Accounting
Definition:-
Definition of accounting: “The
art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are, in part at least of a
financial character and interpreting the results there of”.
Book keeping: It is mainly
concerned with recording of financial data relating to the business operations
in a significant and orderly manner.
Concepts
of Accounting
Business entity concept: - According to this concept, the
business is treated as a separate entity distinct from its owners and others. This concept also
called as Separate entity concept.
Going concern concept: - According to this concept, it is assumed that a business has a
reasonable expectation of continuing business at a profit for an indefinite
period of time.
Money measurement
concept: - This concept says that the accounting records only those
transactions which can be expressed in terms of money only.
Cost concept:
- According to this concept, an asset is recorded in the books at
the price paid to acquire it and that this cost is the basis for all subsequent
accounting for the asset.
Dual
aspect concept: - In every transaction, there will be two
aspects – the receiving aspect and the giving aspect; both are recorded by
debiting one account and crediting another account. This is called double
entry.
Accounting
period concept: - It means the final accounts must be
prepared on a periodic basis. Normally accounting period adopted is one year,
more than this period reduces the utility of accounting data.
Realization
concept: - According to this concepts, revenue is considered as being
earned on the data which it is realized, i.e., the date when the property in
goods passes the buyer and he become legally liable to pay.
Materiality
concept: - It is a one of the accounting principle, as per only important
information will be taken, and unimportant information will be ignored in the
preparation of the financial statement.
Matching
concept: - Matching means requires proper matching of expense with the
revenue. The cost or expenses of a business of a particular period are compared
with the revenue of the period in order to ascertain the net profit and loss.
Accrual
concept: - The profit arises only when there is an
increase in owner’s capital, which is a result of excess of revenue over
expenses and loss.
Conventions of
Accounting:
·
Conservatism
·
Full disclosure
·
Consistency
·
Materiality
Convention of Conservatism: Financial Statements are usually drawn up on rather a
conservative basis. Window-dressing, i.e., showing a position better that what
it is, is not permitted. It is also not proper to show a position substantially
worse than what it is. In other words, secret reserves are not permitted.
Convention of Full disclosure: According to this convention, all accounting statements
should be honestly prepared and to that end full disclosure of all significant
information will be made.
Convention of consistency: According to this convention it is essential that
accounting practices and methods remain unchanged from one year to another.
Convention of Materiality: Materiality means relative importance. In other words whether
a matter should be disclosed or not in the financial statements depends on its
materiality, i.e., whether it is material or not. American Accounting
Association defines ‘Materiality’ as under:
“An item should be regarded as material if there is reason to
believe that knowledge of it would influence the decision of informed
investors”
Systems of book keeping:
·
Single entry system
·
Double entry system
Systems of accounting:
·
Cash system accounting
·
Mercantile system of
accounting.
Principles of accounting:
Personal a/c:
Debit the receiver
Credit the giver
Real a/c:
Debit what comes in
Credit what goes out
Nominal a/c:
Debit all expenses and losses
Credit all gains and incomes
Meaning of journal: Journal means chronological record of transactions.
Meaning of ledger: Ledger
is a set of accounts. It contains all accounts of the business enterprise
whether real, nominal, personal.
Posting: It
means transferring the debit and credit items from the journal to their
respective accounts in the ledger.
Trial balance: Trial
balance is a statement containing the various ledger balances on a particular
date.
General
Credit note: The
customer when returns the goods get credit for the value of the goods returned.
A credit note is sent to him intimating that his a/c has been credited with the
value of the goods returned.
Debit note: When
the goods are returned to the supplier, a debit note is sent to him indicating
that his a/c has been debited with the amount mentioned in the debit note.
Contra entry: Which
accounting entry is recorded on both the debit and credit side of the cashbook
is known as the contra entry.
Petty cash book: Petty
cash is maintained by business to record petty cash expenses of the business,
such as postage, cartage, stationery, etc.
Promissory note: an
instrument in writing containing an unconditional undertaking signed by the
maker, to pay certain sum of money only to or to the order of a certain person
or to the barer of the instrument.
Cheque: A
bill of exchange drawn on a specified banker and payable on demand.
