BASICS

Meaning of Accounting: According to American Accounting Association Accounting is “the process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts”.

Users of Accounts: Generally 2 types. 1. Internal management. 2. External users or Outsiders- Investors, Employees, Lenders, Customers, Government and other agencies, Public.

Sub-fields of Accounting: • Book-keeping: It covers procedural aspects of accounting work and embraces record keeping function. • Financial accounting: It covers the preparation and interpretation of financial statements. • Management accounting: It covers the generation of accounting information for management decisions. • Social responsibility accounting: It covers the accounting of social costs incurred by the enterprise.

Fundamental Accounting equation: Assets = Capital+ Liabilities. Capital = Assets - Liabilities.

Accounting elements: The elements directly related to the measurement of financial position i.e., for the preparation of balance sheet are Assets, Liabilities and Equity. The elements directly related to the measurements of performance in the profit & loss account are income and expenses.

Four phases of accounting process: • Journalisation of transactions • Ledger positioning and balancing • Preparation of trail balance • Preparation of final accounts.

Book keeping: It is an activity, related to the recording of financial data, relating to business operations in an orderly manner. The main purpose of accounting for business is to as certain profit or loss for the accounting period. Accounting: It is an activity of analasis and interpretation of the book-keeping records. Journal: Recording each transaction of the business.

Ledger: It is a book where similar transactions relating to a person or thing are recorded. Types: • Debtors ledger • Creditor’s ledger • General ledger

Concepts: Concepts are necessary assumptions and conditions upon which accounting is based. Business entity concept: In accounting, business is treated as separate entity from its owners.While recording the transactions in books, it should be noted that business and owners are separate entities.In the transactions of business, personal transactions of the owners should not be mixed. For example: - Insurance premium of the owner etc...

1 • Going concern concept: Accounts are recorded and assumed that the business will continue for a long time. It is useful for assessment of . • Consistency concept: It means that same accounting policies are followed from one period to another. • Accrual concept: It means that financial statements are prepared on merchantile system only.

Accrual concept

• The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

ILLUSTRATION NO.1

Company A has received cash of $40,000 from his customers. However, the company actually has done all work satisfactorily and the customers have acknowledged the work done which the company can billed for another $20,000. Furthermore, the expenses for the $20,000 work-done has been taken up into the books of account. Question: Should the company just close their accounting book by presently its income as $40,000 for the cash received or should it be $40,000+$20,000 =$60,000 Answer: Based on this concept, the company has actually completed all work done, also, the work done have being acknowledged by the customers, hence income of $60,000 should be taken up and not just the cash received.

ILLUSTRATION NO.2

Company A has billed customers for $100,000. Total supplier bills paid was $50,000 but there are some suppliers bills not paid amounting to another $15,000 Question: The company’s income is undisputed by $100,000 but what should its book show for expenses- is it only $50,000 being invoices paid or is it all inclusive of the other $15,000 Answer: As the total supplier bills should be $50,000+$15,000=$65,000, the company should based on this concept to accrue for the balance of the bills not being paid.

Types of Accounts: Basically accounts are three types, Personal account: Accounts which show transactions with persons are called personal account. It includes accounts in the name of persons, firms, companies. In this: • Debit the reciver • Credit the giver. For example: - Naresh a/c, Naresh&co a/c etc… Real account: Accounts relating to assets is known as real accounts. A separate account is maintained for each asset owned by the business. In this: • Debit what comes in • Credit what goes out For example: - Cash a/c, Machinary a/c etc… Nominal account: Accounts relating to expenses, losses, incomes and gains are known as nominal account. 2 In this: • Debit expenses and loses • Credit incomes and gains For example: - Wages a/c, Salaries a/c, commission recived a/c, etc.

Accounting conventions: The term convention denotes customs or traditions which guide the accountant while preparing the accounting statements. Convention of consistency: Accounting rules, practices should not change from one year to another. For example: - If Depreciation on fixed assets is provided on straight line method. It should be done year after year.

Convention of Full disclosure: All accounting statements should be honestly prepared and full disclosure of all important information should be made. All information which is important to assets, creditors, investors should be disclosued in account statements.

Trail Balance: A trail balance is a list of all the balances standing on the ledger accounts and cash book of a concern at any given date.The purpose of the trail balance is to establish accuracy of the books of accounts. Trading a/c: The first step of the preparation of final account is the preparation of trading account. It is prepared to know the gross margin or trading results of the business. Profit or loss a/c: It is prepared to know the net profit. The expenditure recording in this a/c is indirect nature. Balance sheet: It is a statement prepared with a view to measure the exact financial position of the firm or business on a fixed date. Outstanding Expenses: These expenses are related to the current year but they are not yet paid before the last date of the financial year. Prepaid Expenses: There are several items of expenses which are paid in advance in the normal course of business operations. Income and expenditure a/c: In this only the current period incomes and expenditures are taken into consideration while preparing this a/c. Royalty: It is a periodical payment based on the output or sales for use of a certain asset. For example: - Mines, Copyrights, Patent.

Hirepurchase: It is an agreement between two parties. The buyer acquires possession of the goods immediately and agrees to pay the total hire purchase price in instalments. Hire purchase price = Cash price + Interest. Lease: A contractual arrangement whereby the lessor grants the lessee the right to use an asset in return for periodic lease rental payments. Double entry: Every transaction consists of two aspects • The receving aspect • The giving aspect The recording of two aspect effort of each transaction is called ‘double entry’. The principle of double entry is, for every debit there must be an equal and a corresponding credit and vice versa. BRS: When the cash book and the passbook are compared, some times we found that the balances are not matching. BRS is preparaed to explain these differences. Capital Transactions: The transactions which provide benefits to the business unit for more than one year is known as “capital Transactions”. