account Dr To share capital account Primary market: Initial public offering of securities (IPO), newly floated shares, first issue of shares Secondary market: Buying and selling of securities (shares) is traded in secondary market OTCI: Over the counter exchange of India (no particular place to buy and selling of shares) Memorandum of association: It determines the scope of the activities of the company and defines the relations of the Company with out side world. Registered office, company name, objectives, 7 members have to promise to take at least one share each, their names and addresses. Articles of association: Rules and regulations of the internal management of the company and very important to the

Shareholders, because they determine the relation between the company and its members. Subsidiary company: A company that is completely control by the company Holding company: A company that has control over other companies through ownership of a sufficient portion Of those companies common stock. A company that owns enough voting stock in another Firm to control management EX: CAPITLA IQ is subsidiary of S & P (standard and poor, credit rating company) S & P is holding company of CAPITLA IQ. Stock exchanges in India and abroad: Place where buying and selling of shares takes place is stock exchange EX: BSE, NSE, NYSE, NASDAQ, London stock exchange, Toronto stock exchange Depreciation: Reduction in the value of asset due to wear tear and laps of time, depletion and obsolesce Convert the cost of asset into cost of operation Methods: Straight-line method Diminishing balance method or declining balance method or accelerated method Sinking fund method Depletion method Accrued expenses: Represent a liability that a firm has to pay for the services which has already receive, Obligations payable by the firm. Ex: wages, salaries outstanding. Deferred income: Represent funds received by the firm for goods and services, which it has agreed to supply in Future Ex: advanced payments by the customers SEBI: Securities and Exchange Board of India (12th April 1988) To promote fair dealing. To provide a degree of protection To regulate and develop a code of conduct, register and working of stock brokers Provision: Preparatory action of measure, money kept aside for a specific work Reserve: Some amount of profit kept aside to meet contingent expenses, put aside for future purpose Minority interest: The ownership interest in a company held by the person other than the parent company and Its subsidiary undertakings General reserve: It can be used for any purpose including distribution of dividend Capital reserve: For specific purpose Dividend: Shareholders will expect some return from their investments by them in the share capital Are generally paid in cash Dividend declared by the board of directors in the AGM (annual general meeting)

Interim dividend: Dividend declared for 6 months is called interim dividend Final dividend: Declared at the end of the financial year Theories: Relevance: Walters model, Gardens model, Bird in a hand argument Irrelevance: Modigliani and Millers Hypothesis Marginal cost: Aggregate amount of variable cost Variable cost: One which various directly with changes in the level of output over a defined period of time Fixed cost: One which is not affected by changes in the level of out put over a defined period of time Semi-variable cost: Which does not vary proportionally but simultaneously cannot remain stationary at all times Ex: Depreciation, repairs Partnership: A business relationship where two or more persons carry on a business with a view to make a profit. Joint-venture: A foreign company joins hands with local company for local interest to carry out a single project pr a limited number of projects, in specific period of time. Non-recurring items in P & L account (Profit and loss account): Sale of investments Non-cash expenditure in P & L account: Depreciation Depletion: Used of oil wells, mines or deposits for depreciation Amortization: For long term investments such as patens copyrights, paying of debt gradually Capital profits: Sale of fixed assets Revenue profits: From main operation of the firm (sale of goods and services) Mutual fund: An open-ended fund operated by an investment company, which arises money from shareholders and investments in a group of assets Raise money by selling shares of the fund to the public (income fund, growth fund) Trade discount: Which is not shown in the books Cash discount: 50% out of MRP like that Trade credit: To the credit that a customer gets from supplier of goods in the normal course Duties of Finance Manager: Raising of funds, allocation of funds, profit planning, understanding capital markets

Interim audit and statutory audit: Chairman: One of the person elected by the directors in the board of directors meeting. Who is the Director: one of the shareholders becomes director CEO: chief executive officer, top officer in the company in the executive cadre Who can appoint CEO: board of directors AGM: shareholders annual general meeting Quorum: attend the minimum number of members in the meeting Statutory books: Register of investment holders and their names, register of earnings, register of debenture and shareholders, register of directors and their shares Financial books: Cash book, general ledger, return outwards and return inwards, invoice, bills payable, bills receivables Resolution: solving the problem Who can appoint auditor: board of directors Minute books: recording of the board of directors meeting Agenda: the meeting, which is discussed by the board of directors Duties of director: to appoint officers and auditors, to take policy decisions. Contribution: sales variable cost Role of stock exchange: to regulate the share trading in India Corporation: Business firm whose articles of incorporation have been approved in some state A business, which is a completely separate entity from its owners Difference between Corporation and Company: Company: an institution created to conduct business He only invest in large well established company He can start the company in his garage Principles of accounting: Policies: prudent, materiality, consistency Assumptions: continuing, consistency, accrual (revenue and cost) Proxy: it includes every proxy consensus and authorization with in the meaning of section 14 (a) of the act (representative) Consignment: Auction are quite simple A consignor brings merchandise for you to sell online Consignor owner Consignee agent Debt & Credit: every account has two sides left side Debit and right side Credit Open market: a market, which is widely accessible to all investors or consumers Annual report: (10 K) Audited document required by the SEC and send to the public companys or mutual funds share at the end of each fiscal year (balance sheet, income statement, cash flow statement and description of company operations, auditors report, summary of operations, chairmans speech) contain in annual report.

