Professional Documents
Culture Documents
c. nominal a/c : Debit all expenses and losses credit all gains and incomes
8. Meaning of journal: Journal means chronological record of transactions.
39. Pref.shares: Those shares which are carrying the pref.rights is called pref. shares
Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the even of
company winding up.
40. Leverage: It is a force applied at a particular work to get the desired result.
41. Operating leverage: The operating leverage takes place when a changes
revenue greater changes in EBIT.
in
42. Financial leverage : It is nothing but a process of using debt capital to increase the
rate of return on equity
43. Combine leverage: it is used to measure of the total risk of the firm = operating risk
+
financial risk.
44. Joint venture: A joint venture is an association of two or more the persons who
combined for the execution of a specific transaction and divide the profit or loss their of
an agreed ratio.
45. Partnership: partnership is the relation b/w the persons who have agreed to share
the
profits of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives
advances against its receivables, from a financial institutions (called factor)
47. Capital reserve: The reserve which transferred from the capital gains is called
capital reserve.
48.General reserve: the reserve which is transferred from normal profits of the firm is
called general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like
surplus cash.
50. Minority Interest: Minority interest refers to the equity of the minority shareholders
in a subsidiary company.
51. Capital receipts: Capital receipts may be defined as non-recurring receipts from
the owner of the business or lender of the money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as A recurring receipts against
sale of goods in the normal course of business and which generally the result of the
trading activities.
62. Subscribed capital: It is the part of the issued capital, which has been allotted to
the public
63. Called up capital: It has been portion of the subscribed capital which has been
called up by the company.
64. Paid up capital: It is the portion of the called up capital against which payment has
been received.
65. Debentures: Debenture is a certificate issued by a company under its seal
acknowledging a debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a subsidiary company to
public company it satisfies the following terms/conditions Sec 3(1)3:
1.Having minimum share capital 5 lakhs
2.Accepting investments from the public
3.No restriction of the transferable of shares
4.No restriction of no. of members.
5.Accepting deposits from the investors
68. Secret reserves: secret reserves are reserves the existence of which does not
appear on the face of balance sheet. In such a situation, net assets position of the
business is stronger than that disclosed by the balance sheet. These reserves are
crated by:
1.Excessive dep.of an asset, excessive over-valuation of a liability.
2.Complete elimination of an asset, or under valuation of an asset.
69. Provision: provision usually means any amount written off or retained by way of
providing depreciation, renewals or diminutions in the value of assets or retained by way
of providing for any known liability of which the amount can not be determinedwith
substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the
purpose it was originally made is also considered as reserve Provision is charge against
profits while reserves is an appropriation of profits Creation of reserve increase
proprietors fund while creation of provisions decreases his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which clear
investment etc
72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with
some other a/c or group of accounts so that the existence of the reserve is not known
such reserve is called an undisclosed reserve.
84. NPV: The net present value of an investment proposal is defined as the sum of the
present values of all future cash in flows less the sum of the present values of all cash
out flows associated with the proposal.
85. Profitability index: Where different investment proposal each involving different
initial investments and cash inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of discounted cash
inflows equals the discounted cash out flow.
87. Treasury management: It means it is defined as the efficient management of
liquidity and financial risk in business.
88. Concentration banking: It means identify locations or places where customers are
placed and open a local bank a/c in each of these locations and open local collection
canter.
89. Marketable securities: surplus cash can be invested in short term instruments in
order to earn interest.
90. Ageing schedule: in a ageing schedule the receivables are classified according to
their age.
91. Maximum permissible bank finance (MPBF): it is the maximum amount that
banks can lend a borrower towards his working capital requirements.
92. Commercial paper: a cp is a short term promissory note issued by a company,
negotiable by endorsement and delivery, issued at a discount on face value as may be
determined by the issuing company.
93. Bridge finance: It refers to the loans taken by the company normally from a
commercial banks for a short period pending disbursement of loans sanctioned
by the financial institutions.
94. Venture capital: It refers to the financing of high-risk ventures promoted by new
qualified entrepreneurs who require funds to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on
the basis of a package of assets (called asset pool).
96. Lease financing: Leasing is a contract where one party (owner) purchases assets
and permits its views by another party (lessee) over a specified period
97. Trade Credit: It represents credit granted by suppliers of goods, in the normal
course of business.
98. Over draft: Under this facility a fixed limit is granted within which the borrower
allowed to overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance
up to certain limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back
by any tangible security.
101. Share capital: The sum total of the nominal value of the shares of a company is
called share capital.
102. Funds flow statement: It is the statement deals with the financial resources for
running business activities. It explains how the funds obtained and how they used.
103.Sources of funds: There are two sources of funds Internal sources and external
sources.
Internal source: Funds from operations is the only internal sources of funds and some
important points add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets
Deduct the following items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation
Of fixed assets
External sources: (a) Funds from long-term loans (b) Sale of fixed assets
(c) Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed assets (b) Payment of
dividend (c)Payment of tax liability (d) Payment of fixed liability
105. ICD (Inter corporate deposits): Companies can borrow funds for a
short period. For example 6 months or less from another company which
have surplus liquidity. Such eposits made by one company in another
company are called ICD.
106. Certificate of deposits: The CD is a document of title similar to a fixed
deposit receipt issued by banks there is no prescribed interest rate on such
CDs it is based on the prevailing market conditions.
107. Public deposits: It is very important source of short term and
medium term finance. The company can accept PD from members of the
public and shareholders. It has the maturity period of 6 months to 3 years.
108.Euro issues: The euro issues means that the issue is listed on a
European stock Exchange. The subscription can come from any part of the
world except India.
109.GDR (Global depository receipts): A depository receipt is basically a
negotiable certificate , dominated in us dollars that represents a non-US
company publicly traded in local currency equity shares.
110. ADR (American depository receipts): Depository receipt issued by
a company in the USA are known as ADRs. Such receipts are to be issued in
accordance with the provisions stipulated by the securities Exchange
commission (SEC) of USA like SEBI in India.
111.Commercial banks: Commercial banks extend foreign currency loans
for international operations, just like rupee loans. The banks also provided
overdraft.
112.Development banks: It offers long-term and medium term loans
including foreign currency loans
113.International
agencies:
International
agencies
like
the
IFC,IBRD,ADB,IMF etc. provide indirect assistance for obtaining foreign
currency.
114. Seed capital assistance: The seed capital assistance scheme is desired
by the IDBI for professionally or technically qualified entrepreneurs and
persons possessing relevant experience and skills and entrepreneur traits.
115. Unsecured loans:It constitutes a significant part of L/T finance
available to an enterprise.
116. Cash flow statement: It is a statement depicting change in cash
position from one period to another.
117.Sources of cash: Internal sources(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
( e) Creation of reserves External sources(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
172.open-ended fund : Open ended funds means investors can buy and sell
units of fund, at NAV related prices at any time, directly from the fund this is
called open ended fund. For ex; unit 64
173.close ended funds : Close ended funds means it is open for sale to
investors for a specific period, after which further sales are closed. Any
further transaction for buying the units or repurchasing them, happen, in the
secondary markets.
174. Dividend option : Investors who choose a dividend on their investments,
will receive dividends from the MF, as when such dividends are declared.
175.Growth option : Investors who do not
distributions can be choose the growth option.
require
periodic
income
176.Equity funds : Equity funds are those that invest pre-dominantly in equity
shares of company.
177.Types of equity funds : Simple equity funds
Sectoral funds Index funds
178. Sectoral funds : Sectoral funds choose to invest in one or more chosen
sectors of the equity markets.
179.Index funds :The fund manager takes a view on companies that are
expected to perform well, and invests in these companies
180.Debt funds : The debt funds are those that are pre-dominantly invest in
debt securities.
181.Liquid funds : The debt funds invest only in instruments with maturities
less than one year.
182. gilt funds : Gilt funds invests only in securities that are issued by the
GOVT. and therefore
does not carry any credit risk.
183.balanced funds :Funds that invest both in debt and equity markets are
called balanced funds.
184. sponsor : Sponsor is the promoter of the MF and appoints trustees,
custodians and the AMC
with prior approval of SEBI .
185. trustee : Trustee is responsible to the investors in the MF and appoint the
AMC for managing the investment portfolio.
186. AMC : The AMC describes Asset Management Company, it is the business
face of the MF, as it manages all the affairs of the MF.
187. R & T Agents : The R&T agents are responsible for the investor servicing
functions, as they maintain the records of investors in MF.
188. Custodians : Custodians are responsible for the securities held in the
mutual funds portfolio.
189. Scheme take over : If an existing MF scheme is taken over by the
another AMC, it is called as scheme take over.
190.Meaning of load: Load is the factor that is applied to the NAV of a
scheme to arrive at the price.
192. Market capitalization : Market capitalization means number of shares
issued multiplied with market price per share.
193.Price earning ratio : The ratio between the share price and the post tax
earnings of company is called as price earning ratio.
194. Dividend yield : The dividend paid out by the company, is usually a
percentage of the face value of a share.
195. Darket risk : It refers to the risk which the investor is exposed to as a
result of adverse
movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk : It the risk which an investor has to face as a result
of a fall in the
interest rates at the time of reinvesting the interest income flows from the fixed
income security.
197. Call risk : Call risk is associated with bonds have an embedded call option
in them. This option hives the issuer the right to call back the bonds prior to
maturity.
198. Credit risk : Credit risk refers to the probability that a borrower could
default on a
commitment to repay debt or band loans
199.Inflation risk :Inflation risk reflects the changes in the purchasing power
of the cash flows
resulting from the fixed income security.
200 Liquid risk : It is also called market risk, it refers to the ease with which
bonds could be traded in the market.
201.Drawings : Drawings denotes the money withdrawn by the proprietor from
the business for his personal use.
202.Outstanding Income : Outstanding Income means income which has
become due during the accounting year but which has not so far been
received by the firm.
203.Outstanding Expenses : Outstanding Expenses refer to those expenses
which have become due during the accounting period for which the Final
Accounts have been prepared but have not yet been paid.
204.Closing stock : The term closing stock means goods lying unsold with the
businessman at the end of the accounting year.
205. Methods of depreciation :
1.Unirorm charge methods :
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods :
a. Diminishing balance method
b.Sum of years digits method
c. Double declining method
3. Other methods :
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
206.Accrued Income : Accrued Income means income which has been earned
by the business during the accounting year but which has not yet become
due and, therefore, has not been received.
207.Gross profit ratio : It indicates the efficiency of the production/trading
operations.
Formula : Gross profit
-------------------X100
Net sales
208.Net profit ratio : it indicates net margin on sales
Formula: Net profit
--------------- X 100
Net sales
209. Return on share holders funds : It indicates measures earning power of
equity capital.
Formula :
profits available for Equity shareholders
--------------------------------------------------- X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): It shows the amount of earnings
attributable to each equity share.
Formula :
212. Price earning ratio : It a measure for determining the value of a share.
May also be used to
measure the rate of return expected by investors.
Formula : Market price of share(MPS)
---- ----------------------------------- X 100
Earning per share (EPS)
213.Current ratio : It measures short-term debt paying ability.
Formula :
Current Assets
-----------------------Current Liabilities
215.Fixed Assets ratio : This ratio explains whether the firm has raised
adepuate long-term funds to meet its fixed assets requirements.
Formula :
Fixed Assets
------------------Long-term Funds
216 . Quick Ratio : The ratio termed as liquidity ratio. The ratio is
ascertained y comparing the
liquid assets to current liabilities.
Formula :
Liquid Assets
-----------------------Current Liabilities
218. Debtors Turnover Ratio : The ratio the better it is, since it would
indicate that debts are being
collected more promptly. The ration helps in cash budgeting since the flow of
cash from
customers can be worked out on the basis of sales.
Formula:
Credit sales
----------------------------------Average Accounts Receivable
Credit Purchases
----------------------Average Accounts Payable
Net Sales
-----------------------Working Capital
221.Fixed Assets Turnover ratio : This ratio indicates the extent to which
the investments in fixed assets contributes towards sales.
Formula:
Net Sales
--------------------Fixed Assets
222 .Pay-out Ratio : This ratio indicates what proportion of earning per
share has been used for
paying dividend.
Formula:
Formula :
235 . Lease : Lease is a contract between to parties under the contract, the
owner of the asset gives the right to use the asset to the user over an agreed
period of the time for a consideration
236.Opportunity cost : The cost associated with not doing something.
237. Budgeting : The term budgeting is used for preparing budgets and other
producer for
planning,co-ordination,and control of business enterprise.
238.Capital : The term capital refers to the total investment of company in
money, tangible and
intangible assets. It is the total wealth of a company.
239.Capitalization : It is the sum of the par value of stocks and bonds out
standings.
240. Over capitalization : When a business is unable to earn fair rate on its
outstanding securities.
241. Under capitalization : When a business is able to earn fair rate or over
rate on it is outstanding securities.
242. Capital gearing : The term capital gearing refers to the relationship
between equity and long term debt.
243.Cost of capital : It means the minimum rate of return expected by its
investment.
244.Cash dividend : The payment of dividend in cash
245.Define the term accrual : Recognition of revenues and costs as they are
earned or incurred . it includes recognition of transaction relating to assets
and liabilities as they occur irrespective of the actual receipts or payments.
245. accrued expenses : An expense which has been incurred in an
accounting period but for which no enforceable claim has become due in
what period against the enterprises.
246.Accrued revenue : Revenue which has been earned is an earned is an
accounting period but in respect of which no enforceable claim has become
due to in that period by the enterprise.
247.Accrued liability : A developing but not yet enforceable claim by an
another person which
256 . Share premium : The excess of issue of price of shares over their face
value. It will be showed with the allotment entry in the journal, it will be
adjusted in the balance sheet on the liabilities side under the head of
reserves & surplus.
257.Accumulated Depreciation : The total
depreciation charges on depreciable assets.
to
date
of
the
periodic
A funds flow statement matches the funds raised and funds applied during a
particular period. The source and application of funds may be of capital as
well as of revenue nature. An income statement matches the incomes of a
period with the expenditure of that period, which are both of a revenue
nature.
1) American Depository Receipt ADR: A negotiable certificate issued
by a U.S. bank representing a specified number of shares (or one share) in a
foreign stock that is traded on a U.S. exchange. ADRs are denominated in
U.S. dollars, with the underlying security held by a U.S. financial institution
overseas, and help to reduce administration and duty costs on each
transaction that would otherwise be levied.
2) Global Depository Receipt GDR: 1. A bank certificate issued in more
than one country for shares in a foreign company. The shares are held by a
foreign branch of an international bank. The shares trade as domestic shares,
but are offered for sale globally through the various bank branches.
3) Working Capital Cycle: The Cycle of working capital rotates from cash,
raw materials, overheads, work-in-progress, debtors and ends with again
cash.
4) Negative effects of working capital: The total current liabilities are in
excess of total current assets gives the negative effect of working capital.
5) Depreciation: It is a measure of wearing out, consumption or other loss
of value of a depreciable assets arising from its usage or passage of time.
6) Depletion : It is a method of providing depreciation on wasting assets
like mineral ores e.t.c.
7) Amortization: It is a method to witting off of the asset over a period of
time similar to depreciation. This method is generally used for Intangible
assets.
8) Profit & Loss (appropriation) account : The provisions contained in
part II of schedule VI of the companies act require that the appropriation
made out of profit like proposed dividend, transfer to and from reserves and
other appropriations should be disclosed in profit & loss (appropriation) a/c.
9)NPV: Net Present Value: The difference between the present value of
cash inflows and the present value of cash outflows. NPV is used in capital
budgeting to analyze the profitability of an investment or project
10) Internal Rate of Return: It is the rate at which the sum totals of cash
inflows after discounting equals to the discounted cash outflows. The IRR of a
project is the discount rate which makes net present value of the project
equal to zero.
11) Treatment of dividends in cash flow statements: When we pay
dividend for the investments made by the outsiders, it is called as financing
activity and taken into consideration of cash flow from financing activity
where as the receipt of dividend in respect of investment that we made
considered in cash flow from investing activity.
12) Treatment of interest in cash flow statements: When we pay
interest on the borrowed amount, it is called as financing activity and taken
into consideration of cash flow from financing activity where as the receipt of
interest in respect of advances that we made considered in cash flow from
investing activity.
13)Profit & loss account Vs Cash flow statement: P & L a/c is a period
end account which gives the details of revenue earned with that of the
expenses charged shows the net profit or loss for the period.
Cash flow statement is as on date statement which gives the details of flow
of cash through receipts and expenses irrespective of revenues and
expenditure.
14) Operating income Vs Net income: Income generated from the
regular operating activities of the business is called operating income.
Income that is left after taking into consideration of operating income,
expenses, non-operating income and non-operating expenses and income
taxes is called net income.
15) Gross working capital Vs Net working capital:
The total of
investments in all current assets is known as gross working capital.
Excess of total current assets over total current liabilities is called net
working capital.
16) Prospectus : It is defined as a public document described or issued as
a prospectus and includes any notice, circular, advertisement or other
document, inviting the public to subscribe or purchase of any shares or
debentures of a body corporate.
27) SEBI Vs SEC: SEBI: It is called as the stock exchange board of India
which is regulatory authority in India established under the act to safeguard
the interests of the shareholders.
SEC: It is called as the Securities exchange and commission act which is a
regulatory authority in USA established under the act similar to that of SEBI
in India.
28) Intangible Assets Vs Fictious Assets
Intangible Assets: These are the assets which are useful for the
appreciation of the business and helps for the growth of the business but
they are not tangible. Exp: Good will, patents, trademarks e.t.c.
Fictitious Assets: These are the debit balances of expenditure which are
treated assets to be written off over a period of time like preliminary
expenditure written off, miscellaneous expenditure written off e.t.c.
29) Gross Profit Vs Net Profit: The surplus balances in the trading
account which is carried forward to the P&L a/c is called as the Gross profit
which is arrived from trading or production activities.
The surplus balance in the P&L account which is reflected in the balance
sheet is called as Net profit arrived after taking into account of operating and
non-operating revenues, operating and non-operating expenses.
30) Equity Vs Preferred: Equity holders are those who are the real owners
of the company and are entitled to ownership rights, preferred holders are
those who are entitled to preferential rights upon the equity holders in terms
of dividends and the distribution of assets at the time of liquidation.
31) Preliminary Expenditure: Expenditure incurred before
incorporation of the company is called as preliminary expenses.
the
32) Cash flow: It is a statement which gives the details about the cash
generated from various activities like operating, investing and financing and
the cash expended on such activities during the period
33) Minority interest: **Paid up equity capital held by outsider plus share
of reserves and surplus on the date of balance sheet
A significant but non-controlling ownership of less than 50% of a company's
voting shares by either an investor or another company
34) Private vs. public: Private ltd is registered company which is limited by
shares and limited by its no. of members and prohibits to publish the
prospectus
Public is a registered company which is opposite to that as private company
35) Goodwill: It is treated to be intangible assets which is purchased for the
limited by guarantee and having a share capital shall with in a period of not
less that one month or more than six months from the date of which the
company is entitled to commence business , hold a general meeting of the
members of the company. This is called as Statuatory meeting.
AGM: Every company shall in each year hold in addition to any other meeting
a general meeting as its annual general meeting and shall specify the
meeting as such in the notice calling it.
EGM: any meeting other than the two above is called E.G.M. It is conducted
for special and urgent business.
40) QUORUM: The minimum no of members who must be present in order to
charter of the company and regulates the external affairs of the company.
AOA specifies the rules regulations and bye-laws for the internal
management of the affairs of the company.
Minority Interest: The portion of net assets of subsidiary onthe date of
business to generate production and revenue with the aid of such capital
employed capital. It is calculated as
Share capital + Reserves & Surplus + Debenture & long term debt
fictituous assets
Or
Fixed Assets + intangible assets + Net working capital.
Deferred tax asset/ liability: Difference between the tax expense which is
calculated on accrual basis and current tax liability to be paid for particular
period as per income tax act is called deferred tax asset/liability.
Call Option: A contract giving the holders a right to buy an underlying
the expiry of
Two years from the date of incorporation of the company
One year after the first allotment of shares. Which ever is earlier.
Such an allotment should be made to the shareholders of the company in
proportion to the capital paid.
Retained earnings refer to the portion of net income which is retained by the
corporation rather than distributed to its owners. Similarly, if the corporation
makes a loss, then that loss is retained. Retained earnings are cumulative
from year to year.
American Depositary Receipt (or ADR) represents ownership in the shares of
a foreign company trading on US financial markets
Nifty, an index for large cap stocks on the National Stock Exchange of India
Accounting is the discipline of measuring, communicating and interpreting
financial activity. Accounting is also widely referred to as the "language of
business".[
ROE It measures a firm's efficiency at generating profits from every dollar of
net assets (assets minus liabilities), and shows how well a company uses
investment dollars to generate earnings growth.
ROCE It basically can be used to show how much a business is gaining for its
assets, or how much it is losing for its liabilities
Finance means the study of different ways in which individuals, businesses
and organizations raise and allocate monetary resources and use the same
for business purposes keeping the risks involved in mind
Accounts Related Questions:
1) What are the models of valuation of the company?
2) Explain about APP in SAP fico module?
3) WHAT IS SECONDARY TRACKING FLEX FIELD QUALIFIER AND
HOW IT IS USED?
4) WHAT IS SECONDARY TRACKING FLEX FIELD QUALIFIER AND
HOW IT IS USED?
5) WHAT IS SECONDARY TRACKING FLEX FIELD QUALIFIER AND
HOW IT IS USED?
company to the public. IPOs are often issued by smaller, younger companies
seeking capital to expand, but can also be done by large privately-owned
companies looking to become publicly traded
The BSE Sensex or Bombay Stock Exchange Sensitive Index is a valueweighted index composed of 30 stocks with the base April 1979 = 100. It
consists of the 30 largest and most actively traded stocks, representative of
various sectors, on the Bombay Stock Exchange
Portfolio management :Involves deciding what assets to include in the
portfolio, given the goals of the portfolio owner and changing economic
conditions. Selection involves deciding what assets to purchase, how many
to purchase, when to purchase them, and what assets to divest. These
program is brand-new, and see if one can provide a detail of expenses for
what one would need to fully accomplish the program
venture capital fund: Its a pooled investment vehicle (often a limited
11.
12.
13.
14.
15.
16.
17.
18.
19.
4. Duties of auditor?
5. Investigation vs. audit?
6. Cost audit system?
7. Investigation vs. audit?
8. Cost audit system?
9. Comptroller auditor general of India functions?
10.
Audit papers?
11.
Audit programme?
12.
13.
Internal audit?
14.
What duty to auditors and independent examiner have to report
problems to the Commission?
15.
When is income from rented accommodation to be treated as
investment income and when as trading income?
16.
17.
A company charity (gross income <? 250k) wishes to take
advantage of the audit exemption regime. However, there is an audit
provision in the company's Articles. Should they be required to change
the Articles?
18.
Euronext Amsterdam
Euronext Brussels
Euronext Lisbon
Euronext Paris
JASDAQ
NASDAQ
Singapore Exchange
would normally be in the form of fiat currency stored in a bank vault (vault
cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing
the country's economy, borrowing, and interest rates.[
The Federal Reserve System (also the Federal Reserve; informally The Fed) is
the central banking system of the United States. The Federal Reserve
System, created in 1913, is a quasi-public, quasi-private banking system
composed of (1) the presidentially-appointed Board of Governors of the
Federal Reserve System in Washington, D.C.; (2) the Federal Open Market
Committee; (
One major area of criticism focuses on the failure of the Federal Reserve
System to stop inflation; this is seen as a failure of the Fed's legislatively
mandated duty [52] to maintain stable prices.
The Federal Reserve System was created via the Federal Reserve Act of
December 23rd, 1913.[17] The Reserve Banks opened for business on
November 16, 1914. Federal Reserve Notes were created as part of the
legislation, to provide a supply of currency. The notes were to be issued to
the Reserve Banks for subsequent transmittal to banking institutions.
The Federal Reserve System tries to control the size of the money supply by
conducting open market operations, in which the Federal Reserve lends or
purchases specific types of securities with authorized participants, known as
primary dealers, such as the United States Treasury.
The Indian stock market mainly consists of the Bombay Stock Exchange and
the National Stock Exchange. The market is one of the fast growing emerging
markets in the world, and the BSE is the oldest stock exchange in Asia. More
than 6500 scripts are traded at the BSE and more than 2500 scripts are
traded at the NSE. It contains different kind of markets: 1 metal market 2 oil
market 3 banking stock market and lots more
Debentures:
A type of debt instrument that is not secured by physical asset or
collateral. Debentures
are
backed
only
by
the
general creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond in order to secure
capital. Like other types of bonds, debentures are documented in an
indenture.
Debentures have no collateral. Bond buyers generally purchase debentures
based on the belief that the bond issuer is unlikely to default on the
repayment. An example of a government debenture would be any
government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds
and T-bills are generally considered risk free because governments, at
worst, can print off more money or raise taxes to pay these type of debts.
Any type of debenture that can be converted into some other security.
For example, a convertible bond can be converted into stock.
PVT. Co:
A company whose ownership is private. As a result, it does not need to meet
the strict Securities and Exchange Commission filing requirements of public
companies.
Private companies may issue stock and have shareholders. However, their
shares do not trade on public exchanges and are not issued through an initial
public offering. In general, the shares of these businesses are less liquid and
the values are difficult to determine.
Public Co:
A company that has issued securities through an initial public offering and
which are traded on at least one stock exchange or over-the-counter market.
These companies must file documents and meet stringent reporting
requirements set out by the Securities and Exchange Commission, including
the public disclosure of financial statements. Any company whose shares are
available to the public is a public company.
Director:
In relation to a company, a director is an officer of the company charged with
the conduct and management of its affairs. A director may be an inside
director (a director who is also an officer) or an outside, or independent,
director. The directors collectively are referred to as a board of directors.
Sometimes the board will appoint one of its members to be the chair of the
board of directors.
Theoretically, the control of a company is divided between two bodies: the
board of directors, and the shareholders in general meeting. In practice, the
amount of power exercised by the board varies with the type of company. In
small private companies, the directors and the shareholders will normally be
the same people, and thus there is no real division of power. In large public
companies, the board tends to exercise more of a supervisory role, and
individual responsibility and management tends to be delegated downward
to individual professional executive directors (such as a finance director or a
marketing director) who deal with particular areas of the company's affairs.
Margin of safety:
A principle of investing in which an investor only purchases securities
when the market price is significantly below its intrinsic value. In other
words, when market price is significantly below your estimation of the
intrinsic value, the difference is the margin of safety. This difference allows
an investment to be made with minimal downside risk. The term was
popularized by Benjamin Graham (known as "the father of value investing")
and his followers, most notably Warren Buffett. Margin of safety doesn't
guarantee a successful investment, but it does provide room for error in an
analyst's judgment. Determining a company's "true" worth (its intrinsic
value) is highly subjective. Each investor has a different way of
calculating intrinsic value which may or may not be correct. Plus, it's
notoriously difficult to predict a company's earnings. Margin of safety
provides a cushion against errors in calculation.
Margin of safety: Is a concept used in many areas of life, not just finance.
For example, consider engineers building a bridge that must support 100
tons of traffic. Would the bridge be built to handle exactly 100 tons? Probably
not. It would be much more prudent to build the bridge to handle, say, 130
tons, to ensure that the bridge will not collapse under a heavy load. The
same can be done with securities. If you feel that a stock is worth $10,
buying it at $7.50 will give you a margin of safety in case your analysis turns
out to be incorrect and the stock is really only worth $9.
There is no universal standard to determine how wide the "margin" in margin
of safety should be. Each investor must come up with his or her own
methodology.
BEP:
1. In general, the point at which gains equal losses.
2. In options, the market price that a stock must reach for option buyers
to avoid a loss if they exercise. For a call, it is the strike price plus the
premium paid. For a put, it is the strike price minus the premium paid
Also referred to as a "breakeven".
For businesses, reaching the break-even point is the first major step towards
profitability.
Put Option:
An option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying security at a specified price within a
specified time. This is the opposite of a call option, which gives the holder
the right to buy shares.
A put becomes more valuable as the price of the underlying stock
depreciates relative to the strike price. For example, if you have one Mar
07 Taser 10 put, you have the right to sell 100 shares of Taser at $10 until
March 2007 (usually the third Friday of the month). If shares of Taser fall to
$5 and you exercise the option, you can purchase 100 shares of Taser for $5
in the market and sell the shares to the option's writer for $10 each, which
means you make $500 (100 x $10-$5) on the put option.
Call Option:
An agreement that gives an investor the right (but not the obligation) to buy
a stock, bond, commodity, or other instrument at a specified price within a
specific time period.
It may help you to remember that a call option gives you the right to "call in"
(buy) an asset. You profit on a call when the underlying asset increases in
price.
Intanigible Asset:
An asset that is not physical in nature. Corporate intellectual property (items
such as patents, trademarks, copyrights, business methodologies), goodwill
and brand recognition are all common intangible assets in today's
marketplace. An intangible asset can be classified as either indefinite or
definite depending on the specifics of that asset. A company brand name is
considered to be an indefinite asset, as it stays with the company as long as
the company continues operations. However, if a company enters a
legal agreement to operate under another company's patent, with no plans
of extending the agreement, it would have a limited life and would be
classified as a definite asset.
Tanigible Asset:
An asset that has a physical form such as machinery, buildings and land. This
is the opposite of an intangible asset such as a patent or trademark. Whether
an asset is tangible or intangible isn't inherently good or bad. For example, a
well-known brand name can be very valuable to a company. On the other
hand, if you produce a product solely for a trademark, at some point you
need to have "real" physical assets to produce it.
Rights issue:
Issuing rights to a company's existing shareholders to buy a proportional
number of additional securities at a given price (usually at a discount) within
a fixed period.
Rights are often transferable, allowing the holder to sell them on the open
market.
Rights:
A security giving stockholders entitlement to purchase new shares issued by
the corporation at a predetermined price (normally less than the current
market price) in proportion to the number of shares already owned. Rights
are issued only for a short period of time, after which they expire.
The payment of stock in lieu of cash for services provided .This is a common
method used by corporations to compensate executives. The theory is that
executives will work harder since they want their own stock to rise in value
and, therefore, have the best interests of shareholders in mind.
Insider Trading:
Insider trading is the trading of a corporation's stock or other securities (e.g.
bonds or stock options) by corporate insiders such as officers, directors, or
holders of more than ten percent of the firm's shares. Insider trading may be
perfectly legal, but the term is frequently used to refer to a practice, illegal in
many jurisdictions, in which an insider or a related party trades based on
material non-public information obtained during the performance of the
insider's duties at the corporation, or otherwise misappropriated. [1]
All insider trades must be reported in the United States. Many investors
follow the summaries of insider trades, published by the United States
Securities and Exchange Commission (SEC), in the hope that mimicking
these trades will be profitable. Legal "insider trading" may not be based on
material non-public information. Illegal insider trading in the US requires the
participation (perhaps indirectly) of a corporate insider or other person who
is violating his fiduciary duty or misappropriating private information, and
trading on it or secretly relaying it. Insider trading is believed to raise the
cost of capital for securities issuers, thus decreasing overall economic
growth.[2]
Venture Capital:
Financing for new businesses. In other words, money provided by
investors to startup firms and small businesses with perceived, longterm growth potential. This is a very important source of funding for startups
that do not have access to capital markets. It typically entails high risk for
the investor, but it has the potential for above-average returns.
Venture capital can also include managerial and technical expertise. Most
venture capital comes from a group of wealthy investors, investment banks
and other financial institutions that pool such investments or partnerships.
This form of raising capital is popular among new companies, or ventures,
with limited operating history, who cannot raise funds through a debt issue.
The downside for entrepreneurs is that venture capitalists usually get a say
in company decisions, in addition to a portion of the equity.
Seed Capital: The initial equity capital used to start a new venture or
business. This initial amount is usually quite small because the venture is still
in the idea or conceptual stage. Also, there's a high risk that the venture will
fail.
Bridge Financing: A method of financing, used by companies before their
IPO, to obtain necessary cash for the maintenance of operations. These
funds are usually supplied by the investment bank underwriting the new
issue. As payment, the company acquiring the bridge financing will give a
number of shares at a discount of the issue price to the underwriters that
equally offsets the loan. This financing is, in essence, a forwarded payment
for the future sales of the new issue.
Stock Split: A type of corporate action where a company's existing shares
are divided into multiple shares. Although the amount of shares outstanding
increases by a specific multiple, the total dollar value of the shares remains
the same compared to pre-split amounts, because no real value has been
added as
a
result
of the
split.
In the U.K., a stock split is referred to as a "scrip issue", "bonus issue",
"capitalization issue" or "free issue".
For example, in a 2-for-1 split, each stockholder receives an additional share
for each share he or she holds.
One reason as to why stock splits are performed is that a company's share
price has grown so high that to many investors the shares are too expensive
to buy in round lots.
For example, if a XYZ Corp's shares were worth $1,000 each, investors would
need to purchase $100,000 in order to own 100 shares. Whereas, if each
share was worth $10 each, investors only need to pay $1,000 to own 100
shares.
Reverse Takeover RTO:
A type of merger used by private companies to become publicly traded
without resorting to an initial public offering. Initially, the private company
buys enough shares to control a publicly traded company. At this point, the
private company's shareholder uses their shares in the private company to
exchange for shares in the public company. At this point, the private
company has effectively become a publicly traded one.A reverse takeover
can also refer to situation where a smaller company acquires a larger
company.
With this type of merger, the private company does not need to pay the
expensive fees associated with arranging an initial public offering. The
problem, however, is the company does not acquired any additional funds
through the merger and it must have enough funds to complete the
transaction on its own.
Deep-Discounted bonds:
1. A bond that sells at a significant discount from par value.
2. A bond that is selling at a discount from par value and has a coupon
rate significantly less than the prevailing rates of fixed-income
securities with a similar risk profile.
3. Typically, a deep-discount bond will have a market price of 20% or
more below its face value. These bonds are perceived to be riskier than
similar bonds and are thus priced accordingly.
4. These low-coupon bonds are typically long term and issued with call
provisions. Investors are attracted to these discounted bonds because
of their high return or minimal chance of being called before maturity.
Merger:
The combining of two or more companies, generally by offering the
stockholders of one company securities in the acquiring company in
exchange for the surrender of their stock.
Basically, when two companies become one. This decision is usually mutual
between both firms.
Factoring:
Factoring is a financial service designed to help firms to arrange
their receivable better. Under a typical factoring arrangement a factor
collects the accounts on due dates, effects payments to the firm on these
dates and also assumes the credit risks associated with the collection of the
accounts.
Sometimes the factor provides an advance against the values of receivable
taken over by it. In such cases factoring serves as a source of short-term
finance for the firm.
Capital budgeting : The process of determining whether or not projects
such as building a new plant or investing in a long-term venture are
worthwhile. Also known as "investment appraisal". Popular methods of
capital budgeting include net present value (NPV), internal rate of return
(IRR), discounted cash flow (DCF) and payback period.
Bankruptcy: The state of a person or firm unable to repay debts. If the
bankrupt entity is a firm, the ownership of the firm's assets is transferred
from the stockholders to the bondholders. Shareholders are the last people
to get paid if a company goes bankrupt. Secure creditors always get first
grabs at the proceeds from liquidation.
Diversification: A risk-management technique that mixes a wide variety
of investments within a portfolio. The rationale behind this technique
contends that a portfolio of different kinds of investments will, on average,
yield higher returns and pose a lower risk than any individual investment
found within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio
so that the positive performance of some investments will neutralize the
negative performance of others. Therefore, the benefits of diversification will
hold only if the securities in the portfolio are not perfectly correlated.
Annual report: : A corporation's annual statement of financial operations.
Annual reports include a balance sheet, income statement, auditor's report,
and a description of the company's operations.
This is usually a sleek, colorful, high gloss publication. Make sure to look
beyond the marketing and dig into the numbers. This is the best way to
discover the direction of the company. The 10-K is the version of the annual
report which gets submitted to the SEC. It contains more detailed financial
information.
Annual general meeting : A mandatory yearly meeting of shareholders
that allows stakeholders to stay informed and involved with company
decisions and workings. This yearly meeting is the single event whereby
shareholders are able to gather and ask the board of directors questions
pertaining to corporate health and strategy. Proper notice must be given to
shareholders with regards to meeting times and agenda.
Subsidiary company: A company whose voting stock is more than 50%
controlled by another company, usually referred to as the parent company.
As long as the parent company has more than 50% of the voting stock in the
subsidiary, it has control. In the case of a foreign subsidiary, the
company under which the subsidiary is incorporated must adhere to the laws
of the country in which the subsidiary operates, although the parent
company still carries the foreign subsidiary's financials on its books
(consolidated financial statements)
Price Earning Ratio:
A valuation ratio of a company's current share price compared to its pershare earnings.
Calculated as:
For example, if a company is currently trading at $43 a share and earnings
over the last 12 months were $1.95 per share, the P/E ratio for the stock
would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can
be taken from the estimates of earnings expected in the next four quarters
(projected or forward P/E). A third variation uses the sum of the last two
actual quarters and the estimates of the next two quarters.
Also sometimes known as "price multiple" or "earnings multiple".
In general, a high P/E suggests that investors are expecting higher
earnings growth in the future compared to companies with a lower P/E.
However, the P/E ratio doesn't tell us the whole story by itself. It's
usually more useful to compare the P/E ratios of one company to other
companies in the same industry, to the market in general or against the
company's own historical P/E. It would not be useful for investors using the
P/E ratio as a basis for their investment to compare the P/E of a technology
company (high P/E) to a utility company (low P/E) as each industry has much
different growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows how
much investors are willing to pay per dollar of earnings. If a company were
currently trading at a multiple (P/E) of 20, the interpretation is that an
investor is willing to pay $20 for $1 of current earnings.
