How the index is calculated?
An index is a statistical aggregate that measures change. In
finance, they usually refer to measures of stock market performance or economic
performance.
How It Works/Example:
Let's say we want to measure the stock price performance of the widget
industry. There are currently four public companies that make widgets in the United States:
Company A, Company B, Company C, and Company D. In the year 2000, when we
started caring about the seedling U.S. widget industry, the four
companies' stock prices were as follows:
|
Company A
|
$10
|
|
Company B
|
$8
|
|
Company C
|
$12
|
|
Company D
|
$25
|
|
Total
$55
|
To create an index, we simply set the total ($55) in the
year 2000 equal to 100 and measure any future periods against that total. For
example, let's assume that in 2001 the stock prices were:
|
Company A
|
$4
|
|
Company B
|
$38
|
|
Company C
|
$12
|
|
Company D
|
$24
|
|
Total
$78
|
Because $78 is 41.82% higher than the 2000 base, the index is now at
141.82. Every day, month, year, or other period, the index can be recalculated
based on current stock prices.
Note that this index is weighted by stock price (i.e., the larger the stock
price, the more influence it has on the index). Indexes can be weighted by
shares outstanding, market capitalization, or any other factors the indexer chooses.
When new companies go public or existing companies founder, the indexer may add
or delete companies from the index or "reweight" the index to
accommodate stock splits or other factors.
Why It Matters:
In finance, the most significant numbers in any given day's news are usually
market indexes. The Dow Jones Industrial Average is probably the best-known and
most widely followed financial index in the world. It consists of 30 of the
largest publicly traded firms in the United States. The S&P 500
Index is also very common, comprising over 70% of the total market cap of all
stocks traded in the U.S.
The Nasdaq Composite is a broad market index that encompasses about 4,000
issues traded on the Nasdaq National Market -- virtually every firm that trades
on the exchange.
Indexes are also used to gauge activity in an economy. Perhaps the best known
economic index in the United
States is the CPI, or Consumer Price Index,
which measures inflation.
Intrinsic value:
Intrinsic value has two primary connotations in the finance
world. In the options-trading world, the term refers to the difference between
the option’s strike price and the market value of the underlying security.
However, the most well-known usage occurs in security analysis, where intrinsic
value is the perceived value of a security (which may differ from its market
value).
How It Works/Example:
Let's assume Company XYZ stock currently sells for $20 per share. Company XYZ
just introduced a new product line, redesigned its packaging, and hired some
new managers away from a competitor. Although these changes do not directly
appear on the company’s financial statements, they may improve Company XYZ’s
competitive advantage in key markets. For these reasons, investors may
calculate the intrinsic value of the stock at $50 per share, or $30 more than
what it is currently selling for.
There is no one intrinsic value for a
stock at any given time; they vary by investor. An investor's required margin
of safety, which is a measure of risk equal to the amount by which a stock's
price is below its intrinsic value, determines what stock price is attractive
to that investor. In the above example, if the investor's required margin of
safety is 70%, the investor would only consider purchasing the stock if it traded
at $15 or less.
Columbia
professor Benjamin Graham, who is credited with conceiving the margin of safety
concept in 1934, introduced the idea that a stock's intrinsic value could be
methodically calculated. Graham demonstrated that this could be done by
analyzing a company's assets and earnings and forecasting its future earnings.
However, there are many ways to do this, and virtually all methods of
calculating intrinsic value involve making predictions that may not be correct
or are influenced by unexpected factors.
Why It Matters:
Approaches to intrinsic value can distinguish value investors from growth
investors. Although growth investors aggressively rely on earnings estimates
that could be wrong, too high, or otherwise unreliable, value investors only
buy stocks selling at a discount to their intrinsic value, and then patiently
wait for the fair value of their investments to be realized. Even though both
types of investors must face the prospect that their companies may falter,
mature, or get so big that maintaining historical growth rates is impossible,
most value investors buy stocks with the expectation that the stock price will
rise to match the intrinsic value of the company rather than the other way
around.
Intrinsic value takes the value of intangible aspects of a company into
account. However, investors can never know everything about a company, and they
can't always predict which factors will negatively affect a stock. Companies
whose assets happen to be primarily intangible, such as technology and other
companies with a lot of intellectual property, may experience considerable
differences between their market values and their intrinsic values.