Quarterly report: (10 Q) Un audited document required by the SEC of all us public companies reporting the financial results for the quarter and noting any significant changes and events in the quarter (financial statements, discussion from the management, list of material events) Merger: two or more companies combine into one company they may form a new company Absorption: two or more companies combine into an existing company Consolidation: is a combination of 2 or more companies into a new company Acquisition: As an act of acquiring effective control by one company over the assets or management of another company without any combination of companies. Take over: as obtaining of control over management of a company by another Types of merger: horizontal, vertical, and conglomerate Reverse acquisition: One way of a company to become publicly traded by acquiring a public company and then installing its own management team and renaming the acquiring company. Reverse merger: The acquiring of a public company by a private company allowing the private company to bypass the usually lengthy and complex process of going public. ADR: American depository receipts, a negotiable certificate issued by a U.S Debt: a liability or economic obligation in the form of bonds, loans Equity: ownership interest in a company in the form of common stock or preferred stock Shareholders equity: total assets total liabilities Depression: a period during which business activity drops significantly Portfolio: A collection of investments allowed by the same individual or organization (equity, bonds, debentures, preferred stock) Portfolio Management: Choosing and maintaining appropriate investments and allocating funds accordingly Security analysis: the entire process of estimating return and risk for individual securities Portfolio analysis: To determine the future risk and return in holding various blends of individual securities Prospects: A legal document offering securities for sale required by the securities section act 1933 it must explain the offer including the terms, issuer, objectives, historical financial statements Private placement: The sale of securities directly to institutional investors such as banks, mutual funs, LIC Bad debt reserve: an amount set aside as reserve for bad debts Listing: The acceptance of securities for trading in a registered stock exchange (at least 49 % offer to public) total paid up capital should not be less than 3 crore GDR: global depositary receipts (CITI Bank 1990 introduced) Underwritings: The procedure by which an underwriter brings a new security issue to the investing public in an offering. The process of insuring someone or something Inventory: raw material, work-in-progress, finished goods not at been sold

Affiliate: A company in which another company has a minority interest related to another company Venture capital: Funds made available for startup firms small business with exceptional growth potential Capital: cash or goods used to generate income Capital budgeting: Firms decision to invest its current funds most effectively in the long-term assets in anticipation of an expected flow of benefits over a series of years Blue chip: Stock of large, national company with a solid record of stable earnings and/or dividend growth and reputation for high quality management, (first class equity shares) Board of directors: Individuals elected by a corporations shareholders to over the management of the company Strategic alliance: An agreement between two or more individuals to achieve a common goal Stock split: To attract the potential investors changing the shareholders equity announcing two or one split of common stock to reduce the face value of the share (pare value) Securitization: The process of aggregating similar investment such as loan mortgage into negotiable securities, SENSEX: An index composed of 30 largest and most actively trading stock companies in BSE, NSE Cost of capital: Minimum acceptable rate of return that a firm must earn on its investments for the market value. Short selling: Trader sells the shares with a small profit a short period by gaining limited returns in a short period. ABC analysis: Statistical tool used over inventory that a firm should not excuse some degree of control over its items which are most costly as compared to less costly items. EOQ: (economic order quantity) Refers to the order size that will result in the lowest total of orders and carrying of an item of an inventory. Leverage: Meeting a fixed cost or paying a fixed return for employing resources or funds, Describe the firms ability to use fixed cost assets or funds to magnify the returns to its owners. Operating leverage: Defined as tendency of operating profit to vary disproportionately with sales High operating leverage fixed cost more than the variable cost Formula: Contribution/operating profit Degree of operating leverage: % of change in EBIT/ %change in sales EBIT: earning before interest and tax, Contribution: sales variable cost