It is important that investors note an important problem that arises with the
P/E measure, and to avoid basing a decision on this measure alone. The
denominator (earnings) is based on an accounting measure of
earnings that is susceptible to forms of manipulation, making the quality of
the P/E only as good as the quality of the underlying earnings number.
Return on Investments: A performance measure used to evaluate the
efficiency of an investment or to compare the efficiency of a number of
different investments. To calculate ROI, the benefit (return) of an investment
is divided by the cost of the investment; the result is expressed as a
percentage or a ratio.
however, may compare the same two products using an entirely different ROI
calculation, perhaps by dividing the net income of an investment by the total
value of all resources that have been employed to make and sell the product.
This flexibility has a downside, as ROI calculations can be easily manipulated
to suit the user's purposes, and the result can be expressed in many different
ways. When using this metric, make sure you understand what inputs are
being used.
Debt to Equity Ratio: A measure of a company's financial leverage
calculated by dividing its total liabilities by stockholders' equity. It indicates
what proportion of equity and debt the company is using to finance its
assets.
Note: Some investors add interest expense back into net income when
performing this calculation because they'd like to use operating returns
before cost of borrowing.
ROA tells you what earnings were generated from invested capital (assets).
ROA for public companies can vary substantially and will be highly
dependent on the industry. This is why when using ROA as a comparative
measure, it is best to compare it against a company's previous ROA numbers
or the ROA of a similar company
The assets of the company are comprised of both debt and equity. Both of
these types of financing are used to fund the operations of the company. The
ROA figure gives investors an idea of how effectively the company is
converting the money it has to invest into net income. The higher the ROA
number, the better, because the company is earning more money on less
investment. For example, if one company has a net income of $1 million and
total assets of $5 million, its ROA is 20%; however, if another company earns
the same amount but has total assets of $10 million, it has an ROA of 10%.
Based on this example, the first company is better at converting its
investment into profit. When you really think about it, management's most
important job is to make wise choices in allocating its resources. Anybody
can make a profit by throwing a ton of money at a problem, but very few
managers excel at making large profits with little investment.
Return On Capital Employed (ROCE)
A ratio that indicates the efficiency and profitability of a company's capital
investments.
Calculated as:
ROCE should always be higher than the rate at which the company borrows,
otherwise any increase in borrowing will reduce shareholders' earnings.
A variation of this ratio is return on average capital employed (ROACE), which
takes the average of opening and closing capital employed for the time
period.
For many hotel operators, the total revenue received per room can be much
more than the per-day "boilerplate" rate, and is a more full expression of how
much the company is receiving per customer. RevPOR is used by analysts to
determine the total revenue and profit potential of a company; occupancy
rates will rise and fall with the general and local economy, but RevPOR is a
metric that stands independent of how full the hotel is at any point in time.
Capital Expenditure (CAPEX)
Funds used by a company to acquire or upgrade physical assets such as
property, industrial buildings or equipment. This type of outlay is made by
companies to maintain or increase the scope of their operations. These
expenditures can include everything from repairing a roof to building a brand
new factory.
The amount of capital expenditures a company is likely to have depends on
the industry it occupies. Some of the most capital intensive industries
include oil, telecom and utilities.
In terms of accounting, an expense is considered to be a capital expenditure
when the asset is a newly purchased capital asset or an investment that
improves the useful life of an existing capital asset. If an expense is a capital
expenditure, it needs to be capitalized; this requires the company to spread
the cost of the expenditure over the useful life of the asset. If, however, the
expense is one that maintains the asset at its current condition, the cost is
deducted fully in the year of the expense.
Capital Reserve:
A type of account on a municipality's or company's balance sheet that is
reserved for long-term capital investment projects or any other large and
anticipated expense(s) that will be incurred in the future. This type of reserve
fund is set aside to ensure that the company or municipality has adequate
funding to at least partially finance the project.
Contributions to the capital reserve account can be made from government
subsidies, donated funds, or can be set aside from the firm's or
municipalities regular revenue-generating operations. Once recorded on the
reporting entity's balance sheet, these funds are only to be spent on the
capital expenditure projects for which they were initially intended, excluding
any unforeseen circumstances
Reserve Fund:
An account set aside by an individual or business to meet any unexpected
costs that may arise in the future as well as the future costs of upkeep. In
most cases, the fund is simply a savings account or another highly liquid
asset, as it is impossible to predict when an unexpected cost may
arise. However, if the fund is set up to meet the costs of scheduled upgrades,
less liquid assets may be used.
An individual, for example, may put money into a reserve account to save
money in case of unexpected unemployment. A business, such as one
dealing with rental properties, will put some rental income into a fund used
to pay for any unexpected repairs to the properties. Condominiums often will
set up reserve funds in which condo owners pay a set monthly amount
to maintain the quality of the condominium
Enterprise Value (EV):
A measure of a company's value, often used as an alternative to
straightforward market capitalization. EV is calculated as market cap plus
debt, minority interest and preferred shares, minus total cash and cash
equivalents.
Think of enterprise value as the theoretical takeover price. In the event of a
buyout, an acquirer would have to take on the company's debt, but would
pocket its cash. EV differs significantly from simple market capitalization
in several ways, and many consider it to be a more accurate representation
of a firm's value. The value of a firm's debt, for example, would need to be
paid by the buyer when taking over a company, and thus EV provides a
much more accurate takeover valuation because it includes debt in its value
calculation.
Embedded Value:
A common valuation measure used outside North America, particularly in the
insurance industry. It is calculated by adding the adjusted net asset value
and the present value of future profits of a firm. The present value of future
profits considers the potential profits that shareholders will receive in the
future, while adjusted net asset value considers the funds belonging to
shareholders that have been accumulated in the past.
The first sale of stock by a private company to the public. IPOs are
often issued by smaller, younger companies seeking capital to expand, but
can also be done by large privately-owned companies looking to become
publicly
traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which
helps it determine what type of security to issue (common or preferred), best
offering
price
and
time
to
bring
it
to
market.
Also referred to as a "public offering".
IPOs can be a risky investment. For the individual investor, it is tough to
predict what the stock will do on its initial day of trading and in the near
future since there is often little historical data with which to analyze the
company. Also, most IPOs are of companies going through a transitory
growth period, and they are therefore subject to additional uncertainty
regarding their future value
Leverage Ratio:
1. Any ratio used to calculate the financial leverage of a company to get
an idea of the company's methods of financing or to measure its ability
to meet financial obligations. There are several different ratios, but the
main factors looked at include debt, equity, assets and interest
expenses.
2. A ratio used to measure a company's mix of operating costs, giving an
idea of how changes in output will affect operating income. Fixed and
variable costs are the two types of operating costs; depending on the
company and the industry, the mix will differ.
Debt Ratio:
A ratio that indicates what proportion of debt a company has relative to its
assets. The measure gives an idea to the leverage of the company along
with the potential risks the company faces in terms of its debt-load.
A debt ratio of greater than 1 indicates that a company has more debt than
assets, meanwhile, a debt ratio of less than 1 indicates that a company has
more assets than debt. Used in conjunction with other measures of financial
health, the debt ratio can help investors determine a company's level of risk.
Debt/Equity Ratio:
Operating Ratio
A ratio that shows the efficiency of management by comparing operating
expense to net sales:
The smaller the ratio, the greater the organization's ability to generate profit
if revenues decrease. When using this ratio, however, investors should be
aware that it doesn't take into account debt repayment or expansion.
Net Sales
The amount of sales generated by a company after the deduction
of returns, allowances for damaged or missing goods and any discounts
Types Of EPS :
Gertrude Stein said, "A rose is a rose is a rose," but the same cannot be said
about earnings per share (EPS).
While the math may be simple, there are many varieties of EPS being used
these days, and investors must understand what each one represents if
they're to make informed investment decisions. For example, the EPS
announced by the company may differ significantly from what is reported in
the financial statements and in the headlines. As a result, a stock may
appear over- or undervalued depending on the EPS being used. This article
will define some of the varieties of EPS and discuss their pros and cons.
By definition, EPS is net income divided by the number of shares
outstanding; however, both the numerator and denominator can change
depending on how you define "earnings" and "shares outstanding". Because
there are so many ways to define earnings, we will first tackle shares
outstanding.
Shares Outstanding :
Shares outstanding can be classified as either primary (primary EPS) or fully
diluted (diluted EPS).
Primary EPS is calculated using the number of shares that have been issued
and held by investors. These are the shares that are currently in the market
and can be traded.
Diluted EPS entails a complex calculation that determines how many shares
would be outstanding if all exercisable warrants, options, etc. were converted
into shares at a point in time, generally the end of a quarter. We prefer
diluted EPS because it is a more conservative number that calculates EPS as
if all possible shares were issued and outstanding. The number of diluted
shares can change as share prices fluctuate (as options fall into/out of the
money), but generally the Street assumes the number is fixed as stated in
the 10-Q or 10-K.
Companies report both primary and diluted EPS, and the focus is generally
on diluted EPS, but investors should not assume this is always the case.
Sometimes, diluted and primary EPS are the same because the company
does not have any "in-the-money" options, warrants or convertible bonds
outstanding. Companies can discuss either, so investors need to be sure
which is being used.