Stale Cheque: A
stale cheque means not valid of cheque that means more than six months the
cheque is not valid.
Bank reconciliation statement: It is a statement reconciling the balance as shown by the
bank passbook and the balance as shown by the Cash Book. Obj: to know the
difference & pass necessary correcting, adjusting entries in the books.
Bad debts: Bad
debts denote the amount lost from debtors to whom the goods were sold on
credit.
Opening Stock: The
term ‘opening stock’ means goods lying unsold with the businessman in the
beginning of the accounting year. This is shown on the debit side of the
trading account.
Closing Stock: The
term ‘Closing Stock’ includes goods lying unsold with the businessman at the
end of the accounting year. The amount of closing stock is shown on the credit
side of the trading account and as an asset in the balance sheet.
Valuation of closing stock: The closing stock is valued on the basis of “Cost or
Market prices whichever is less” principle.
Goodwill: The
present value of firm’s anticipated excess earnings.
Responsibilities of accounting: It is a system of control by delegating and locating the
Responsibilities for costs.
Contingency: A
condition (or) situation the ultimate out comes of which gain or loss will be
known as determined only as the occurrence or non occurrence of one or more
uncertain future events.
Contingent Asset: An
asset the existence ownership or value of which may be known or determined only
on the occurrence or non occurrence of one more uncertain future event.
Contingent liability: An obligation to an existing condition or situation which
may arise in future depending on the occurrence of one or more uncertain future
events.
Deficiency: the
excess of liabilities over assets of an enterprise at a given date is called
deficiency.
Deficit: The
debit balance in the profit and loss a/c is called deficit.
Surplus: Credit
balance in the profit & loss statement after providing for proposed
appropriation & dividend, reserves.
Appropriation Assets: An account sometimes included as a separate section of the
profit and loss statement showing application of profits towards dividends,
reserves.
Floating Change: Assume
change on some or all assets of an enterprise which are not attached to
specific assets and are given as security against debt.
Suspense account: The
suspense account is an account to which the difference in the trial balance has
been put temporarily.
Drawings: Drawings
denotes the money withdrawn by the proprietor from the business for his
personal use.
Define the term preliminary expenses: Expenditure relating to the formation of an enterprise.
There include legal accounting and share issue expenses incurred for formation
of the enterprise.
Meaning of Charge: charge
means it is a obligation to secure an indebtness. It may be fixed charge and
floating charge.
Appropriation: It
is application of profit towards Reserves and Dividends.
Absorption costing: A method where by the cost is determine so as to include
the appropriate share of both variable and fixed costs.
Marginal Cost: Marginal
cost is the additional cost to produce an additional unit of a product. It is
also called variable cost.
What are the ex-ordinary items in the P&L
a/c: The transaction which is not related to the business is
termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses
on the sale of fixed assets, interest received from other company investments,
profit or loss on foreign exchange, unexpected dividend received.
Meaning of Working capital: The funds available for conducting day to day operations
of an enterprise. Also represented by the excess of current assets over current
liabilities.
Financial analysis: The process of interpreting the past, present, and future
financial condition of a company.
Income statement: An
accounting statement which shows the level of revenues, expenses and profit
occurring for a given accounting period.
Annual report: The
report issued annually by a company, to its share holders. it containing financial
statement like, trading and profit & lose account and balance sheet.
Bankrupt: A
statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration
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.
Opportunity cost: The
cost associated with not doing something.
Expenses
Revenue
expenditure: An expenditure that incurred in the
course of regular business transactions of a concern.
Capital
expenditure: It means an expenditure which has been
incurred for the purpose of obtaining a long term advantage for the business.
Differed
revenue expenditure: An expenditure, which is
incurred during an accounting period but is applicable further periods also.
Eg: Heavy Advertisement.
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.
Prepaid
Expenses: An Expenses paid during the accounting period but those are not
incurred and due in the current accounting period, which are related to future
period expenses.
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.
Difference between Expenses And Expenditure
Expense: An Amount
spent to get a short term benefit. This comes under P&L account.
Expenditure: An Amount
spent to get a Long term benefit. This comes under BS account.
Incomes
Revenue income: The
income, which arises out of and in the course of the regular business
transactions of a concern.