Financial leverage: Defines as tendency of the residual income to vary disproportionately with operating profit Formula: operating profit (EBIT)/ PBT Degree of financial leverage: %change in EPS/ %change in EBIT EPS: earnings per share, PBT: profit before tax Combination of operating and financial leverage: %Change in EPS/ % change in sales Discounted cash flow technique: time value of money concept NPV, IRR, PI Bankruptcy: becoming insolvent IRR: Is that the rate of which the sum of discounted cash inflow equals the sum of discounted cash outflow. Where NPV is 0 Shareholder: one who owns share of stock in a corporate or mutual funds Liquidate: To convert into cash (or) to sell all of a company assets pay outstanding debts and distribute the remaining to shareholders and then go out of business. Savings account: A deposit account at a bank or savings and loan which pays interest but cannot be withdrawn by check writing Transaction: An agreement between a buyer and a seller to exchange an asset for payment Credit: the borrowing capacity of an individual or company Accounts payable: Money which is owned to vendors for products and services purchased on credit Accounts receivables: Money which is owned to a company by a customer for products and services provided on credit. Broker: An individual or firm acting as intermediary between a buyer and seller, usually charging a commission. Dual trading: The practice by a broker of acting as an agent and simultaneously acting as a dealer (buying and selling of ones own account) Loan-value ratio: The amount borrowed dividend by the appraised value of the collateral (securities) in % Common-stock ratio: A companys common stock divided by its total capitalization Tax: A fee charged (levied) by a government on a product, income or activity If tax is levied directly a personal or corporation income its called as direct tax. If tax is levied on price of goods or services is called as indirect tax Income Tax: Annual tax levied by the federal government on an individual or corporations net profit Earnings report: An official quarterly or annually final document published by a public company Shows earnings, expenses and net profit

Net profit: gross sales (taxes + interest + depreciation + other expenses) Retail price: price charged to retail customers Whole sage: the purchase of goods in quantity for resale purpose Retail: selling directly to consumers or customers Credit card: Any card that may be used repeatedly to borrow money or buy products and services on credit issued by bank Debit card: A card, which allows customer to access their funds immediately electronically Profit: the positive gain from an investment or business operations Face value: the nominal $ amount assigned to a security by the issuer AMEX: (American stock exchange) Second largest stock exchange in the US after NYSE (Newyork stock exchange) largest representation of stock and bonds issued by smaller companies than the NYSE In 1998 the NASDAQ purchased the AMEX Compound interest: Interest which is calculated not only on the initial principal but also the accumulated interest of prior period. Capitalization: the sum of corporations long-term debt stock and retained earnings ADS: American depositary shares the share issued under American depositary agreement, which is actually traded GATT: General agreement on tariffs and trade affiliate with the United Nations, to facilitate international trade Tariff: A tax imposed on a product when it is imported into a country or company EBITDA: earning before interest tax dividend and amortization Exchange ratio: The number of shares of the acquiring company that shareholders will receive for one share of the acquired company Form S 1: a registration statement used in the initial public offering of securities Pooling of interest: In which the balance sheet of the two companies combined line by line without a tax impact Capital budgeting decisions: operating, administration and strategic Decision tree: Define investment, identify decision alternatives, draw decision tree, and analyze data Concept of cash flow: Initial investment, annual net cash flow, terminal cash flow Investment evaluation: Estimation of cash flow, estimation of required rate of return decision rule for making the choice. Financial analysis: It is the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss a/c Liquidity: Refers to the firms ability to pay debts as they mature

Solvency: refers to the firms ability to meet eventually all its long-term and short-term debt Accounting system: A source of financial information of a firm should know the financial implications of its operations Treasurer: auditing cost control Controller: planning and budgeting, inventory management, accounting Finance: Is the conversion of accumulated funds to productive use Finance aptly been called as science of money Finance functions: Investment decision Dividend decision Liquidity decision Financing decision Scope: finance, production and marketing Finance management: Is that managerial activity which is concerned with the planning and controlling of the firms financial resources Forfeiture of shares: when a shareholder fails to pay calls Dividend: Profit and loss a/c Dr To proposed dividend a/c (Being dividend proposed by the directors) Preliminary expenses: Are those expenses which are incurred on the formation of the company Cost: the amount of expenditure incurred on attributable to a specific thing or activity Short-term finance: Trade credit, bank credit, public deposits, advances, personal loans, retained earnings, accrued expenses, and provision for tax, depreciation Commerce: business Calls in erriers will be disclosed in balance sheet: Deduction from subscribed capital Father of scientific management: F.W Tayler Espit Decorps: Employee at all levels should be given the opportunity to take initiative and exercise judgment Government Company: Central government or state government holds 51 % more of the total paid up capital Entrepot trade: import of foreign goods view to re export Calls in advances will be disclosed in balance sheet: Deduction from subscribed capital Under share premium disclosed in B/S: reserves and surplus Net profit on reissue of forfeited shares will be transferred to: capital reserve Condition for issue of shares at discount: After one year from the date of certificate of commencement of business