Initial Public Offering
The term initial public offering (IPO) refers to a
company's first issuance of stock on the open market. In most cases, the IPO
makes the company's stock accessible to a large group of public investors for
the first time.
"Going Public"
When a security is listed for purchase or sale on an exchange, or on the
over-the-counter (OTCBB) market, is it considered to be publicly traded. The
process of going from a private to a public company often begins when a young
company needs additional capital to grow its business. In order to gain access
to that capital, the firm will sometimes choose to sell an ownership stake --
or shares of stock -- to outside investors. This process is referred to as
"going public."
The Underwriter
In order to sell its shares to the public, a company first needs to retain the
services of an investment banker to underwrite the issue. The role of the
underwriter is to raise capital for the issuing company. The underwriter
accomplishes this by purchasing shares from the issuing corporation at a
predetermined price, then reselling them to the public for a profit.
In most cases, a single investment-banking firm takes the
lead role in setting up a new IPO. This lead firm, referred to as the managing
underwriter, then often forms a larger group of investment bankers, called an
underwriting syndicate, to participate in the sale. This syndicate in turn
often gathers an even larger group of broker dealers to assist with the
distribution of the new issue.
The Securities Act of 1933
The Securities Act of 1933 regulates new issues of corporate securities sold to
the public. This law requires that the company file a registration statement
and preliminary prospectus with the Securities and Exchange Commission (SEC).
The purpose is to ensure that investors are fully informed about the offering
and the issuing company.
The Registration Statement
Before launching an IPO, the issuing company must first file a registration
statement, which discloses all material information about the company, with the
SEC. Part of the registration statement is the prospectus, which must be
provided to all purchasers of the new issue. The prospectus contains much of
the same information included in the registration statement, but without the
supporting documentation. The registration statement must contain:
-- A description of the business and how the proceeds from
the IPO will be used
-- The company's capitalization
-- Legal proceedings
-- The names and addresses of the company's officers and directors, their
salaries, and a five-year history of each individual
-- The amount of securities owned by the officers and directors, as well as a
list of stockholders who own more than 10% of the company
The "Cooling Off" Period
After the issuer files the registration statement with the SEC for review, the
cooling off period begins. During this 20-day period, securities brokers can
discuss the new issue with clients, but the only information about the offering
that can be distributed is the preliminary prospectus.
The Preliminary Prospectus
The preliminary prospectus declares that the registration statement has been
filed with the SEC, but is not yet effective. This document contains the same
information that will be found in the final prospectus with the exception of
the offering price, commissions, the underwriting spread, dealer discounts and
other related financial information. The preliminary prospectus is also known
as a red herring because the legend on the cover is printed in red ink.
Indications of Interest
An indication of interest is an investor's declaration that they may be
interested in purchasing shares of the IPO from the underwriter after the
security comes out of registration. These declarations, however, are not
legally binding because sales are prohibited until after the registration
becomes effective. The underwriters and the selling group members use the
preliminary prospectus gauge investor receptivity and to gather indications of
interest.
The Final Prospectus
When the registration statement becomes effective, the issuing company amends
the preliminary prospectus to add such important information as the offering
price and the underwriting spread. The final prospectus must contain:
-- Description of the offering
-- History of the business
-- Description of management
-- Price
-- Date
-- Selling discounts
-- Use of proceeds
-- Description of the underwriting
-- Financial information
-- Risks to buyers
-- Legal opinion regarding the formation of the company
-- SEC disclaimer
When the final prospectus is released, brokers can take
orders to buy from those clients who indicated an interest during the cooling
off period. A copy of the final prospectus must precede or accompany all sales
confirmations.
The SEC Review
The Securities and Exchange Commission (SEC) reviews each prospectus to ensure
that it contains all necessary material facts, but it does not guarantee the
accuracy of the disclosures. The agency does not approve the issue, but simply
clears it for distribution. The SEC cannot prevent an IPO based on the quality
of the offering, but it can require the issuer to disclose all material facts about
the offering and the company.
Blue Chip
A blue chip is a nationally recognized, well-established and
financially sound company. The term comes from blue poker chips, which have the
highest value in the game.
How It Works/Example:
Blue chip companies have several characteristics:
· They are usually large companies.
· They are usually older companies.
· They generally sell widely used products or services.
· They perform relatively well during economic downturns.
· They have records of long-term, stable growth.
