Professional Documents
Culture Documents
MEANING:
Ratio Analysis:
It is the relationship between two financial values. To make it clear the word relationship stands
for a financial ratio which is the result of two mathematical values.
Uses:
Classification of ratios:
1. Profitability ratios
2. Activity turn over ratios
3. Financial ratios
a) Liquidity ratios
b) Leverage ratios
1. Miscellaneous ratios
Before going to ratios we need to know about what the current assets are & what the current
liabilities are
Current Assets:
Cash in hand
Cash at bank
Sundry debtors
Bills receivable
Fixed Assets:
Motor vehicles
Intangible Assets:
Trade marks
Patents
Copy rights
Goodwill
Current Liabilities:
Sundry creditors
Bills payable
Bank overdraft
Outstanding expenses
Mortgage loan
Bank loan
Profitability Ratios:
Formulaes:
a) Gross profit ratio: (Gross profit / Net sales) 100
This ratio tells us the result from trading activity to know operating efficiency of the
organization.
b) Net profit ratio: (Net profit / Net sales) 100
It indicates the final result to organization and overall efficiency of the organization.
c) Operating ratio:
This ratio speaks of the operational performance of the organization and refers the
managerial efficiency of the firm.
Where, CGS = Sales Gross profit (or)
Opening stock + purchases + manufacturing expenses closing stock
Operating expenses = Office Administrative Expenses + Selling & Distribution Expenses +
Financial Expenses.
d) Operating net profit ratio: 100 Operating ratio
Expenses ratios:
Return on shareholders fund: (Net profit after taxes / Shareholders fund) 100
j)
k) Dividend pay-out ratio (DPR): Dividend per equity shares / Earnings per share
l)
Earnings yield ratio (EYR): (Earnings per share / Market value per share) 100
f)
e) Capitalization method:
Net Capital Employed = Future maintainable profits / Normal rate of return
Debit note:
It is the note prepared and sent to the supplier while returning the goods purchased on credit
from him, intimating that his account is debited to the extent.
Credit note:
It is the note prepared and sent to the customer after receiving the goods returned by him,
intimating that his account is credited to that extent.
Definition of Accounting:
Accounting has been defined by the American Institute of Certified Public Accountants, a
"The art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least, of a financial character, and
interpreting the results thereof".
Principles of Accounting:
a)
Personal account:
Real account:
Nominal account:
Recording in Journal
Posting into Ledger
Generation of Trial Balance
Trading & Profit & loss account
Balance Sheet
Concepts of Accounting:
1. Business entity concept: According to this concept, the business is treated as a
separate entity distinct from its owners and others.
2. Going concern concept: According to this concept, it is assumed that a business has
a reasonable expectation of continuing business at a profit for an indefinite period of
time.
3. Money measurement concept: This concept says that the accounting records only
those transactions which can be expressed in terms of money only.
4. Cost concept: According to this concept, an asset is recorded in the books at the
price paid to acquire it (Actual cost) and that this cost is the basis for all subsequent
accounting for the asset.
5. Dual aspect concept: In every transaction, there will be two aspects the receiving
aspect and the giving aspect; both are recorded by debiting one accounts and crediting
another account. This is called double entry.
6. Accounting period concept: It means the final accounts must be prepared on a
periodic basis. Normally accounting period adopted is one year, more than this period
reduces the utility of accounting data.
7. Realization concept: According to these concepts, revenue is considered as being
earned on the data which it is realized, i.e., the date when the property in goods passes the
buyer and he become legally liable to pay.
8. Materiality concept: It is a one of the accounting principle, as per only important
information will be taken, and unimportant information will be ignored in the preparation
of the financial statement.
9. Matching concept: The cost or expenses of a business of a particular period are
compared with the revenue of the period in order to ascertain the net profit and loss.
10. Accrual concept: The profit arises only when there is an increase in owners capital,
which is a result of excess of revenue over expenses and loss.
Accounting Conventions:
1.
Consistency: Accounting practices should remain the same from year to year.
2. Disclosure: All information which is essential for fully understanding the financial
statements should be disclosed in addition to the information required to be disclosed by
law.