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.
Prepaid
Income: Income which is received in advance called as prepaid income
Accrued Income: Accrued
income means income which has been earned by the business during the accounting
year but which has not yet been due and, therefore, has not been received.
Capital income: The
term capital income means an income which does not grow out of or pertain to
the running of the business proper.
Assets
Asset: A useful or valuable thing or person.
Current Assets: Assets which can be converted into cash within a
year.
Fixed Assets(Tangible):
Fictitious assets: These are assets not represented by tangible possession or
property. Examples of preliminary expenses, discount on issue of shares, debit
balance in the profit And loss account when shown on the assets side in the
balance sheet.
Intangible Assets: Intangible
assets mean the assets which is not having the physical appearance. And it’s
have the real value, it shown on the assets side of the balance sheet.
Depreciation
Depreciation: Depreciation
denotes gradually and permanent decrease in the value of asset due to wear and
tear, technology changes, laps of time and accident.
Depletion: It
implies removal of an available but not replaceable source, Such as extracting
coal from a coal mine.
Amortization: The
process of writing of intangible assets is term as amortization.
Dilapidations: The
term dilapidations to damage done to a building or other property during
tenancy.
Accumulated Depreciation: The total to date of the periodic depreciation charges on
depreciable assets.
Methods of depreciation:
·
Uniform
charge methods:
·
Fixed instalment method
·
Depletion
method
·
Machine
hour rate method.
·
Declining
charge methods:
·
Diminishing
balance method
·
Sum
of years digits method
·
Double
declining method
Other methods:
·
Group
depreciation method
·
Inventory
system of depreciation
·
Annuity
method
·
Depreciation
fund method
·
Insurance
policy method
BRS
BRS: It
is a statement reconciling the balance as shown by the bank pass book and
balance shown by the cash book.
Objective of BRS: The
objective of preparing such a statement is to know the causes of difference
between the two balances and pass necessary correcting or adjusting entries in
the books of the firm.
Joint Venture Vs
Partnership Vs Company
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.
Partnership: Partnership
is the relation b/w the persons who have agreed to share the profits of
business carried on by all or any of them acting for all.
Factoring: It
is an arrangement under which a firm (called borrower) receives advances
against its receivables, from financial institutions (called factor)
Free Cash: The
cash not for any specific purpose free from any encumbrance like surplus cash.
Minority Interest: Minority
interest refers to the equity of the minority shareholders in a subsidiary
company.
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.
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”.
Meaning of Company: A company is an association of many persons who contribute
money or money’s worth to common stock and employs it for a common purpose. The
common stock so contributed is denoted in money and is the capital of the
company.
Types of a company:
·
Statutory
companies
·
Government
company
·
Foreign
company
Registered companies:
·
Companies
limited by shares
·
Companies
limited by guarantee
·
Unlimited
companies
·
private
company
·
public
company
Private company: A
private co. is which by its AOA: Restricts the right of the members to transfer
of shares Limits the no. Of members 50. Prohibits any Invitation to the public
to subscribe for its shares or debentures.
Public company: A
company, the articles of association of which does not contain the requisite
restrictions to make it a private limited company, is called a public company.
Characteristics of a company:
·
Voluntary association
·
Separate legal entity
·
Free transfer of shares
·
Limited liability
·
Common seal
·
Perpetual existence.
Formation of company:
·
Promotion
·
Incorporation
·
Commencement of business
Difference between joint venture and
partnership: In joint venture the business is carried
on without using a firm name, In the partnership, the business is carried on
under a firm name. In the joint venture, the business transactions are recorded
under cash system In the partnership, the business transactions are recorded
under mercantile system. In the joint venture, profit and loss is ascertained
on completion of the venture In the partnership, profit and loss is ascertained
at the end of each year. In the joint venture, it is confined to a particular
operation and it is temporary. In the partnership, it is confined to a particular
operation and it is permanent.
RESERVES AND PROVISIONS
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 proprietor’s fund while creation of provisions decreases his funds in
the business.
Capital reserve: The
reserve which transferred from the capital gains is called capital reserve.
General reserve: the
reserve which is transferred from normal profits of the firm is called general
reserve
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 cannot be determined
with substantial accuracy.