Discount on issue of shares will be disclosed in B/S: miscellaneous expenses Purpose of preparing receipts and payment account: To know balance of cash and bank at the end of the year Tangible assets: which are having physical existence (Fixed assets) Intangible assets: which does not having physical existence (patents, copyrights, and trademarks, franchises, intellectual property rights) Not a negotiable instrument: deed of partnership Unclaimed dividend: dividend paid out not yet claimed by the shareholder Deferred revenue expenditure: Expenditure whose benefits lasts for more than one accounting period (advertisement exp) Right issue: issue of shares to existing shareholders Which how many days the minimum subscription amount should be received by a company: 90 days A public company needs the business to start: Certificate of commencement of business Fundamental analysis: To find out the intrinsic value of a security, true economic worth of a financial asset (It contains economic analysis, industry analysis, and company analysis) Technical analysis: Based on past information prices of stock depends on supply and demand Dow theory: Raising trend line no single individual or buyer can influence the major trend of the market Flat trend line market discounts natural calamities can influence the market Falling trend line it is provided way to understand it Bull market: up ward Bear market: down ward NSDL: national securities depository limited Random walk theory:

Strong efficient market all information is reflected on prices big one Semi strong all public information is reflect on security prices second one Weakly efficient market all historical market influence the security prices small one Markwitz theory: the effect of combining two securities CAPM: (capital asset pricing model) The relationship between expected return and UN avoidable risk Combine risk free securities with risk securities Derivatives: A financial derivative is a product that derives its value from an underlying asset Tools for better financial and risk management Confer on the financial system are well known

Options: Types of contract between two parties Put option: to sell the securities to fixed amount Call option: to purchase securities for fixed amount Futures: Is an agreement to pay or sell an asset at a certain time in the future for a certain price Types Organized exchange which are traded in over the counter (OTCI) Standardization, clearing house, margins Risk: Foregoing of money (systematic, unsystematic, business risk, market risk, financial risk) Trading system: Through brokers and dealers Commission brokers, floor brokers, odd-lot dealers, Taravaniwala, bundiwalars, arbitrager, security dealers Accounting: It records business transactions takes place during the accounting period with a view to prepare financial statements Accounting is art of recording classifying and summarizing in a sufficient manner in terms of money, (to communicate quantitative information) Objectives: To measure the profit of the company, to ascertain the financial position of the company Accounting cycle: Recording transaction in subsidiary books Classifying data by posting them from subsidiary books to accounts Closing the books and preparing of final accounts Accounting concepts: Entity concept: Scope of what is to be recorded or what is being excluded from the accounting books (ex: drawings account) important to the accountant Corporate capital paid out only at the time of winding up of the company Dual aspect concept: It is transaction based purchase, sales, payments, receipts total amount debit is equal total amount credited capital + liabilities = assets Going concern: The enterprise will continue to exist in the foreseeable future continuing in operation for the foreseeable future Accounting period concept: The time interval is called accounting period, natural business year 12 months Money measurement concept: Transaction is recorded in terms of money ex: purchase of building Matching concept: Profit = revenue expenses

Cost concept: (historic) Asset is recorded at the price paid to acquire it purchase land 80,000 (whether it is 1,75,000 at the time of preparation of balance sheet) will not be considered Revenue recognition concept: The amount received (receivables) sale of out put are called revenue Revenue is the gross inflow of cash (sale of goods manufactured by the company) Accrual concept: Cost or recognized when they are incurred and not when paid until cash is received Objectivity concept: (evidence) Transaction should be supported by verifiable document asset is shown by replacement cost Accounting conventions: Convention of disclosure: Accounts must be honestly prepared and all material information must be disclosed there in Contingent liabilities appearing as a note, market value of investments appearing as a note Convention of materiality: Material and immaterial matters Value of stock: loss of markets due to competition or government regulations, increase in wage bill Allocation of cost: allocated to every one of the three years Convention of consistency: Important conclusions regarding the working of a company over a number of years, accounting procedures, and policies should be consisting. Convention of conservatism: (playing sage) Considering of all prospective losses but leaves all prospective profits Make the provision of all prospective losses but leaves all prospective profits Make the provision for doubtful debts Valuation of stock, provision for fluctuation of investments Amortization Financial accounting: To ascertain the financial results Profit & loss in the operations of the business during the accounting period Cost accounting: To analyze the expenditure To ascertain the cost of various products manufacture by the company Management accounting: To assist the management in taking rational policy decisions Financial statements: It contains summarized information of the firms financial affairs organized systematically Financial statements are prepared from the accounting records maintained by the firm Generally accepted accounting principles (GAAP) and procedures are followed to prepare those statements It presents firms financial situation to users Preparation for the purpose of external reporting to owners investors and creditors