· They usually pay regular dividends, and those dividends usually
grow over time.
· They have reputations as management and industry leaders.
· They are usually very creditworthy.
IBM, AT&T, General Electric, Coca-Cola, and DuPont are examples of blue
chip companies.
Why It Matters:
Investors often consider the stocks of blue chip companies good long-term
investments because they tend to offer consistent returns. Higher stock prices
and lower yields generally balance this perceived lower risk, however.
The two most popular lists of blue chip stocks are the Dow Jones Industrial
Average and the Nifty Fifty. The Dow Jones Industrial Average is a list of
thirty industry-leading companies chosen by the editors of the Wall Street
Journal. The Nifty Fifty are the fifty blue chip stocks that became popular
before the bear market of 1973-1974.
Investors can purchase shares of blue chip companies directly, or they can
invest in derivative blue chip instruments that provide exposure to a variety
of blue chip stocks. One example are Diamonds, which are exchange-traded
securities that represent fractional shares of the underlying components of the
Dow Jones Industrial Average.
International Monetary Fund
The International Monetary Fund (IMF) is the central
institution embodying the international monetary system and promotes balanced
expansion of world trade, reduced trade restrictions, stable exchange rates,
minimal trade imbalances, avoidance of currency devaluations, and the
correction of balance-of-payment problems. The IMF's goal is to prevent and
remedy international financial crises by encouraging countries to maintain
sound economic policies. Because of its size, the IMF is also a forum for
discussion of global economic policies.
The IMF is headquartered in Washington, D.C., but has offices in Paris,
Tokyo, New York,
and Geneva.
How It Works/Example:
The IMF formally came into existence in December 1945 with 29 member countries
after it was conceived during negotiations of the Bretton Woods Agreement in
1944. It was originally tasked with stabilizing exchange rates after World War
II through regulation of rates among the member countries. Between 1944 and
1971, most of the world operated under a fixed exchange-rate system, which required
each country to maintain a reserve balance of other currencies in order to
weather temporary supply and demand problems. Thus, the IMF required each
member country to deposit currency into an IMF reserve fund. The IMF then
loaned these funds to nations with balance-of-payment problems.
Today, the IMF promotes its objectives through surveillance and consultation
with member countries rather than regulation. It still provides short-term
loans to member countries having balance-of-payment problems, and countries
seeking IMF assistance must meet or exceed certain thresholds related to
inflation rates, budget deficits, money supplies, and political stability.
Mechanics of the IMF
The IMF is run by a board of governors, which makes decisions on major policy
issues but delegates day-to-day decision making to the executive board. All
member countries are represented on the board of governors, which meets once
per year. Each member country appoints a governor and an alternate governor to
represent it to the IMF. The governors are usually the ministers of finance or
governors of their central banks.
The IMF's 24-member executive board is chaired by a managing director. The
managing director is selected by the executive board every five years, and
three deputy managing directors, each from a different region of the world,
report to the managing director. The executive board meets three times a week,
and the IMF's five largest shareholders (the United
States, Japan,
France, Germany, and the United Kingdom) as well as China, Russia,
and Saudi Arabia,
each have a seat on the board. The other sixteen directors are elected for
two-year terms by groups of countries.
There are several committees within the IMF. The International Monetary and
Financial Committee, which is a committee of the board of governors, meets
twice per year to evaluate policy issues relating to the international monetary
system. The IMF Development Committee, which is composed of members of the
boards of governors of both the IMF and the World Bank, advises and reports to
the IMF governors on matters concerning developing countries.
The IMF has a weighted voting system that gives more votes to countries with
larger economies. However, according to the IMF, most decisions are not made
based on formal voting, but by consensus.
The IMF is funded by the subscriptions countries pay upon joining the IMF or
when their subscriptions are increased. Members pay 25% of their subscriptions
in Special Drawing Rights (SDRs) or in major currencies. The IMF can call on
the remaining 75% as needed for lending. The IMF determines a country's
subscription amount based on its relative size in the world economy. The IMF
may borrow money to supplement the funds received from subscriptions.
Generally, the IMF may borrow money from several countries that participate in
one of two standing lending agreements with the IMF.