Earnings
As has been evident in recent headlines, EPS can be whatever the company
wants it to be, depending on assumptions and accounting policies. Corporate
spin-doctors focus media attention on the number the company wants in the
news, which may or may not be the EPS reported in documents filed with the
Securities & Exchange Commission (SEC). Based on a set of assumptions, a
company can report a high EPS, which reduces the P/E multiple and makes
the stock look undervalued. The EPS reported in the 10Q, however, can
result in a much lower EPS and an overvalued stock on a P/E basis. This is
why it is critical for investors to read carefully and know what type of
earnings is being used in the EPS calculation.
We will focus on five types of EPS and define them in the context of the type
of "earnings" being used.
Reported EPS (or GAAP EPS) :
We define reported EPS as the number derived from generally accepted
accounting principles (GAAP), which are reported in SEC filings. The company
derives these earnings according to the accounting guidelines used. (Note: A
discussion of how a company can manipulate EPS under GAAP is beyond the
scope of this article, but investors should remember that it is possible. Our
focus is on how earnings can be distorted even if there is no intent to
manipulate results.)
A company's reported earnings can be distorted by GAAP. For example, a
one-time gain from the sale of machinery or a subsidiary could be considered
as operating income under GAAP and cause EPS to spike. Also, a company
could classify a large lump of normal operating expenses as an "unusual
charge" which can boost EPS because the "unusual charge" is excluded from
calculations. Investors need to read the footnotes in order to decide what
factors should be included in "normal" earnings and make adjustments in
their own calculations.
Ongoing EPS :
This EPS is calculated based upon normalized or ongoing net income and
excludes anything that is an unusual one-time event. The goal is to find the
stream of earnings from core operations which can be used to forecast future
EPS. This can mean excluding a large one-time gain from the sale of
equipment as well as an unusual expense. Attempts to determine an EPS
using this methodology is also called "pro forma" EPS.
Pro Forma EPS :
The words "pro forma" indicate that assumptions were used to derive
whatever number is being discussed. Different from reported EPS, pro forma
EPS generally excludes some expenses/income that were used in calculating
reported earnings. For example, if a company sold a large division, it could,
in reporting historical results, exclude the expenses and revenues associated
with that unit. This allows for more of an "apples-to-apples" comparison.
Another example of pro forma is a company choosing to exclude some
Calculated as:
When investing in a company, one of the most important factors you need
to consider is how much debt the company is carrying. Here are some
questions to ask yourself when analyzing a company's debt: How much debt
really exists? What kind of debt is it (long/short-term maturities)? What is the
debt for (repay or refinance old debts)? Can the company afford the debt if it
runs into financial trouble? And, finally, how does it compare to the debt
levels of competing companies?
Acid-Test Ratio:
A stringent test that indicates whether a firm has enough short-term assets
to cover its immediate liabilities without selling inventory. The acid-test ratio
is far more strenuous than the working capital ratio, primarily because the
working capital ratio allows for the inclusion of inventory assets.
Calculated by:
Companies with ratios of less than 1 cannot pay their current liabilities and
should be looked at with extreme caution. Furthermore, if the acid-test ratio
is much lower than the working capital ratio, it means current assets are
highly dependent on inventory. Retail stores are examples of this type of
business.
The term comes from the way gold miners would test whether their findings
were real gold nuggets. Unlike other metals, gold does not corrode in acid; if
the nugget didn't dissolve when submerged in acid, it was said to
have passed the acid test. If a company's financial statements pass the
figurative acid test, this indicates its financial integrity.
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
The ratio is mainly used to give an idea of the company's ability to pay
back its short-term liabilities (debt and payables) with its short-term assets
(cash, inventory, receivables). The higher the current ratio, the more capable
the company is of paying its obligations. A ratio under 1 suggests that the
company would be unable to pay off its obligations if they came due at that
point. While this shows the company is not in good financial health, it does
not necessarily mean that it will go bankrupt - as there are many ways to
access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating
cycle or its ability to turn its product into cash. Companies that have trouble
getting paid on their receivables or have long inventory turnover can run into
liquidity problems because they are unable to alleviate their obligations.
Because business operations differ in each industry, it is always more
useful to compare companies within the same industry.
Discretionary Cash Flow:
Discretionary
cash
flow
is
any
money
left
over
once
all possible capital projects with positive net present values have been
financed, and all mandatory payments have been paid. The capital can be
used to pay for other responsibilities such as giving out cash dividends to
stockholders, buying back common stock and paying off any outstanding
debt.
How discretionary cash flow is distributed is the responsibility
of management. They decide how to use the funds to benefit the company
the most. The way these funds are allocated can have huge affects on the
performance of the company, and as a result the evaluation of the
effectiveness of management.
Operating Cash Flow Ratio:
A measure of how well current liabilities are covered by the cash flow
generated
from
a
company's
operations.
Formula:
The operating cash flow ratio can gauge a company's liquidity in the short
term. Using cash flow as opposed to income is sometimes a better indication
of liquidity simply because, as we know, cash is how bills are normally paid
off.
Operating Cash Flow (OCF)
The cash generated from the operations of a company, generally defined as
revenues less all operating expenses, but calculated through a series of
adjustments to net income. The OCF can be found on the statement of cash
flows.
Also known as "cash flow provided by operations" or "cash flow from
operating activities".
One method of calculated OCF is:
Operating cash flow is the cash that a company generates through running
its business.
It's arguably a better measure of a business's profits than earnings because
a company can show positive net earnings (on the income statement) and
still not be able to pay its debts. It's cash flow that pays the bills!
You can also use OCF as a check on the quality of a company's earnings. If a
firm reports record earnings but negative cash, it may be using aggressive
accounting techniques.
Operating Income
The amount of profit realized from a business's own operations, but
excluding operating expenses (such as cost of goods sold) and
depreciation from gross income.
Also referred to as "operating profit" or "recurring profit".
Calculated as:
Operating income would not include items such as investments in other
firms, taxes or interest expenses. In addition, nonrecurring items such as
cash paid for a lawsuit settlement are often not included.
Operating income is required to calculate operating margin, which describes
a company's operating efficiency.
Operating Expense
A category of expenditure that a business incurs as a result of performing its
normal business operations. One of the typical responsibilities that
management must contend with is determining how low operating expenses
can be reduced without significantly affecting the firm's ability to compete
with
its
competitors.
Also known as "OPEX"
For example, the payment of employees' wages and funds allocated toward
research and development are operating expenses. In the absence of raising
prices or finding new markets or product channels in order to raise profits,
some businesses attempt to increase the bottom line purely by cutting
expenses.
While laying off employees and reducing product quality can initially boost
earnings and may even be necessary in cases where a company has lost its
competitiveness,
there are
only
so
many operating
expenses
that management can cut before the quality of business operations is
damaged.
Operating Profit
The amount of profit earned from a firm's normal core business operations.
This value does not include any profit earned from the firm's investments
(such as earnings resulting from firms that the company has partial interest
in) and the effects of interest and taxes.
Also known as "earnings before interest and tax (EBIT)".
Calculated as:
For example, suppose ABC Printing Company earned $50 million from its core
printing related operations, $10 million from its 40% stake in XYZ Corp and
$3.5 million from interest earned from its money market and bank
accounts. Also, the company spent $10 million in production related costs as
well.
Overall the company's operating profit is: $40 million, calculated as the $50
million operating revenues million minus the $10 million in production costs.
The other $10 million and $3.5 million in earnings are not included in
operating income, since they are investment income.
Earnings:
The amount of profits that a company produces during a specific period,
which is usually defined as a quarter (three calendar months) or a
year. Earnings typically refer to after-tax net income.Ultimately, a business's
earnings are the main determinant of its share price, because earnings and
the circumstances relating to them can indicate whether the business will be
profitable and successful in the long run.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
An indicator of a company's financial performance which is calculated as
follows:
EBITDA
can be used to analyze and compare profitability between companies and
industries because it eliminates the effects of financing and accounting
decisions. However, this is a non-GAAP measure that allows a greater
amount of discretion as to what is (and is not) included in the calculation.
This also means that companies often change the items included in their
EBITDA calculation from one reporting period to the next.
EBITDA first came into common use with leveraged buyouts in the 1980s,
when it was used to indicate the ability of a company to service debt. As
time passed, it became popular in industries with expensive assets that had
to be written down over long periods of time. EBITDA is now commonly
quoted by many companies, especially in the tech sector - even when it isn't
warranted.
A common misconception is that EBITDA represents cash earnings. EBITDA is
a good metric to evaluate profitability, but not cash flow. EBITDA also leaves
out the cash required to fund working capital and the replacement of old
equipment, which can be significant. Consequently, EBITDA is often used as
an accounting gimmick to dress up a company's earnings. When using this
metric, it's key that investors also focus on other performance measures to
make sure the company is not trying to hide something with EBITDA.
Amortization
1. The paying off of debt in regular installments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually
over the asset's life). More specifically, this method measures the
consumption of the value of intangible assets, such as a patent or a
copyright.
Suppose XYZ Biotech spent $30 million dollars on a piece of medical
equipment and that the patent on the equipment lasts 15 years, this
would mean that $2 million would be recorded each year as an amortization
expense.
While amortization and depreciation are often used interchangeably,
technically this is an incorrect practice because amortization refers to
intangible assets and depreciation refers to tangible assets.
Depreciation
1. In accounting, an expense recorded to allocate a tangible asset's cost over
its useful life. Because depreciation is a non-cash expense, it increases free
cash flow while decreasing reported earnings.
2. A decrease in the value of a particular currency relative to other
currencies.
1. Depreciation is used in accounting to try to match the expense of an asset
to the income that the asset helps the company earn. For example, if a
company buys a piece of equipment for $1 million and expects it to have a
useful life of 10 years, it will be depreciated over 10 years. Every accounting
year, the company will expense $100,000 (assuming straight-line
depreciation), which will be matched with the money that the equipment
helps to make each year.