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 created by:
·
Excessive depot an asset,
excessive over-valuation of a liability.
·
Complete elimination of
an asset, or under valuation of an asset.
Reserve fund: The
term reserve fund means such reserve against which clearly investment etc.,
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.
Capital redemption reserve: A reserve created on redemption of the average cost: - the
cost of an item at a point of time as determined by applying an average of the
cost of all items of the same nature over a period. When weights are also
applied in the computation it is termed as weight average cost.
Debenture redemption reserve: A reserve created for the redemption of debentures at a
future date.
Dividend Equalization reserve: A reserve created to maintain the rate of dividend in
future years.
SHARE CAPITAL
Share capital: The
sum total of the nominal value of the shares of a company is called share
capital.
Equity share capital: The total sum of equity shares is called equity share
capital.
Authorized share capital: It is the maximum amount of the share capital, which a
company can raise for the time being.
Issued capital: It
is that part of the authorized capital, which has been allotted to the public
for subscriptions.
Subscribed capital: it is the part of the issued capital, which has been
allotted to the public
Called up capital: It has been portion of the subscribed capital which has
been called up by the company.
Paid up capital: It
is the portion of the called up capital against which payment has been
received.
Debentures: Debenture
is a certificate issued by a company under its seal acknowledging a debt due by
it to its holder.
Cash profit: cash
profit is the profit it is occurred from the cash sales.
Deemed public Ltd. Company: A private company is a subsidiary company to public
company it satisfies the following terms/conditions Sec 3(1)3:
·
Having minimum share
capital 5 lakhs
·
Accepting investments
from the public
·
No restriction of the
transferable of shares
·
No restriction of no. of
members.
·
Accepting deposits from
the investors.
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”.
Investment: Expenditure
on assets held to earn interest, income, profit or other benefits.
Capital: Generally
refers to the amount invested in an enterprise by its owner.
Ex; paid up share capital in corporate enterprise.
Capital Work In Progress: Expenditure on capital assets which are in the process of
construction as completion.
Convertible Debenture: A debenture which gives the holder a right to conversion
wholly or partly in shares in accordance with term of issues.
Redeemable Preference Share: The preference share that is repayable either after a
fixed (or) determinable period (or) at any time dividend by the management.
Cumulative preference shares: A class of preference shares entitled to payment of emulates
dividends. Preference shares are always deemed to be cumulative unless they are
expressly made non-cumulative preference shares.
Cumulative dividend: A dividend payable as cumulative preference shares which
it unpaid Emulates as a claim against the earnings of a corporate before any
distribution is made to the other shareholders.
FINANCIAL MANAGEMENT
Finance management: Financial management deals with procurement of funds and
their effective utilization in business.
Objectives of financial management: financial management having two objectives that Is:
Profit maximization: The finance manager has to make his decisions in a manner
so that the profits of the concern are maximized.
Wealth maximization: Wealth maximization means the objective of a firm should
be to maximize its value or wealth, or value of a firm is represented by the
market price of its common stock.
Functions of financial manager:
·
Investment decision
·
Dividend decision
·
Finance decision
·
Cash management decisions
·
Performance evaluation
·
Market impact analysis
Time value of money: The time value of money means that worth of a rupee
received today is different from the worth of a rupee to be received in future.
Capital structure: It
refers to the mix of sources from where the long-term funds required in a
business may be raised; in other words, it refers to the proportion of debt,
preference capital and equity capital.
Optimum capital structure: Capital structure is optimum when the firm has a combination of
equity and debt so that the wealth of the firm is maximum.
Wacc: It
denotes weighted average cost of capital. It is defined as the overall cost of
capital computed by reference to the proportion of each component of capital as
weights.
Financial break-even point: It denotes the level at which a firm’s EBIT is just
sufficient to cover interest and preference dividend.
Capital Budgeting
Budget: It
is a detailed plan of operations for some specific future period. It is an
estimate prepared in advance of the period to which it applies.
Budgetary control: It
is the system of management control and accounting in which all operations are
forecasted and so for as possible planned ahead, and the actual results
compared with the forecasted and planned ones.