IMF Operations
The IMF monitors economic and financial developments and policies in member
countries and at the global level and then gives policy advice to its members
based on its observations and experience. IMF advice generally focuses on
macroeconomic, financial-sector regulation, and structural policies. To do
this, the IMF engages in three types of surveillance: country surveillance,
global surveillance, and regional surveillance. During country surveillance,
which occurs annually, a team of economists visits a member country to collect
data, examine policies, and meet with government and bank officials. The team
submits its findings to the IMF executive board, which makes recommendations to
the country. The IMF's global surveillance functions center around the
publication of the World Economic Outlook and Global Financial
Stability reports, which are issued twice a year. Regional surveillance usually
occurs within a series of internal IMF discussions about developments in
certain regions or within groups of countries.
The IMF also provides technical help and training to the central banks and
governments of member countries. This often comes in the form of advice on
banking regulation, tax administration, and budget formulation as well as
managing statistical data and drafting or reviewing legislation. They also
provide training courses for government and central bank officials.
One of the IMF's single biggest functions is lending money to members in need.
If a country is unable to make payments to other countries without taking
"measures destructive of national or international prosperity," such
as implementing trade restrictions or devaluing its currency, it may borrow
money from the IMF. When the IMF lends a country money, it often requires the
borrower to follow a program aimed at meeting certain quantifiable economic
goals, which are described in a letter of intent from the borrowing government
to the IMF's managing director. IMF loans are not provided to fund particular
projects or activities, they are provided to promote a country's overall
economic health. The duration, payment terms, and lending conditions vary on a
case-by-case basis. The IMF charges borrowers a market-related interest rate
and also requires service charges and a refundable commitment fee. Low-income
countries pay as little as 0.5% interest per year.
The IMF also lends money to countries dealing with sudden losses of financial
confidence, such as after natural disasters or wars, in order to prevent the
spread of financial crises stemming from those countries. There are five main
facilities from which the IMF makes loans: IMF Stand-By Arrangements (for
short-term lending), the Extended-Fund Facility, the Poverty Reduction and
Growth Facility, the Supplemental Reserve Facility, and the Exogenous Shocks
Facility.
When a country borrows from the IMF, the proceeds are deposited in the
country's central bank. The repayment period varies for each loan, but
maturities usually extend from six months to up to ten years. The international
community places considerable pressure on a borrower to repay the IMF so that
those funds are available to other countries, and the IMF in turn is diligent
about timely repayment in order to maintain its status as a preferred creditor.
Why It Matters:
Like the World Bank, the IMF is one of the most powerful and controversial
legislative bodies in the world. The IMF's objectives focus on macroeconomic
performance and policies, while the World Bank focuses on long-term economic
development and poverty-reduction issues. The IMF works actively with the World
Bank, the World Trade Organization, the United Nations, and other international
bodies that share an interest in international trade.
Whether the IMF truly benefits the international economy is the subject of
considerable debate. Much of the criticism centers on the IMF's requirements to
adopt certain economic policies in order to receive IMF loans, which may
encourage poor countries to neglect social concerns in order to comply.
Supporters note that the IMF strengthens the economic and financial-integration
effects of globalization and helps low-income countries benefit from
globalization through the development of sustainable economic policies and debt
reduction in the poorest countries. They also state that IMF approval often
indicates a country's economic policies are favorable, which may reassure and
motivate investors and other governments who might provide additional financing
to the country in need. This not only attracts capital, it prevents investors
from withdrawing funds from an economy, which could create further distress for
that country and possibly for other countries.
Comprehensive Important Notes
1.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”.
2.Book
keeping:It is mainly concerned with recording of financial data relating to the
business operations in a significant and orderly manner.
3. Concepts of
accounting:
A. separate entity concept
B. going concernconcept
C. money measurement concept
D. cost concept
E. dual aspect concept
F. accounting period concept
G. periodic matching of costs and revenue
concept
H. realization concept.
4 Conventions of
accounting
A. conservatism
B. full disclosure
C. consistency
D materiality.
5. Systems of book keeping:
A.
single entry system
B. double entry system
6. Systems of
accounting
A. cash system accounting
B. mercantile system of accounting.
7. Principles of
accounting
a. personal a/c : debit the receiver
Credit the giver
b. real a/c : debit what comes in
credit
what goes out
c. nominal a/c : debit all expenses and losses
credit all
gains and incomes
8. Meaning of
journal: journal means chronological record of transactions.
9.
Meaning of ledger: ledger is a set of accounts. It contains all accounts of the
business enterprise whether real,
nominal, personal.