Objective: For decision making To provide reliable financial information about economic resources and obligations of business enterprise. For estimating the earnings potential of the enterprise Types of financial statements: Income statement (P & L a/c): Periodic statement FPO (for the period of) It presents the summary of revenues, expenses and net income or net loss of a firm Measure the firms profitability; it is a scoreboard for a period of time Operating expenses: Office salary, wages, insurance, rent, rates, taxes, stationary, printing, post office, repairs Selling expenses: Sales man salary, traveling exp, advertising, discount paid, bad debts, commission for sales Distribution expenses: Sales traveling, wear housing rent, insurance Financial expenses: Bank charges, bank commission, and bank overdraft interest, interest on capital Non-debiting expenses in P & L account: Drawings, income tax, life insurance P & L account credit items: Interest received, discount received, rent received, and collection of bad debts Balance sheet: Pointed statement Portrays an exact picture of the financial position of the enterprise About economic resources and obligations of a business entity and about it owners as a specific date, it is a measure of the firms liquidity and solvency What is business owns (assets) and owes (liability) the difference is capital or owners equity all its contain in balance sheet Uses: communicating to the users, for raising further capital Statement of retained earnings: It means the accumulated excess of earnings over losses and dividends the balance shown by the income statement is transferred to the valance sheet through this statement after making necessary appropriations Statement of changes in financial position: (cash flow statement) It is essential to identify the movement of working capital or cash in and out of the business Changes in the firms working capital Changes in the firms cash position Changes in the firms total financial position Income: Increase in the net worth of the business arising out of business operations Cost of goods sold: Opening stock + purchases + direct expenses closing stock Assets = liabilities + share holders equity

Assets: Any owned physical object (tangible) or right (intangible) having economic value to its owners Fixes assets: A substantial part of its capital in acquiring what are known as fixed assets 80% - 90% of long-term funds used to acquire fixed assets Valuation of fixed assets: Historical cost method, discounted cash flow method, replacement cost method Goodwill: Means that old customer will resort to the old place, name fame and reputation of the company, goodwill arises when a new partner admitted, acquire by another, spent on R & D Methods of calculating goodwill: Average method, super annuation method, capitalization method Other assets: Preliminary expenses, share issuing expenses, discount on issue of shares and debentures, these should be written of from out of profits Contingent assets: Un called share capital of the company, not shown in the balance sheet because principal of conservatism Current assets: Are those, which are realized within the operating cycle of the business Investments: Idle funds of a business are invested in marketable securities Objective: convert them into cash with in a period of one year Investments in government securities Immovable properties Capital of partnership business Liability: Economic obligation of an enterprise Current liability: Which are paid within one year (paid out of current assets) Long-term liabilities: Which do not become due for payment in one year Contingent liabilities: Uncalled liability on investments in another companies Erriers of fixed cumulative dividend Bills discount (if drawee doesnt pay the bill amount to bank) Owners equity: equal to net worth Subsidiary books: Special books: Sales book purchase book Returns book sales, purchases Bills book payable receivables Cashbook

General books: Opening entries adjusting and closing post entries, correcting entries Personal accounts: Proprietors, suppliers, creditors Artificial persons limited company a/c, insurance company a/c, government company a/c Representative persons common title, salaries outstanding, rent prepaid Real accounts: Tangible land, buildings, machinery Intangible goodwill, patents, intellectual properties, Nominal accounts: Salaries, rent, commission, discount, insurance

Personal accounts: Real accounts: Nominal accounts:

Debit the receiver what comes in all losses and exp

credit the giver what goes out all gains

Ledger: is a set of accounts, ledger is the important book of the double entry system Posting: process of entering in the ledger Journal entry: The book of first entry (original entry) chronological record Trail balance: All the accounts of a concern are thus balanced off then they are put in a list Debit side trail to credit side Debit side: losses, expenses, and assets Credit side: gains, revenues, liabilities To find out the figures arithmetically correct or not Trading account: To find out the gross profit Debit side: wages, carriage, and royalties if it is used for production Factory expenses, package goods are incomplete such as biscuits consumable stores (cotton waste, grease, engine oil) factory rent salaries Gross profit: sales cost of goods sold Inventories: Raw materials, work in progress, finished goods Need for holding inventories: Transaction motive smooth production Precautionary motive risk, unpredictable changes Speculative motive price fluctuations Methods: First-in first-out method (FIFO) Last-in first-out method (LIFO) Weighted average method Specific identification method Ordering cost: entire cost of acquiring raw materials Carrying cost: incurred for maintaining storage, insurance, taxes