Cash budget: It
is a summary statement of firm’s expected cash inflow and outflow over a
specified time period.
Master budget: A summary of budget schedules in capsule form made for the
purpose of presenting in one report the highlights of the budget forecast.
Fixed budget: It
is a budget, which is designed to remain unchanged irrespective of the level of
activity actually attained.
Zero- base- budgeting: It is a management tool which provides a systematic method
for evaluating all operations and programmes, current of new allows for budget
reductions and expansions in a rational inner and allows reallocation of source
from low to high priority programs.
Capital budgeting: Capital budgeting involves the process of decision making with
regard to investment in fixed assets. Or decision making with regard to
investment of money in long term projects.
Payback period: Payback
period represents the time period required for complete recovery of the initial
investment in the project.
ARR: Accounting
or average rates of return means the average annual yield on the project.
NPV: The Net
present value of an investment proposal is defined as the sum of the present
values of all future cash inflows less the sum of the present values of all
cash out flows associated with the proposal.
Profitability
Index: Where different investment proposal each involving different
initial investments and cash inflows are to be compared
IRR: Internal
rate of return is the rate at which the sum total of discounted cash inflows
equals the discounted cash out flow.
Funds flow statement
& Cash flow statement
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.
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
·
Depreciation on fixed
assets
·
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:
·
Funds from long-term
loans
·
Sale of fixed assets
·
Funds from increase in
share capital
Budgeting: The
term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and control of business enterprise.
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.
Capitalization: It
is the sum of the par value of stocks and bonds out standings.
Over capitalization: When a business is unable to earn fair rate on its
outstanding securities.
Under capitalization: When a business is able to earn fair rate or over rate on
it is outstanding securities.
Cost of capital: It
means the minimum rate of return expected by its investment.
Cash dividend: The
payment of dividend in cash
Application of funds:
·
Purchase of fixed assets
·
Payment of dividend
·
Payment of tax liability
·
Payment of fixed
liability
Cash flow statement: It is a statement depicting change in cash position from
one period to another.
Sources of cash:
Internal sources:
·
Depreciation
·
Amortization
·
Loss on sale of fixed
assets
·
Gains from sale of fixed
assets
·
Creation of reserves
External sources-
·
Issue of new shares
·
Raising long term loans
·
Short-term borrowings
·
Sale of fixed assets,
investments
Application of cash:
·
Purchase of fixed assets
·
Payment of long-term
loans
·
Decrease in deferred
payment liabilities
·
Payment of tax, dividend
·
Decrease in unsecured
loans and deposits
Difference between Funds flow and Cash flow
statement: A Cash flow statement is concerned only with the change in
cash position while a funds flow analysis is concerned with change in working
capital position between two balance sheet dates. A cash flow statement is
merely a record of cash receipts and disbursements. While studying the
short-term solvency of a business one is interested not only in cash balance
but also in the assets which are easily convertible into cash.
Difference between the Funds flow and Income
statement:A funds flow statement deals with the financial resource
required for running the business activities. It explains how were the funds
obtained and how were they used, whereas an income statement discloses the
results of the business activities, i.e., how much has been earned and how it
has been spent. 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.
Derivatives
Derivative: derivative
is product whose value is derived from the value of one or more basic variables
of underlying asset.
Forwards: a
forward contract is customized contracts between two entities were settlement
takes place on a specific date in the future at today’s pre agreed price.
Futures: A
future contract is an agreement between two parties to buy or sell an asset at
a certain time in the future at a certain price. Future contracts are
standardized exchange traded contracts.
Options: An
option gives the holder of the option the right to do something. The option
holder option may exercise or not.
Call option: A call
option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
Put option: A put
option gives the holder the right but not obligation to sell an asset by a
certain date for a certain price.
0ption price: Option price is the price which the option buyer pays to the
option seller. It is also referred to as the option premium.
Expiration date: The
date which is specified in the option contract is called expiration date.
European option: It
is the option at exercised only on expiration date itself.
Basis: Basis
means future price minus spot price.
Cost of carry: The relation between future prices and spot prices can be
summarized in terms of what is known as cost of carry.
Initial margin: The
amount that must be deposited in the margin a/c at the time of first entered
into future contract is known as initial margin.