2. Examples of currency depreciation are the infamous Russian ruble crisis in
1998, which saw the ruble lose 25% of its value in one day.
Non-Cash Charge
A charge off, made by a company against earnings, that does not require an
initial outlay of cash.
Non-cash charges are typically against the depreciation, amortization, and
depletion accounts on a company's balance sheet. Companies take these
charges against earnings due to extraordinary circumstances such as
accounting policy changes or significant depreciation of asset's market value.
Any sort of charge will usually result in lower earnings in the period when the
charge was made.
Sometimes also referred to as a write down.
Write-Down
Reducing the book value of an asset because it is overvalued compared to
the market value.
This is usually reflected in the company's income statement as an expense,
thereby reducing net income.
Write-Off
A reduction in the value of an asset or earnings by the amount of an expense
or loss. Companies are able to write off certain expenses that are required to
run the business, or have been incurred in the operation of the business and
detract from retained revenues.
For example, if you spend money on dinner to take out a client, that meal is
a possible write-off towards your income because you presumably discussed
business opportunities during the dinner. Suppose, for another example, you
made a sale on credit to a customer, but two weeks later the client's
business declared bankruptcy and became completely unable to pay off the
credit account with you. This uncollectible debt would then be written off by
your company and recorded as an expense by accountants.
Write-Up
An increase made to the book value of an asset because it is undervalued
compared to market values.
A write-up will increase a company's accounting book value without any
expenditures. For example, if an economy experiences significant inflation, a
production company may decide to write up its inventory to better match the
market price.
Equity Method
An accounting technique used by firms to assess the profits earned by their
investments in other companies. The firm reports the income earned on the
investment on its income statement and the reported value is based on the
firm's share of the company assets. The reported profit is proportional to the
size of the equity investment. This is the standard technique used when one
company has significant influence over another.
When a company holds approximately 20-25% or more of another company's
stock, it is considered to have significant control, which signifies the power
that a company can exert over another company. This power includes
representation on the board of directors, partaking in company policy
development and the interchanging of managerial personnel. If a firm
owns 25% of a company with a $1 million net income, that firm would
report earnings of $250,000.
Generally Accepted Accounting Principles (GAAP)
The common set of accounting principles, standards and procedures that
companies use to compile their financial statements. GAAP are a
combination of authoritative standards (set by policy boards) and simply the
commonly accepted ways of recording and reporting accounting information.
GAAP are imposed on companies so that investors have a minimum level of
consistency in the financial statements they use when analyzing companies
for investment purposes. GAAP cover such things as revenue recognition,
balance sheet item classification and outstanding share measurements.
Companies are expected to follow GAAP rules when reporting their financial
data via financial statements. If a financial statement is not prepared using
GAAP principles, be very wary!
That said, keep in mind that GAAP is only a set of standards. There is plenty
of room within GAAP for unscrupulous accountants to distort figures. So,
even when a company uses GAAP, you still need to scrutinize its financial
statements.
This is an excellent way to buy shares in a foreign company while realizing
any dividends and capital gains in U.S. dollars. However, ADRs do not
eliminate the currency and economic risks for the underlying shares in
another country. For example, dividend payments in euros would be
converted to U.S. dollars, net of conversion expenses and foreign taxes and
in accordance with the deposit agreement. ADRs are listed on either the
NYSE, AMEX or Nasdaq.
The relationship between all the stakeholders in a company. This includes the
shareholders, directors, and management of a company, as defined by the
corporate charter, bylaws, formal policy and rule of law.
Ethical companies are said to have excellent corporate governance.
Securitization:
Securitization is a structured finance process in which assets, receivables or
financial instruments are acquired, classified into pools, and offered as
collateral for third-party investment.[1] It involves the selling of financial
instruments which are backed by the cash flow or value of the underlying
assets.[2]
Securitization typically applies to assets that are illiquid (i.e. cannot easily be
sold). It is common in the real estate industry, where it is applied to pools of
leased property, and in the lending industry, where it is applied to lenders'
claims on mortgages, home equity loans, student loans and other debts.
Securitization utilizes a special purpose vehicle (SPV) (alternatively known as
a special purpose entity [SPE] or special purpose company [SPC]) in order to
reduce the risk of bankruptcy and thereby obtain lower interest rates from
potential lenders. A credit derivative is also generally used to change the
credit quality of the underlying portfolio so that it will be acceptable to the
final investors.]
Corporate governance:
Corporate governance is the set of processes, customs, policies, laws and
institutions affecting the way in which a corporation is directed, administered
or controlled. Corporate governance also includes the relationships among
the many players involved (the stakeholders) and the goals for which the
corporation is governed. The principal players are the shareholders,
management and the board of directors. Other stakeholders include
employees, suppliers, customers, banks and other lenders, regulators, the
environment and the community at large.
Recently there has been considerable interest in the corporate governance
practices of modern corporations, particularly since the high-profile collapses
of a number of large U.S. firms such as Enron Corporation and Worldcom.
Board members and those with a responsibility for corporate governance are
increasingly using the services of external providers to conduct anticorruption auditing, due diligence and training.
Definition
The term corporate governance has come to mean two things.
The processes by which all companies are directed and controlled.
A field in economics, which studies the many issues arising from the
separation of ownership and control.[1]
Relevant rules include applicable laws of the land as well as internal rules of
a corporation. Relationships include those between all related parties, the
most important of which are the owners, managers, directors of the board,
regulatory authorities and to a lesser extent employees and the community
at large. Systems and processes deal with matters such as delegation of
authority.
The corporate governance structure specifies the rules and procedures for
making decisions on corporate affairs. It also provides the structure through
which the company objectives are set, as well as the means of attaining and
monitoring the performance of those objectives.
Corporate governance is used to monitor whether outcomes are in
accordance with plans and to motivate the organization to be more fully
informed in order to maintain or alter organizational activity. Corporate
governance is the mechanism by which individuals are motivated to align
their actual behaviors with the overall participants
The concept in accounting of recognizing expenses in the same accounting
period when the related revenues are recognized
The concept in accounting of recognizing expenses in the same accounting
period when the related revenues are recognized
Wasting asset: An asset which has a limited life and therefore decreases in
value over time, such as an option which is out of the money.
Wasting assets are held for too long, they will ultimately lose all their value.
Derivatives such as options are thought of as wasting assets since they have
fixed expiration dates and lose value as the time gap until expiration
narrows. An asset which has a limited life and therefore decreases in value
over time, such as an option which is out of the money.
Marginal Cost (MC)
The marginal cost of an additional unit of output is the cost of the additional
inputs needed to produce that output. More formally, the marginal cost is
the derivative of total production costs with respect to the level of
output.Marginal cost and average cost can differ greatly. For example,
suppose it costs $1000 to produce 100 units and $1020 to produce 101
units. The average cost per unit is $10, but the marginal cost of the 101st
unit is $20 Marginal costs are defined as the change in total costs resulting
from a one unit change in output. They are the variable costs associated with
increasing output in the short run. A change in marginal costs might come
about for example because of a change in the prices of essential raw
materials or an increase in the wage rate paid to part-time employees.
PerpetualSuccession:
A company does not die or cease to exist unless it is specifically wound up or
the task for which it was formed has been completed. Membership of a
company may keep on changing from time to time but that does not affect
life of the company. Death or insolvency of member does not affect the
existence of the company.
SeparateLegalEntity:
On incorporation under law, a company becomes a separate legal entity as
compared to its members. The company is different and distinct from its
members in law. It has its own name and its own seal, its assets and
liabilities are separate and distinct from those of its members. It is capable of
owning property, incurring debt, and borrowing money, having a bank
account, employing people, entering into contracts and suing and being sued
separately.
LimitedLiability:
The liability of the members of the company is limited to contribution to the
assets of the company up to the face value of shares held by him. A member
is liable to pay only the uncalled money due on shares held by him when
called upon to pay and nothing more, even if liabilities of the company far
exceeds its assets. On the other hand, partners of a partnership firm have
unlimited liability i.e. if the assets of the firm are not adequate to pay the
liabilities of the firm, the creditors can force the partners to make good the
deficit from their personal assets. This cannot be done in case of a company
once the members have paid all their dues towards the shares held by them
in the company.
Types of Companies
1.Public Company means a company which not a private company.
2.Private Company means a company which by its articles of association :a. Restricts the right of members to transfer its shares
b. Limits the number of its members to fifty. In determining this
number of 50, employee-members and ex-employee members
are not to be considered.
c. Prohibits an invitation to the public to subscribe to any shares in
or the debentures of the company.
1.
2.
3.
4.
5.
For example, a company has 100 shares of stock each with a price of $50.
The market capitalization is 100 $50 = $5000. The company splits its stock
"2-for-1". There are now 200 shares of stock and each shareholder holds
twice as many shares. The price of each share has been adjusted to $25. The
market capitalization is 200 $25 = $5000, the same as before the split.
Reverse stock split, or reverse split, is just the same but in reverse: a
reduction in number of shares and an accompanying increase in the share
price. The ratio is also reversed: 1-for-2, or 1-for-3.
7 Merchant banking
Merchant banking----A bank that deals mostly in (but is not limited to)
international finance, long-term loans for companies and underwriting.
Merchant banks do not provide regular banking services to the general
public.