3. Conservatism: Financial statements should be drawn up on a conservative basis i.e.,
anticipated income should not be recorded where as likely losses should be provided for.
Journal: The journal contains details of transactions (other than those relating to receipts or
payments in cash or through bank), recorded in chronological order.
Ledger: Ledger is a set of accounts. It contains all accounts of the business enterprise whether
real, nominal, personal.
Trail balance: A trial balance is a statement of debit and credit balances extracted from the
various accounts in the ledger with a view to test the arithmetical accuracy of books.
Debit note: It is the note prepared and sent to the supplier while returning the goods purchased
on credit from him, intimating that his account is debited to the extent.
Credit note: It is the note prepared and sent to the customer after receiving the goods returned
by him, intimating that his account is credited to that extent.
Single Entry system: Under this system, only one aspect of each transaction is recorded. This is
not a scientific method of accounting and is prone to error and manipulation.
Double Entry system: Under this system, both aspects of each transaction are recorded,
ensuring that the sum of all debits is equal to the sum of all credits. This is the most scientific
method of accounting and reduces the occurrence of errors and scope for manipulation.
Trading account: It is the account prepared to find out trading profit or loss of the business i.e.,
Gross profit or loss during the period. This is a Nominal Account in its nature hence all the
Trading expenses should be debited where as all the Trading incomes should be credited to
Trading Account. The Balance of Trading Account will be considered as Gross profit (credit
balance) or Gross loss (debit balance) and will be transferred to Profit and loss account.
While preparing the Trading Account the following equation also can be used
Sales less returns (-) Cost of Goods sold =Gross Profit or Gross loss.
Sales=Total (Cash + Credit) sales
Cost of goods sold = Opening stock of goods = Purchases (Cash + Credit) less returns +Direct
Expenses (-) Closing Stock of Goods.
Capital Expenditure: Any amount spent in increasing the earning capacity of a business is
called as Capital Expenditure and includes Expenses like Purchase, Installation and improvement
of Fixed Assets and repayment of loans.
Revenue Expenditure: Any amount spent in earning Revenue/Profit is called as Revenue
Expenditure and includes the Expenses like salaries, rent, wages, repairs, maintenance, stores,
depreciation and materials etc.,
Capital Receipts: Any amount Received as investment by the owners, raised by the way of
loans and sale proceeds of fixed Assets is called as capital Receipt.
Revenue Receipts: Any amount Received in the normal course of Business is called as Revenue
Receipts and includes sale of goods, interest, discount, commission, rent received.
Deferred Revenue Expenditure: The benefit of the expenditure will be differed to the future
periods for which the expenditure is charges. Differed revenue expenditure is known as asset in
balance sheet.
Ex: Preliminary expenses, Advertisement expenses.
Deferred Revenue Income: Deferred revenue income which is income differed to the future
periods. That means it is not related to one period but related to more than one period.
Ex: Pension Fund Scheme.
Accrued expenses: The expenditure which is incurred and the payment there of might or might
not be paid.
Accrued income: Income earned during the current accounting year but has not been actually
received by the end of the same year.
Prepaid expenses: The amount paid for the expenditure relating to the future years. Prepaid
expenses are to be deducted from such expenses in the debit side of profit and loss account,
Shown on the asset side of a Balance sheet as an asset.
Outstanding expenses: Outstanding expenses refer to those expenses which have become due
during the accounting period for which the final accounts have been prepared but have not yet
been paid.
Outstanding income: Outstanding income means income which has become due during the
accounting year but which has not so far been received by the firm.
Account receivable: Money owed by customers to another entity in exchange for goods or
services that have been delivered or used, but not yet paid for. Receivables usually come in the
form of operating lines of credit and are usually due within a relatively short time period, ranging
from a few days to a year.
Account payable: Money which a company owes to vendors for products & services purchased
on credit. Since the exception is that the liability will be fulfilled is less than a year. When
accounts payable are paid off, it represents the negative cash flow of the company.