10.
Posting: it means transferring the debit and credit items from the journal to
their respective accounts in the ledger.
11. Trial
balance: trial balance is a statement containing the various ledger balances on
a particular date.
12.
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.
13. 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.
14.
Contra entry: which accounting entry is recorded on both the debit and credit
side of the cashbook is known as
the contra entry.
15. Petty
cash book: petty cash is maintained by business to record petty cash expenses
of the business, such as postage, cartage, stationery, etc.
16.promisory note: an instrument in writing containing an unconditional
undertaking igned 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.
17. Cheque: a
bill of exchange drawn on a specified banker and payable on demand.
18. Stale
cheque: a stale cheque means not valid of cheque that means more than six months the cheque is not valid.
20. 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.
21.
Matching concept: matching means requires proper matching of expense with the
revenue.
22.
Capital income: the term capital income means an income which does not grow out
of or pertain to the running of the
business proper.
23.
Revenue income: the income, which arises out of and in the course of the
regular business transactions of a concern.
24.
Capital expenditure: it means an expenditure which has been incurred for the
purpose of obtaining a long term advantage for the business.
25.
Revenue expenditure: an expenditure that incurred in the course of regular
business transactions of a concern.
26.
Differed revenue expenditure: an expenditure, which is incurred during an
accounting period but is applicable further periods also. Eg: heavy
advertisement.
27. Bad
debts: bad debts denote the amount lost from debtors to whom the goods were
sold on credit.
28.
Depreciation: depreciation denotes gradually and permanent decrease in the
value of asset due to wear and tear, technology changes, laps of time and
accident.
29. 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.
30.Intanglbe
Assets: Intangible assets mean the assets which is not having the physical
appearance. And its have the real value, it shown on the assets side of the
balance sheet.
31.
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.
32. Out
standing Income : Outstanding Income means income which has become due during the accounting year but which has
not so far been received by the firm.
33.
Suspense account: the suspense account is an account to which the difference in
the trial balance has been put
temporarily.
34.
Depletion: it implies removal of an available but not replaceable source, Such
as extracting coal from a coal mine.
35.
Amortization: the process of writing of
intangible assets is term as amortization.
36.
Dilapidations: the term dilapidations to damage done to a building or other
property during tenancy.
37. 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)
38. Equity
shares: those shares which are not having pref. rights are called equity
shares.
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 in revenue greater changes in EBIT.
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”.
53.
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.
54. Types of a
company:
1.Statutory companies
2.government company
3.foreign company
4.Registered companies:
a. Companies limited by shares
b. Companies limited by guarantee
c. Unlimited companies
D. private company
E. public company
55. 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.
56. 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.
57.
Characteristics of a company:
Voluntary association
Separate legal entity
Free transfer of shares
Limited liability
Common seal
Perpetual
existence.
58. Formation of
company:
Promotion
Incorporation
Commencement of business
59. Equity share
capital: The total sum of equity shares is called equity share capital.
60.
Authorized share capital: it is the maximum amount of the share capital, which
a company can raise for the time being.
61.
Issued capital: It is that part of the authorized capital, which has been
allotted to the public for
subscriptions.
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
determined
with 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 proprietor’s fund
while creation of provisions decreases his funds in the business.
71.
Reserve fund: the term reserve fund means such reserve against which
clearly 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.
73.
Finance management: financial management deals with procurement of funds and
their effective utilization in
business.
74.
Objectives of financial management: financial management having two objectives
that Is:
1. Profit maximization: the finance manager
has to make his decisions in a manner so
that the profits of the concern are maximized.
2. 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.
75. Functions of
financial manager:
Investment decision
Dividend decision
Finance decision
Cash management decisions
Performance evaluation
Market impact analysis
76. 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.
77.
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.
78.
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.
79. 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.
80.
Financial break-even point: it denotes the level at which a firm’s EBIT is just
sufficient to cover interest and
preference dividend.
81. 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.
82. Pay
back period: payback period represents
the time period required for complete recovery of the initial investment in the
project.
83. ARR:
accounting or average rate of return means the average annual yield on the
project.
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)
(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.
1 06. 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 l0ans: It constitutes a
significant part of long-term 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
(c) Decrease in
deferred payment liabilities
(d) Payment of
tax, dividend
(e) Decrease in
unsecured loans and deposits
119.