Capital structure: Refers the mix of long-term sources of funds, preference capital and equity capital and retained earnings BEP: (break-even-point) Total revenues equals to total cost Behavior of profits in response to the changes in volume, cost and prices Need: What minimum level of sales need be achieved to avoid losses What should be the sales level to earn a target profit Make or buy decision, production planning BEP (units): total fixes cost/ selling price variable cost per unit BEP (rupees): total fixed cost/ 1- variable cost per unit/ selling price P/V ratio: sales variable cost/ sales BEP (rupees): fixed cost/ p/v ratio (or) contribution ratio Angle of 45: The vertical and horizontal lines are spaced equally with the same distance Intersection between sales line and total cost line is the break-even point Margin of safety: The excess of actual sales (or) budgeted sales over the break even sales is known as M.S Ratio: budgeted sales break-even sales/ budgeted sales Target sales: fixed cost + desired profit/ contribution ratio (or) p/v ratio Budget: Is a detailed plan of operations for some specific future period Corporate finance: It is concerned with the raising and administration of funds used in business Deals with practices and policies Deals with financial problems Marketable securities: Are the temporary short-term investments in shares, debentures and bonds Commercial papers, UTI units, inter corporate lending Bad debts: debts, which will never be collected, are called Bills receivables: Represents the promises made in writing by debtors to pay definite some of money after some specific period of time Loans and advances: due from employees and associates Patents: Right granted by the government enabling the holder to control the use of an invention Copy right: Exclusive right to reproduce and sell literacy musical and artistic works Franchises: Contracts giving exclusive right to perform certain functions or to sell certain products or services Other assets (preliminary exp, deferred revenue expenditure): Prepayments for services or benefits for period longer than the accounting period Ex: advertising, preliminary exp

Relation ship between B/S and P & L a/c: Revenue is an inflow of assets (or outflow of liabilities) Expenses is an outflow of assets (or inflow of liabilities) Bills of exchange: The seller draws a bill of exchange for a specific amount payable at a specified date in future It is accepted by the customer or by a bank Brawer: who write the bill Drawee: who accepted the bill Purchase or discount of bills: The amount provided under this agreement is covered within the overall cash credit or overdraft limit implies that the bank becomes owner of the bill Banks holds the bill as a security for the credit Banks charge discount charges Over draft: The borrower is allowed to withdraw funds in excess of the balance in his current account Up to a certain specified limit during a stipulated period, interest charged on daily basis operates the account through cheques Cash credit: Borrower is allowed to withdraw funds from the bank up to the sanctioned credit limit Funds flow statement: (statement of sources and uses of funds) The statement of changes in financial position prepared to determine only the sources and application (or uses) of working capital between the dates of two balance sheets Banks and financial institutions required it when a company approaches them for loans Increase in assets is use of funds Increase in liabilities and net worth (shareholders equity) is source of funds Decrease in assets is source of funds Decrease in liabilities and retained earnings is use of funds Fund: Its a financial product, change in cash only, Change in working capital, change in financial resources Working capital: Fund required to run the day-to-day business activities cannot be overemphasized Finance provided to support the short-term assets of the business Sources: Over draft, cash credit, purchase or discounting of bills What is the need to invest funds in current assets How much funds should be invest in each type of current assets Gross working capital: current assets Net working capital: current assets current liabilities (net current assets) Need: To run the day to day operations of the business Fixed working capital: Minimum level of current assets is referred to as permanent or fixed working capital Degree of excessive working capital: Chances of inventory mishandling, waste, losses increase Defective credit policy, stock collection period Higher incident of bad debts, managerial inefficiency

Inadequate working capital: Difficult to implement operating plan, operating inefficiency, Fixed assets are not efficiently utilized, losses its reputation Working capital cycle: Acquiring raw materials resources Manufacturing the products finished goods Accounts receivables through sales if credit sales book debts Use of working capital: Adjusted net loss from operations Purchase of non-current assets Repayment of long-term debt Redemption of redeemable preferred shares Payment of cash dividend Determinants: Nature and size of business Manufacturing cycle Sales growth Production policy Price level changes Operating efficiency and performance Firms credit policy Availability of credit Estimating working capital: Current assets holdings period Ratio of sales Ratio of fixed investments Cash flow statements: Summarizes the causes of changes in cash position between dates of two B/S Only cash transactions depreciation is not considering It is useful for short-term planning Statements of changes in financial statements on cash basis Sources: Profitable operations of the firm Decrease in assets (except cash) Increase in liabilities Comparative statement analysis: To find out the periodic changes in the financial performance of a company, at least for two years, changes: income or decrease aggregate changes Common-size statements: Vertical analysis Take sales as 100 Take total assets and total liabilities as 100 Trend analysis: (time series analysis) The direction of changes over a period of years Applicable to the items of P & L a/c Trends of sales and net income