Debentures: (AS-6): When a company borrows money from investing people, it issues a bond
which is stamped with the official seal of the company. These bonds are called "Debentures".
Debentures are the most common form of loan capital which is made available by
investors on a long-term basis.
It provides vital information about the companys ability to generate future cash flow to
satisfy investors and creditors expectation.
Fund flow statement: A statement that uses net working capital as a measure of liquidity
position is referred to as funds flow statement.
Reveals the changes in the working capital and gives the details of the sources from
which working capital has been financed.
Helps in the analysis of the financial operations and explains causes for the changes on
the liquidity position of the company.
Cash flow statement is concerned only with the change in cash position.
1) Funds flow statement is concerned with change in working capital position between two
balance sheet dates.
2) A cash flow statement is merely record of cash receipts and disbursements.
3) A funds flow is the studying the solvency of a business one is interested not only in cash bal
but also in the assets which are easily convertible into cash
Differences between equity shares & preference share holders
EQUITY SHARES and PREFERENCE SHARES
1)
1)
2)
2)
3) Equity Shares are shares whose profit sharing depends on Profit Making of the Co. If the
company makes huge profits, there dividend sharing will be high else it will be low.
3) Preference Share Holders, Dividend is a fixed income to them. They get dividend at a fixed
rate, Irrespective of the Profit Making of the Company.
4)
4) Preference Share Holder, it is a right to get cumulative or non cumulative dividends from the
company.
5) Equity Shareholders are called RESIDUAL OWNERS of the company. After all the
obligations of the company are over, the Equity Share Holders get their share.
5)
Preference Share Holders get paid their dividends ahead of Equity Shareholders.
1)
1)
2) In public limited company there are minimum seven members require to start it operations,
and there is no limit for maximum.
2) In private limited company there are minimum two members require to start its operations,
and maximum members are 50.
3)
3)
4) Public ltd company starts its operations only after getting business commencement
certificate (but not after incorporation).
4)
5)
5)
Bombay Stock Exchange (BSE): Bombay stock exchange is the first and securities market in
India, the BSE was established in the year 1875 as the Native share & stock brokers association
based on Mumbai, India. The BSE list over 6000 companies & is one of the largest exchanges in
the world. The BSE has helped to develop the countrys capital markets, including the retail debt
market and helped to grow the Indian corporate sector.
National Stock Exchange (NSE): The National Stock exchange is Indias largest financial
market. Established in the year 1992, the NSE has developed into a sophisticated, electronic
market, which ranks third in the world for transacted volume.
The national stock exchange conducts transactions in the wholesale debt, equity & derivative
markets.
Initial Public Offering (IPO): IPO stands for Initial Public offering. The shares are issued for
the first time to the public as opposed to the secondary market.
IPOs are often risky investments, but often have the potential for significant gains.
IPOs are often used as a way for a young company to gain necessary market capital.
Follow on Public offering (FPO): An issuing of shares to investors by a public company i.e.,
already listed on a stock exchange.
Fictitious assets: These are assets not represented by tangible possession or property. Examples
of preliminary expenses, discount on issue of shares, debit balance in the profit and loss account
when shown on the assets side in the balance sheet.
Working capital: The funds available for conducting day to day operations of an enterprise.
Also represented by the excess of current assets current liabilities.
Venture capital: It refers to the financing of high risk ventures promoted by new qualified
entrepreneurs who require funds to give shape to their ideas.
Amortization: The process of writing of intangible assets is term as amortization.
Capital employed: The term capital employed means sum of total long term funds employed in
the business. i.e.(Share capital + reserves & surplus + long term loans (non business assets +
fictitious assets)
Minority Interest: Minority interest refers to the equity of the minority shareholders in a
subsidiary company.
Leverage: It is a force applied at a particular point to get the desired result.
Operating leverage: The operating leverage takes place when a changes in revenue greater
changes in EBIT.
Financial leverage: It is nothing but a process of using debt capital to increase the rate of return
on equity.
Combined leverage: It is used to measure of the total risk of the firm = operating risk +
financial risk.
