Professional Documents
Culture Documents
Course Name-DBM
Subject Name- AFM
Semester - I
INVESTING IN STOCKS
Why :
1. You do not need a lot of money to start making money, unlike
buying property and paying a monthly mortgage.
2. It requires very minimal time to trade - unlike building a conventional
business.
3.. Its fast cash and allows for quick liquidation (You can convert it to
cash easily, unlike selling a property or a business).
4. Its easy to learn how to profit from the stock market.
Types of stock
Common Stock
Preferred stock
Common shares represent ownership in a company and a claim
(dividends) on a portion of profits. Investors get one vote per share
to elect the board members, who oversee the major decisions made
by management.
Preferred stock represents some degree of ownership in a company
but usually doesn't come with the same voting rights. (This may vary
depending on the company.) With preferred shares, investors are
usually guaranteed a fixed dividend forever.
Corporate Securities
Ownership Securities
Preference Shares
Equity Shares
FINANCIAL MARKET
1.
Primary market or New Issue Market: all financial instruments are firstly
issued in this market. There are two type of primary market issues of
common stock .
Firstly: Initial Public offers (IPO) are stocks issued by a formerly privately
owned company selling stock to public for the first time
Secondly: New issue offered by companies that already have floated equity
Securities Market
Primary Market or New Issue Market
Methods:
1. Issue through Prospectus
2. Issue through Offer of Sale
3. Private Placement
4. Right Issue
5. Bonus Issue
Secondary Market
Stock Exchange
Listing of Securities
Kinds of Speculators
- Bull
- Bear
Arbitrage
SEBI
Copyright Amity University
Accounting Entries
Issue of shares for consideration rather than
cashTo the vendor
On purchase
Asset a/c
Dr
To liability a/c
To vendors a/c
On issue of shares
Vendors a/c
Dr
Dr
Dr.
Dr
Bank a/c
Dr
Calls in advance a/c
Dr
To share .call a/c
Calls in arrear
Calls in arrear @ 5%-A share holder may not pay the call
amount when it becomes due. Accounting entry will be
Share call a/c
Dr
To share capital a/c
Bank a/c
Dr
To share call a/c
Calls in arrear a/c
Dr
To share.call a/c
Bank a/c
Dr.
To share .call a/c / calls in arrears a/c
To interest a/c
Forfeiture of share
When a share holder fails to pay the due
amount his a share are taken back by the
company .
Accounting entriesShare capital a/c
Dr,
To unpaid calls a/c
To Forfeited share a/c
When they are issued at par same as above
Surrender of shares
Pro rate allotment and forfeiture of share
Total share applied for
Total share allotted x share allotted to
the default shareholders
Loan capital
Bonds
Debentures
loan (secured and unsecured )
Meaning of debenture
It is a fixed interest rate bearing security
where fixed interest is paid at a specified
rates at given date. it can be purchases from
a stock exchange at a price more or less than
face value
Issuing Debentures
Issuing of debt
Attracts interest
Must be repaid in a specified time frame
Borrower
Lender = principal
Interest = Charge (Fixed or Floating)
Maturity date
Redemption
Issued via prospectus to the general public and also privately
to elite few
Must appoint a trustee
Clear disclosure of all matters relating to the debentures
Type of debenture
Redeemable and irredeemable
Secured and unsecured
Convertible and non convertible
Registered and bearer
Debt
Ownership entitlement
No Ownership entitlement
Voting rights
No Voting rights
Dilute ownership
Must be repaid
Dividends = Profit
Interest = Expense
Mortgage Debenture
Secured by a first mortgage over land and/or
buildings
Cannot exceed >60% of the value of asset
Limits rights to resell/transfer asset
Trustee can take possession and sell to repay
debenture holders
Unsecured Note
Debt which is not secured by any charge over
assets
Higher risk = higher rate of interest
Convertible Note
Allows debenture holder to convert debt to paid up
share capital or cash upon maturity
Application Debentures
Cr
Cr
Cr
General Journal
Dr
Trust Acc Cr
Debentures
Transfer of trust monies
Cr
Cr
Cr
Cr
Cr
Bank
Cr
Applications
Applications
Applications
Debentures
Mortgage
Debentures
Unsecured
Notes
Interest
Interest
Interest
Premium
Premium
Premium
Discount
Discount
Discount
Voting Rights
Proxy voting
Classes of stock
Other Rights
Share proportionally in declared dividends
Share proportionally in remaining assets
during liquidation
Preemptive right first shot at new stock
issue to maintain proportional ownership if
desired
Practice questions
Presentation topics
Conceptual framework
Balance Sheet
Income Statement
Conceptual Framework
1. Conceptual frameworks define the fundamental accounting
principle and theories for formulation of accounting standards. They
also decide : Elements of Financial statements,qualitative
characteristics, fundamental assumptions , other concepts etc.
2. Framework statements have been issued in IGAAP and IFRS . In US
GAAP, Statement of Financial Accounting Concepts (SFAC) act as
framework statement which are detailed and rule oriented .
3. Framework assist in- Standard Setting process, interpretation and
application of Accounting standards, harmonisation with other
standards, enabling Auditors in forming an opinion wherever there are
no standard or standards are silent etc.
US GAAP Hierarchy
SFAC
GASB
Balance Sheet..IGAAP.
Balance sheet is required under the GAAPs to give disclosure about
assets and Liabilities and as a primary financial statement .
Format : IGAAP provides two format of Balance Sheet- Horizontal
and Vertical format ( Part I of schedule VI to the Companies Act,
1956)
IGAAP does not prescribe any current and non current classification.
It rather lists out line items in increasing order of liquidity as sources
and application of funds.
Vertical format requires details of each item in separate schedule,
read with notes.
IFRS does not prescribe any format, but stipulates minimum line
items like PPE, Investment property, Intangible assets, Financial
assets, Biological assets, inventory, receivables etc. Additional line
items, subheadings and subtotals shall be presented on the face of
BS if relevant. The order of presentation within the group or otherwise
in not mandatory.
US GAAP also does not prescribe any format , but Rule S-X of SEC
stipulates for listed companies minimum line items to be disclosed
either on face of Balance sheet or Notes to Accounts like Current
Assets ( Cash and cash items, marketable securities, allowance for
Bad debts, prepaid expenses, other current assets) and Non Current
Assets on asset side and current and non current liabilities on
liabilities side.
Balance Sheet..comparison
Income statement...IGAAP
Costs and exp include cost of tangible goods sold, operating exp of
public utility, exp relating to rental income, Selling general and admn
exp,Provisions .
US GAAP -2) In case of specific situations like change from LIFO method of
valuation of stock,accounting for long term construction contract, change from/
to full cost method in extractive Industry and Change in depreciation Policy,
retrospective application required to restate opening retained earning. Effect of
changes on income before extraordinary items, net income and EPS should be
disclosed for all periods on the face of Income statement in the period of change.
IGAAP, IFRS & US GAAP
SUMMARY
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