Ratio analysis: The relationship between two or more things Benchmark for evaluating the financial position and performance of a firm To make large quantitative of financial data and to make qualitative judgment about the firms financial performance Standards of comparison: Past ratios from the past reports, project ratios, competition ratios Industry ratios ratios of the industry to which the firms belongs Uses of ratio analysis: The ability of the firm to meet its current obligations Long-term solvency by borrowing funds The efficiency utilizing assets in generating sales revenue Overall operating efficiency and performance of the firm Financial ratios as predicators of failure Types: liquidity, leverage, activity, and profitability Liquidity ratios: Essential for a firm to be able to meet its obligations as they become due Measure the ability of the firm to meet its current obligations Firm should not suffer from lack of liquidity will result in a poor credit worthiness Loss of creditors confident A very high degree of liquidity is also bad idle assets earn nothing Current ratio: current assets/ current liabilities Standard is 2 to 1 (or) 2:1 For measuring short-term solvency It represents a margin of safety for creditors Quick ratio: current assets inventories/ current liabilities Standard is 1 to 1 (or) 1:1 Converted into cash without any loss of value Cash is the most liquid asset Inventories less liquidity fluctuate Cash ratio: cash + marketable securities/ current liabilities Internal measure: current assets inventory/ average daily operating expenses Total operating expenses/360 A firms ability to meet its regular cash expenses is internal measure Operating exp: expenses + cost of goods sold + selling & administrative expenses + general expenses depreciation Net working capital (NWC): NWC/ net assets Current liabilities exclude short-term borrowings Leverage ratios: For bankers - firms current debt paying ability For firms long-term financial strength The firm has a legal obligation to pay interest to debt holders irrespective of the profit made or loss incurred by the firm Total debt ratio: total debt/ total debt + net worth (or) TD/ NA TD: total debt, NA: net assets For long term solvency of a firm

Capital employed = net assets (or) Shareholders equity + long term debt Net worth = shareholders equity Debt equity ratio: external equity/ internal equity or TD/NW (net wroth) A high ratio shows that claims of creditors are greater than those of owners A low ratio implies greater claims of owners than creditors Capital employed to net worth ratio (CE): CE/ NW By lenders and owners contribution Total liabilities to total assets ratio: TL/ TA Financial risk: preference capital include in net worth Lease payment = debt Debt ratio: TD + value of lease/ TD + value of lease + net worth Coverage ratios: Interest coverage ratio: EBIT/ interest (or) EBIDT/ interest Whether the business would earn sufficient profits to pay periodical the interest charges Standard is 6 to 7 times Debt service coverage ratio: EBIT/ interest + principle payment installment/ 1 tax rate Whether the company to make payment of principle amount Activity ratios: Funds of creditors and owners are invested in various assets to generate sales and profits The better the management of assets the larger the amount of sales Turnover ratios: balance between sales and assets Inventory turnover ratio: cost of goods sold/ average inventory The ratio indicates the efficiency of the firm in selling its product Days of inventory holdings: 360/ inventory turnover How rapidly the inventory is turning into receivable through sales Debtors turnover ratio: credit sales/ average debtors (or) sales/ debtors Average debtors: opening balance + closing balance/ 2 Collection period: 360/ debtors turnover Average collection period measures the quality of debtors speed of their collection Creditors turnover ratio: credit purchases/ average creditors (not important) Assets turnover ratio: sales/ net assets Assets used to generate sales Ex: Sales of one rupee of capital employed in net assets Total assets: sales/ TA Fixed assets: sales/ net F.A (fixed assets) Working capital turnover ratio: sales/ net CA Ex: The one rupee of sales the company need as 0.31 of net current assets Profitability ratios: The company should earn profits to serve and grow over a long period of time Profitability in relation to sales Profitability in relation to investment Gross profit margin: sales cost of goods sold/ sales Efficiency which management produces each unit of product