Maintenance margin: This is
somewhat lower than initial margin.
Mark to market: In
future market, at the end of the each trading day, the margin a/c is adjusted
to reflect the investors’ gains or loss depending upon the futures selling
price. This is called mark to market.
Baskets: basket
options are options on portfolio of underlying asset.
Swaps: swaps
are private agreements between two parties to exchange cash flows in the future
according to a pre agreed formula.
Impact cost: Impact
cost is cost it is measure of liquidity of the market. It reflects the costs
faced when actually trading in index.
Hedging: Hedging
means minimize the risk.
Capital market: Capital
market is the market it deals with the long term investment funds. It consists
of two markets 1.primary market 2.secondary market.
Primary market: Those
companies which are issuing new shares in this market. It is also called new
issue market.
Secondary market: Secondary market is the market where shares buying and selling.
In India secondary market is called stock exchange.
Arbitrage: It
means purchase and sale of securities in different markets in order to profit
from price discrepancies. In other words arbitrage is a way of reducing risk of
loss caused by price fluctuations of securities held in a portfolio
Mutual fund: A
mutual fund is a pool of money, collected from investors, and is invested
according to certain investment objectives.
Characteristics of mutual fund: Ownership of the MF is in the hands of the of the
investors MF managed by investment professionals The value of portfolio is
updated every day
Advantage of MF to investors: Portfolio diversification Professional management Reduction in
risk Reduction of transaction casts Liquidity Convenience and flexibility
Net asset value: the value of one unit of investment is called as the Net Asset
Value
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.
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.
Dividend option: investors
who choose a dividend on their investments, will receive dividends from the MF,
as when such dividends are declared.
Growth option: investors
who do not require periodic income distributions can be choose the growth
option.
Equity funds: equity funds are those that invest pre-dominantly in equity
shares of company.
Types of equity funds: Simple equity funds Primary market funds Sectoral funds
Index funds
·
Sectoral funds: Sectoral funds choose to invest in one or more chosen
sectors of the equity markets.
·
Index funds: The fund manager takes a view on companies that are
expected to perform well, and invests in these companies
·
Debt funds: the debt funds are those that are pre-dominantly invest in
debt securities.
·
Liquid funds: the debt funds invest only in instruments with maturities
less than one year.
·
Gilt funds: gilt funds invests only in securities that are issued by
the GOVT. and therefore does not carry any credit risk.
·
Balanced funds: Funds that invest both in debt and equity markets are
called balanced funds.
Sponsor: sponsor
is the promoter of the MF and appoints trustees, custodians and the AMC with
prior approval of SEBI.
Trustee: Trustee
is responsible to the investors in the MF and appoint the AMC for managing the
investment portfolio.
AMC: the
AMC describes Asset Management Company; it is the business face of the MF, as
it manages all the affairs of the MF.
R & T Agents: the
R&T agents are responsible for the investor servicing functions, as they
maintain the records of investors in MF.
Custodians: Custodians
are responsible for the securities held in the mutual fund’s portfolio.
Scheme takes over: if
an existing MF scheme is taken over by another AMC, it is called as scheme take
over.
Meaning of load: Load
is the factor that is applied to the NAV of a scheme to arrive at the price.
Market capitalization: market capitalization means number of shares issued multiplied
with market price per share.
Price earnings ratio: The ratio between the share price and the post tax
earnings of company is called as price earnings ratio.
Dividend yield: The
dividend paid out by the company, is usually a percentage of the face value of
a share.
Market 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.
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.
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.
Credit risk: Credit
risk refers to the probability that a borrower could default on a commitment to
repay debt or band loans
Inflation risk: Inflation
risk reflects the changes in the purchasing power of the cash flows resulting
from the fixed income security.
Liquid risk: It
is also called market risk, it refers to the ease with which bonds could be
traded in the market.
Banking
Treasury management: It
means it is defined as the efficient management of liquidity and financial risk
in business.
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.
Marketable securities: Surplus cash can be invested in short term instruments in
order to earn interest.
Ageing schedule: In
an ageing schedule the receivables are classified according to their age.