Joint Venture: A joint venture is an association of two or more the persons who combined for
the execution of a specific transaction and divide the profit or loss thereof an agreed ratio.
Partnership: Partnership is the relation b/w the persons who have agreed to share the profits of
business carried on by all or any of them acting for all.
Factoring: It is an arrangement under which a firm (called borrower) receives advances against
its receivables, from financial institutions (called factor).
Capital budgeting: Capital budgeting involves the process of decision making with regard to
investment in fixed assets. Or decision-making with regard to investment of money in long term
projects.
Payback period: Payback period represents the time period required for complete recovery of
the initial investment in the project.
ARR: Accounting or Average rates of return means the average annual yield on the project.
NPV: The net present value of an investment proposal is defined as the sum of the present
values of all future cash inflows less the sum of the present values of all cash out flows
associated with the proposal.
Profitability index: Where different investment proposal each involving different initial
investments and cash inflows are to be compared.
IRR: Internal rate is the rate at which the sum total of discounted cash inflows equals the
discounted cash out flow.
GDR (Global depository receipts): A depository receipt is basically a negotiable certificate,
dominated in us dollars that represent a non-US company publicly traded in local currency
equityshares.
ADR (American depository receipts): Depository receipt issued by a company in the USA is
known as ADRs. Such receipts are to be issued in accordance with the provisions stipulated by
the securities Exchange commission (SEC) of USA like SEBI in India.
Budget: It is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies.
Budgetary control: It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the actual results compared
with the forecasted and planned ones.
Cash budget: It is a summary statement of firms expected cash inflow and outflow over a
specified time period.
Master budget: A summary of budget schedules in capsule form made for the purpose of
presenting in one report the highlights of the budget forecast.
Fixed budget: It is a budget which is designed to remain unchanged irrespective of the level of
activity actually attained.
Zero-based budgeting: It is a management tool which provides a systematic method for
evaluating all operations and programs, current of new allows for budget reductions and
expansions in a rational manner and allows reallocation of source from low to high priority
programs.
Marginal cost: It is a technique of costing in which allocation of expenditure to production is
restricted to those expenses which arise as a result of production, i.e. materials, labour, and direct
expenses and variable overheads.
Marginal costing: An additional cost which is involved for production of additional unit.
DERIVATIVES
Derivative: This derivative concept was introduced in India in the year 1992.
Derivative is product whose value is derived from the value of one or more basic variables of
underlying asset.
(or)
A Derivative is a financial contract whose value is derived from or depends on the price of
some underlying asset. Equivalently the value of a derivative changes when there is a change in
the price of an underlying related asset.
Underlying assets:
Shares
Securities
Bullion
Stocks
Bonds
Currency
Types of derivatives: Mainly there are four types of derivatives they are
1. Forward contract
2. Future contract
3. Options
a)
Call option
b) Put option
1. Swaps
1. 1. Forward contract: A forward contract is customized contracts between two entities
were settlement takes place on a specific date in the future at todays pre agreed price
(or)
Future contract:
A future contract is an agreement between two parties to buy or sell an asset at a certain time in
the future at a certain price. Future contracts are standardized exchange traded contracts.
(or)
It is an agreement between two parties for exchanging of underlying asset at a specific maturity
date to the future maturity date market value, in future contract maturity value is fixed on the rate
of maturity date at market price.
1. 3. Options: An option gives the holder of the option the right to do something. The
option holder option may exercise or not.
Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
Put option: A put option gives the holder the right but not obligation to sell an asset by a certain
date for a certain price.
American option: This American option should be exercised before the maturity date or earlier
to maturity date.
European option: This European option should be exercised only after the maturity date.
Bermuda option: This Bermuda option is an combination of both American & European
option.
1. 4. Swaps: Swaps are private agreements between two parties to exchange cashflows in
the future according to a pre-agreed formula.
Types of swaps:
Interest rate swaps: An interest rates swap is an agreement between two parties to
exchange interest payment for a specific maturity for an agreed notional (principle)
amount.
Currency swaps: It is an agreement between two parties for exchanging of two different
currencies for a specified date along with exchange of principles.