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.
120.
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.
121. Cash budget: It is a summary
statement of firm’s expected cash inflow and outflow over a specified time
period.
122.
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.
123.
Fixed budget: It is a budget, which is
designed to remain unchanged irrespective of the level of activity actually
attained.
124.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 manner and allows
reallocation of source from low to high priority programs.
125.
Goodwill: The present value of firm’s
anticipated excess earnings.
126.
BRS: It is a statement reconciling the
balance as shown by the bank pass book and balance shown by the cash book.
127. 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.
128.Responsibilities
of accounting: It is a system of control
by delegating and locating the
Responsibilities for costs.
129.
Profit centre: A centre whose
performance is measured in terms of both the expense incurs and revenue it
earns.
130.Cost
centre: A location, person or item of
equipment for which cost may be ascertained and used for the purpose of cost
control.
131. Cost: The
amount of expenditure incurred on to a given thing.
132. 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.
133. Elements of
cost:
(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components
of total costs: (A) Prime cost (B)
Factory cost
(C)Total cost of production (D) Total
c0st
135.
Prime cost: It consists of direct
material direct labour and direct expenses.
It is also known as basic or
first or flat cost.
136. 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.
137. Cost
of production: In office and
administration overheads are added to factory cost, office cost is arrived at.
138.
Total cost: Selling and distribution
overheads are added to total cost of production to get the total cost or cost
of sales.
139. Cost
unit: A unit of quantity of a product,
service or time in relation to which costs
may be ascertained or expressed.
140.Methods
of costing: (A)Job costing (B)Contract
costing (C)Process costing (D)Operation costing (E)Operating costing (F)Unit
costing (G)Batch costing.
141.
Techniques of costing: (a) marginal
costing (b) direct costing (c)absorption costing (d) uniform costing.
142.
Standard costing: standard costing is a system under which the cost of the
product is determined in advance on certain predetermined standards.
143. 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.
144.
Derivative: derivative is product whose value is derived from the value of one or more basic variables of underlying
asset.
145.
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.
146.
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.
147.
Options: an option gives the holder of the option the right to do some thing.
The option holder option may exercise or not.
148. 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.
149. 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.
150. Option price: option price is the price which
the option buyer pays to the option seller. It is also referred to as the
option premium.
151. Expiration date: the date which is specified
in the option contract is called expiration date.
152. European option: it is the option at exercised
only on expiration date it self.
153. Basis: basis means future price minus spot
price.
154. Cost of carry: the relation between future
prices and spot prices can be summarized in terms of what is known as cost of
carry.
155. 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.
156 Maintenance margin: this is some what lower
than initial margin.
157. 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.
158. Baskets : basket options are options on
portfolio of underlying asset.
159. Swaps: swaps are private agreements between
two parties to exchange cash flows in the future according to a pre agreed
formula.
160. Impact cost: impact cost is cost it is measure
of liquidity of the market. It reflects the costs faced when actually trading
in index.
161. Hedging: hedging means minimize the risk.
162. 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.
163. Primary market: those companies which are
issuing new shares in this market. It is also called new issue market.
164. Secondary market: secondary market is the
market where shares buying and selling. In India secondary market is called
stock exchange.
165. 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.
166. Meaning of ratio: Ratios are relationships
expressed in mathematical terms between figures which are connected with each
other in same manner.
167. Activity ratio: it is a measure of the level
of activity attained over a period.
168. mutual fund : a mutual fund is a pool of
money, collected from investors, and is invested according to certain investment
objectives.
169. 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
170.advantage of MF to investors : Portfolio diversification
Professional management Reduction in
risk Reduction of transaction casts
Liquidity Convenience and flexibility
171.net asset value : the value of one unit of
investment is called as the Net Asset Value
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 require
periodic income distributions can be choose the growth option.
176.equity funds : equity funds are those that
invest pre-dominantly in equity shares of company.
177.types of equity funds : Simple equity
funds Primary market 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 fund’s 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. 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.
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
e. Insurance policy 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
:
profits available for Equity shareholders
----------------------------------------------
Number
of Equity shares
211.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
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
214. 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
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
217. 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
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
219.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
220. 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
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: Dividend per Equity
Share
--------------------------------------------X100
Earning per Equity share
223.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’
224 . 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
225. 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
226. 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 installment
227. 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
228.Difference between joint venture and partner
ship : 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 partner ship , 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.