Maximum permissible bank finance (MPBF): It is the maximum amount that banks can lend a borrower
towards his working capital requirements.
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.
Bridge finance: It
refers to the loans taken by the company normally from commercial banks for a
short period pending disbursement of loans sanctioned by the financial
institutions.
Venture capital: It
refers to the financing of high-risk ventures promoted by new qualified
ntrepreneurs who require funds to give shape to their ideas.
Debt securitization: It is a mode of financing, where in securities are issued
on the basis of a package of assets (called asset pool).
Lease financing: Leasing
is a contract where one party (owner) purchases assets and permits its views by
another party (lessee) over a specified period
Trade Credit: It
represents credit granted by suppliers of goods, in the normal course of
business.
Over draft: Under
this facility a fixed limit is granted within which the borrower allowed to
overdraw from his account.
Cash credit: It
is an arrangement under which a customer is allowed an advance up to certain
limit against credit granted by bank.
Clean overdraft: It
refers to an advance by way of overdraft facility, but not back by any tangible
security.
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
deposits made by one company in another company are called ICD.
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.
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.
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.
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.
ADR (American depository receipts): Depository receipts 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.
Banks: Commercial
banks extend foreign currency loans for international operations, just like
rupee loans. The banks also provided overdraft.
Development banks: It
offers long-term and medium term loans including foreign currency loans
International agencies: International agencies like the IFC,IBRD,ADB,IMF etc.
provide indirect assistance for obtaining foreign currency.
Seed capital assistance: The seed capital assistance scheme is desired by the IDBI
for professionally or technically qualified entrepreneurs and persons
possessing relevantexperience and skills and entrepreneur traits.
Unsecured loans: It constitutes a significant part of long-term finance available
to an enterprise.
Ratios
Meaning of ratio: Ratios
are relationships expressed in mathematical terms between figures which are
connected with each other in same manner.
Activity ratio: It is a measure of the level of activity attained over a period.
Capital employed: The
term capital employed means sum of total long term funds employed in the
business. i.e.
(Share capital+ reserves
& surplus +long term loans – (non business assets + fictitious assets)
Equity shares: Those
shares which are not having pref. rights are called equity shares.
Pref.shares: Those
shares which are carrying the pref.rights are called pref. shares Pref.rights
in respect of fixed dividend. Pref.right to repayment of capital in the event
of company winding up.
Leverage: It
is a force applied at a particular work to get the desired result.
Operating leverage: the operating leverage takes place when a changes in
revenue greater changes in EBIT.
Financial leverage: it is nothing but a process of using debt capital to
increase the rate of return on equity
Combine leverage: It
is used to measure of the total risk of the firm = operating risk + financial
risk.
Capital gearing: The
term capital gearing refers to the relationship between equity and long term
debt.
Gross profit ratio: it indicates the efficiency of the production/trading
operations.
Formula:
Gross profit
-----------------X 100
Net sales
Net profit ratio: it indicates net
margin on sale
Formula:
Net profit
-----------------X 100
Net sales
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
Earning per Equity share (EPS): it shows the amount of earnings attributable to each
equity share.
Formula:
Profits available for
Equity shareholders
----------------------------------------------
Number of Equity shares
Dividend yield ratio: it shows the rate of return to shareholders in the form of
dividends based in the market price of the share
Formula:
Dividend per share
---------------------------- X100
Market price per share
Price earnings 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
Earnings per share (EPS)
Current ratio: it
measures short-term debt paying ability.
Formula:
Current Assets
------------------------
Current Liabilities
Debt-Equity Ratio: it
indicates the percentage of funds being financed through borrowings; a measure
of the extent of trading on equity.
Formula:
Total Long-term Debt
---------------------------
Shareholders’ funds
Fixed Assets ratio: This ratio explains whether the firm has raised adequate
long-term funds to meet its fixed assets requirements.
Formula:
Fixed Assets
-------------------
Long-term Funds
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
Stock turnover Ratio: The ratio indicates whether investment in inventory in
efficiently used or not. It, therefore explains whether investment in inventory
within proper limits or not.
Formula:
cost of goods sold
------------------------------
Average stock
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
Creditors Turnover Ratio: It indicates the speed with which the payments for credit
purchases are made to the creditors.