8 Can share holders offer its share price at premium during the IPO?
9 Who regulates/controls the price of the shares?
10 Form filed for Prospectus in SEC?
Share warrant----A certificate, usually issued along with a bond or preferred
stock, entitling the holder to buy a specific amount of securities at a specific
price, usually above the current market price at the time of issuance, for an
extended period, anywhere from a few years to forever. In the case that the
price of the security rises to above that of the warrant's exercise price, then
the investor can buy the security at the warrant's exercise price and resell it
for a profit. Otherwise, the warrant will simply expire or remain unused.
Warrants are listed on options exchanges and trade independently of the
security with which it was issued. also called subscription warrant.
Share certificate - legal document that certifies ownership of a specific
number of stock shares (or fractions thereof) in a corporation.
Share Premium----The market value of shares in excess of their par value.
Proxy----A representative;
representative.
an
agent;
document
appointing
Net Present Value - NPV ----The difference between the present value of
cash inflows and the present value of cash outflows. NPV is used in capital
budgeting to analyze the profitability of an investment or project.
The internal rate of return (IRR) is defined as the discount rate that gives
a net present value (NPV) of zero. The NPV is calculated from an annualized
cash flow by discounting all future amounts to the present.
The length of time required to recover the cost of an investment.
Franchise, Examples of Franchise
Vs Affiliate
Has not been employed by Occidental within the last five years;
Has not been an employee or affiliate of any present or former internal
or external auditor of Occidental within the last three years;
regarded as the personal property of the corporation and part of its assets.
The corporation can sell the stock for cash or credit, for par value or market
value, or upon any terms that it could be sold by a stockholder. Shares that
the corporation has not issued in spite of its authority to do so are ordinarily
not regarded as treasury shares but are merely unissued shares.
Public Company Vs Private Company: A company that has issued
securities through an initial public offering and which are traded on at least
one stock exchange or over-the-counter market.
Index (Stock index): A statistical indicator providing a representation of
the value of the securities which constitute it. Indices often serve as
barometers for a given market or industry and benchmarks against which
financial or economic performance is measured.
Sensex :An abbreviation of the Bombay Exchange Sensitive Index (Sensex) the benchmark index of the Bombay Stock Exchange (BSE). It is composed of
30 of the largest and most actively-traded stocks on the BSE. Initially
compiled in 1986, the Sensex is the oldest stock index in India.
BSE: The BSE SENSEX (also known as the BSE 30) is a value-weighted index
composed of 30 scrips, with the base April 1979=100. The set of companies
which make up the index has been changed only a few times in the last 20
years. These companies account for around one-fifth of the market
capitalization of the BSE.
Joint Stock Company Vs Joint venture
Joint Stock Company----A company which has some features of a corporation
and some features of a partnership. The company sells fully transferable
stock, but all shareholders have unlimited liability.
Joint Stock Company----A business whose capital is held in transferable
shares of stock by its joint owners.
Joint venture----A contractual agreement joining together two or more parties
for the purpose of executing a particular business undertaking. All parties
agree to share in the profits and losses of the enterprise.
Joint venture----An association of two or more individuals or companies
engaged in a solitary business enterprise for profit without actual partnership
or incorporation; also called a joint adventure.
Restructuring : A significant modification made to the debt, operations or
structure of a company. This type of corporate action is usually made when
there are significant problems in a company, which are causing some form of
financial harm and putting the overall business in jeopardy. The hope is that
through restructuring, a company can eliminate financial harm and improve
the business.
Disinvestment:
The action of an organization or government selling or liquidating an asset
or subsidiary. Also known as "divestiture". A reduction in capital expenditure,
or the decision of a company not to replenish depleted capital goods
Underwriter:
1. A person or firm engaged in the insurance business.
2. An insurance agent who assesses the risk of enrolling an applicant for
coverage or a policy.
3. One that guarantees the purchase of a full issue of stocks or bonds.
A company or other entity that administers the public issuance and
distribution of securities from a corporation or other issuing body. An
underwriter works closely with the issuing body to determine the offering
price of the securities, buys them from the issuer and sells them to investors
via the underwriter's distribution network.
Insurance Vs Reinsurance:
Insurance----A contract whereby, for a specified consideration, one party
undertakes to compensate the other for a loss relating to a particular subject
as a result of the occurrence of designated hazards.
Reinsurance----The contract made between an insurance company and a
third party to protect the insurance company from losses. The contract
provides for the third party to pay for the loss sustained by the insurance
company when the company makes a payment on the original contract.
Preferred Stock:
A preferred stock, also known as a preferred share or simply a preferred, is a
share of stock carrying additional rights above and beyond those conferred
by common stock.
Rights
Unlike common stock, preferred stock usually has several rights attached to
it.
The company can declare a reverse stock split that not only reduces
the number of shares but also reduces the number of shareholders. In
this type of reverse stock split, the company typically gives
shareholders a single new share in exchange for a block10, 100, or
even 1,000 sharesof the old shares. If a shareholder does not have a
sufficient number of old shares to exchange for new shares, the
company will usually pay the shareholder cash based on the current
market price of the companys stock.
While SEC rules don't prevent companies from going private, they do require
companies to provide information to shareholders about the transaction that
caused the company to go private. The company may have to file a merger
proxy statement or a tender offer document with the SEC. In addition, if the
transaction is initiated by an affiliate (an insider) of the company, Rule 13e-3
of the Securities Exchange Act of 1934 requires the affiliate to file a Schedule
13E-3 with the SEC.
Going private transactions require shareholders to make difficult decisions.
To protect shareholders, some states have adopted corporate takeover
statutes that provide shareholders with dissenter's rights. These statutes
provide shareholders the opportunity to sell their shares on the terms
offered, to challenge the transaction in court, or to hold on to the shares.
Once the transaction is concluded, remaining shareholders may find it very
difficult to sell their retained shares because of a limited trading market.
Futures : -Contracts that promise to purchase or sell standard commodities
at a forthcoming date and at a fixed price. This type of contract is an
extremely speculative transaction and ordinarily involves such standard
goods as rice or soybeans. Profit and loss are based upon promises to deliver
as opposed to possession ofthe actual commodities.
Exit Strategy:
1. The method by which a venture capitalist or business owner intends to get
out of an investment that he or she has made in the past. In other words, the
exit strategy is a way of "cashing out" an investment. Examples include an
initial public offering (IPO) or being bought out by a larger player in the
industry. Also referred to as a "harvest strategy" or "liquidity event".
2. In the context of an active trader, a plan as to when a trade will be closed
out.
Monopoly :Exclusive control by one group of the means of producing or
selling a commodity or service
MRTP Monopoly & Restrictive Trade Practices Act
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:
Revenue profits: From main operation of the firm (sale of goods and
services)
Mutual fund: An open-ended fund operated by an investment company,
which arises money from shareholders and investments in a group of
assetsRaise money by selling shares of the fund to the public (income fund,
growth fund)
Trade discount: Which is not shown in the books
Cash discount: 50% out of MRP like that
Trade credit: To the credit that a customer gets from supplier of goods in
the normal course
Duties of Finance Manager: Raising of funds, allocation of funds, profit
planning, understanding capital markets
Chairman: One of the person elected by the directors in the board of
directors meeting.
Who is the Director: one of the shareholders becomes director
CEO: chief executive officer, top officer in the company in the executive
cadre
Who can appoint CEO: board of directors
AGM: shareholders annual general meeting
Quorum: attend the minimum number of members in the meeting
Statutory books: Register of investment holders and their names, register
of earnings, register of debenture and shareholders, register of directors and
their shares
Financial books:
Cash book, general ledger, return outwards and return inwards, invoice, bills
payable, bills receivables
Resolution: solving the problem
Who can appoint auditor: board of directors
Minute books: recording of the board of directors meeting
Agenda: the meeting, which is discussed by the board of directors
Portfolio
Management:
Choosing
and
maintaining
appropriate
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:
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:
and/or
dividend
growth
and
reputation
for
high
quality
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
Degree of operating leverage: % of change in EBIT/ %change in sales
EBIT: earning before interest and tax, Contribution: sales variable cost
ADS:
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
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)
brokers,
floor
brokers,
odd-lot
dealers,
Taravaniwala,
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
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
Manufacturing cycle
Sales growth
Production policy
I.
Essential for a firm to be able to meet its obligations as they become due
II.
Measure the ability of the firm to meet its current obligations
III.
Firm should not suffer from lack of liquidity will result in a poor credit
worthiness
IV.
Loss of creditors confident
V.
A very high degree of liquidity is also bad idle assets earn nothing
Current ratio: current assets/ current liabilities
1) Standard is 2 to 1 (or) 2:1
2) For measuring short-term solvency
3) It represents a margin of safety for creditors
Quick ratio: current assets inventories/ current liabilities
Standard is 1 to 1 (or) 1:1
Converted into cash without any loss of value
Cash is the most liquid asset
Inventories less liquidity fluctuate
Cash ratio: cash + marketable securities/ current liabilities
Internal measure: current assets inventory/ average daily operating
expenses
Total operating expenses/360 . A firms ability to meet its regular cash
expenses is internal measure
Operating exp: Expenses + cost of goods sold + selling & administrative
expenses + general expenses depreciation
Net working capital (NWC): NWC/ net assets
Current liabilities exclude short-term borrowings
Leverage ratios:
For bankers - firms current debt paying ability
For firms long-term financial strength
The firm has a legal obligation to pay interest to debt holders irrespective of
the profit made or loss incurred by the firm
Total debt ratio: Total debt/ total debt + net worth (or) TD/ NA
TD: Total debt, NA: Net assets
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
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
Tax a/c Dr
To Bank a/c
To advance tax a/c
To bank a/c
Life insurance premium: paid on life it is add to drawings
Insurance premium:
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
Manufacturing account:
It shows the expenditure in an activity or product it will transfer to trading
account