229.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.
230.concepts of accounting :
1.Business entity concepts :- According to this
concept, the business is treated as a separate entity distinct from its owners
and others.
2.Going concern concept :- According to this
concept, it is assumed that a business has a reasonable expectation of
continuing business at a profit for an indefinite period of time.
3.Money measurement concept :- This concept says
that the accounting records only those transactions which can be expressed in
terms of money only.
4.Cost concept :- According to this concept, an
asset is recorded in the books at the price paid to acquire it and that this
cost is the basis for all subsequent accounting for the asset.
5.Dual aspect concept :- In every transaction,
there will be two aspects – the receiving aspect and the giving aspect; both
are recorded by debiting one accounts and crediting another account. This is
called double entry.
6.Accounting period concept :- It means the final
accounts must be prepared on a periodic basis.
Normally
accounting period adopted is one year, more than this period reduces the
utility of accounting data.
7.Realization concept :- According to 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.
8.Materiality concepts :- It is a one of the
accounting principle, as per only important information will be taken, and un
important information will be ignored in the preparation of the financial
statement.
9.Matching concepts :- The cost or expenses of a
business of a particular period are compared with the revenue of the period in
order to ascertain the net profit and loss.
10.Accrual concept :- The profit arises only when
there is an increase in owners capital, which is a
result
of excess of revenue over expenses and loss.
231. Financial analysis :The process of interpreting
the past, present, and future financial condition of a company.
232. Income statement : An accounting statement
which shows the level of revenues, expenses and profit occurring for a given
accounting period.
233.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.
234. Bankrupt
: A statement in which a firm is unable to meets its obligations and
hence, it is assets are surrendered to court for administration
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
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.
248.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.
249.Convention of consistency : According to this
convention it is essential that accounting practices and methods remain
unchanged from one year to another.
250.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.
251.Meaning of Charge : charge means it is a
obligation to secure an indebt ness. It may be fixed
charge
and floating charge.
252.Appropriation : It is application of profit
towards Reserves and Dividends.
253.Absorption costing : A method where by the cost
is determine so as to include the appropriate share of both variable and fixed
costs.
254.Marginal Cost : Marginal cost is the additional
cost to produce an additional unit of a product. It is also called variable
cost.
255. What are the ex-ordinary items in the P&L
a/c : The transaction which are 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.
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 to date of
the periodic depreciation charges on depreciable assets.
258.Investment : Expenditure on assets held to earn
interest, income, profit or other benefits.
259.Capital : Generally refers to the amount
invested in an enterprise by its owner. Ex; paid up share capital in corporate
enterprise.
260. Capital Work In Progress : Expenditure on
capital assets which are in the process of construction as completion.
261. Convertible Debenture : A debenture which
gives the holder a right to conversion wholly or partly in shares in accordance
with term of issues.
262.Redeemable Preference Share : The preference
share that is repayable either after a fixed (or) determinable period (or) at
any time dividend by the management.
263. Cumulative preference shares : A class of
preference shares entitled to payment of
umulates
dividends. Preference shares are always deemed to be cumulative unless
they are expressly made non-cumulative preference shares.
264.Debenture redemption reserve : A reserve
created for the redemption of debentures at a future date.
265. Cumulative dividend : A dividend payable as
cumulative preference shares which it unpaid cumulates as a claim against the
earnings of a corporate before any distribution is made to the other
shareholders.
266. Dividend Equalization reserve : A reserve
created to maintain the rate of dividend in future years.
267. 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.
268.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.
269.Valuation of closing stock : The closing stock
is valued on the basis of “Cost or Market price whichever is less” principle.
272. Contingency : A condition (or) situation the
ultimate out come of which gain or loss will be known as determined only as the
occurrence or non occurrence of one or more uncertain future events.
273.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 events.
274. 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.
275. Deficiency : the excess of liabilities over
assets of an enterprise at a given date is called
deficiency.
276.Deficit : The debit balance in the profit and
loss a/c is called deficit.
277.Surplus : Credit balance in the profit &
loss statement after providing for proposed appropriation & dividend ,
reserves.
278.Appropriation Assets : An account sometimes
included as a separate section of the profit and loss statement showing
application of profits towards dividends, reserves.
279. 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.
280.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.
281.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.
282. 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.