Formula:
Credit Purchases
-----------------------
Average Accounts Payable
Working capital turnover ratio: It is also known as Working Capital Leverage Ratio. This
ratio indicates whether or not working capital has been effectively utilized in
making sales.
Formula:
Net Sales
----------------------------
Working Capital
Fixed Assets Turnover ratio: This ratio indicates the extent to which the investments
in fixed assets contribute towards sales.
Formula:
Net Sales
--------------------------
Fixed Assets
Pay-outs Ratio: This
ratio indicates what proportion of earning per share has been used for paying
dividend.
Formula:
Dividend per Equity Share
-------------------------------------------X100
Earning per Equity share
Overall Profitability Ratio: It is also called as “Return on Investment” (ROI) or
Return on Capital Employed (ROCE). It indicates the percentage of return on the
total capital employed in the business.
Formula:
Operating profit
------------------------------X
100
Capital employed
The term capital employed
has been given different meanings a.sum total of all assets Whether fixed or
current b.sum total of fixed assets, c.sum total of long-term funds employed In
the business, i.e., share capital +reserves &surplus +long term loans –
(non business assets + fictitious assets). Operating profit means ‘profit
before interest and tax’
Fixed Interest Cover ratio: The ratio is very important from the lender’s point of view. It
indicates whether the business would earn sufficient profits to pay
periodically the interest charges.
Formula:
Income before interest
and Tax
---------------------------------------
Interest Charges
Fixed Dividend Cover ratio: This ratio is important for preference shareholders
entitled to get dividend at a fixed rate in priority to other shareholders.
Formula:
Net Profit after Interest
and Tax
------------------------------------------
Preference Dividend
Debt Service Coverage ratio: This ratio is explained ability of a company to make
payment of principal amounts also on time.
Formula:
Net profit before
interest and tax
-----------------------------------------------
1-Tax rate
Interest + Principal
payment instalment
Proprietary ratio: It
is a variant of debt-equity ratio . It establishes relationship between the
proprietor’s funds and the total tangible assets.
Formula:
Shareholders funds
------------------------------
Total tangible assets
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.
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.
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.
Accrued liability: A
developing but not yet enforceable claim by another person which accumulates
with the passage of time or the receipt of service or otherwise. It may rise
from the purchase of services which at the date of accounting have been only
partly performed and are not yet billable.
Cost
Accounting (Costing)
Profit centre: A
centre whose performance is measured in terms of both the expense incurs and
revenue it earns.
Cost centre: A
location, person or item of equipment for which cost may be ascertained and
used for the purpose of cost control.
Cost: The amount of
expenditure incurred on to a given thing.
Cost accounting: It is thus
concerned with recording, classifying, and summarizing costs for determination
of costs of products or services planning, controlling and reducing such costs
and furnishing of information management for decision making.
Elements
of Cost:
·
Material
·
Labour
·
Expenses
·
Overheads
Components of total costs:
1.
Prime cost
2.
Factory cost
3.
Total cost of production
4.
Total cost
Prime cost: It
consists of direct material direct labour and direct expenses. It is also known
as basic or first or flat cost.
Factory cost: It
comprises prime cost, in addition factory overheads which include cost of
indirect material indirect labour and indirect expenses incurred in factory.
This cost is also known as works cost or production cost or manufacturing cost.
Cost of production: In office and administration overheads are added to
factory cost, office cost is arrived at.
Total cost: Selling
and distribution overheads are added to total cost of production to get the
total cost or cost of sales.
Cost unit: A
unit of quantity of a product, service or time in relation to which costs may
be ascertained or expressed.
Methods of costing:
·
Job costing
·
Contract costing
·
Process costing
·
Operation costing
·
Operating costing
·
Unit costing
·
Batch costing.
Techniques of costing:
1.
Marginal costing
2.
Direct costing
3.
Absorption costing
4.
Uniform costing.
Standard costing: standard
costing is a system under which the cost of the product is determined in
advance on certain predetermined standards.
Marginal costing: it
is a technique of costing in which allocation of expenditure to production is
restricted to those expenses which arise as a result of production, i.e.,
materials, labour, direct expenses and variable overheads.
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