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

Creditors: Are those persons who have already advanced some money or moneys worth to the business Conflicts of accounting principles: Valuation of stock: some years market value Some years cost, because of principle of conservatism But the principles of consistency will controversy Feasibility: assets are recorded at cost less depreciation Petty cash book: Small amounts and high frequency Ex: payment of stationary, postage, telegrams, and carriage Errors not disclosed by Trail Balance: Omission in recording the transaction in the books of original entry debit and credit side both Wrong recording in the original books Posting to wrong account with correct amount and no correct side Compensatory error: forgetting to post Error of principle Errors disclosed by trail balance: Error in casting of subsidiary books (make total) Error in carrying forward the one page to another page Error in posting to ledger Error in balancing the amount Preparation of debtors and creditors schedule How to find out the errors: Divide the difference by 2 and find out the equal figure appear in the trail balance If the difference is evenly divisible by 9 error the trans position (847 treated as 987) If the amount is net round figure its mistake in posting If the amount is round figure mistake in casting or carrying forward If the difference is large amount compare this year trail balance to previous year Free samples: debit to advertisement a/c and credited to purchase a/c Closing entry: In an account is having debit balance that is credited either trading a/c or P & L a/c similarly like the way to credit Debit sales a/c debit p & l a/c Credit trading a/c credit salaries a/c Post closing trail balance: In order to see whether the amount in the ledger are still in balance, which are still open Mercantilist system: period taken into account Stock destroyed: deducted from closing stock loss is shown in debit side of P & L a/c When not insured: P & L a/c Dr To Trading a/c When fully insured: Insurance claim a/c Dr To Trading a/c

When partially insured: Insurance claim a/c Dr P & L a/c Dr To Trading a/c Expenses out standing: Debit expenses (p & l a/c) Credit expenses out standing a/c (liability) Expenses paid in advance: Prepaid expenses (asset) Credit expenses (p & l a/c) Out standing or accrued income: (asset) Like interest on securities, dividend on shares, commission are earned but not received It has to credited to insurance a/c Debit accrued income (asset) Credit income (p & l a/c credit side) Income received in advance: Debit income (p & l a/c) Credit income received in advance (liability) Depreciation: Debit depreciation a/c (p & l a/c) Credit asset (B/S) Bad debts: Debit bad debt (p & l a/c) Credit debtors (B/S) Bad debt provision: Balancing of debtors (objective) Debit p & la/c Credit bad debts provision Provision for discount on debtors and creditors Discount on debtors: debit p & l a/c Credit provision of discount on debtors Discount on creditors: debit provision for discount on creditors Credit p & l a/c Interest on capital Debit p & l a/c Credit capital a/c Interest on drawings: Debit capital a/c Credit p & l a/c Cash paid allowed discount: Cash a/c Dr X a/c Dr Discount a/c Dr To cash a/c To X a/c To discount a/c

Advance tax payment: Advance tax a/c Dr To Bank a/c

Tax a/c Dr To advance tax a/c To bank a/c Life insurance premium: paid on life it is add to drawings Insurance premium: If shop p & l a/c If goods purchased, factory building, factory machine Trading a/c Loss or gain on asset sold: p & l a/c Discount received and allowed: P & L a/c Stock at the end appear in trail balance: Opening stock: Debit purchase a/c Credit stock a/c Closing stock: Debit stock a/c Credit purchase a/c Bank reconciliation statement (BRS): Two sources to find out the balance at bank Bank columns of the cash book (or) bank account in the ledger Pass book (copy of bank column in cash book) Passbook: credit balance favorable Cashbook: debit balance favorable Purpose of preparing BRS: To reconcile the two balances which often differ for various reasons The statement show the difference between two balances Reasons: Cheques deposited for collection but not yet collected Cash book debit Passbook - credit If the cash book balance is given - less to the If the pass book balance is given add to the Cheques issued but not yet presented for payment: Cashbook credit Pass book debit If the cash book balance is given add to the If the pass book balance is given lee to the Credits in the pass book only: Interest on favorable balance Interest on fixed deposits Dividend and interest on securities collected Sales proceeds of securities behave of the cash Bills promises notes collected Amount remitted to the account of the customer by the debtors (deposit) In all cases cashbook shows the high balance than cashbook If the cash book balance is given add to the

If the pass book balance is given less to the Debits in the pass book: payment as per LIC premium, subscription to club Interest on unfavorable balance (overdraft) Bank charges Purchase of investments In all cases passbook balance shows less balance than cashbook If the cash book balance is given less If the passbook balance is given add Error in passbook and cashbook Payment side of the cashbook is undercast by 200 in case of favorable balance add to the passbook In case of un favorable balance reduce from the passbook A cheque for Rs 100 paid to a party entered error in the cashbook the passbook balance is more by 100 Sa cheque for 600 draws no 1 a/c wrongly charged by the bank to no 2 a/c No 1 a/c pass book balance increase 600 reduce the pass book balance no 2 Bookkeeping: Recording of business transactions by following accounting procedures Accounting: following the rules and procedures Manufacturing account: It shows the expenditure in an activity or product it will transfer to trading account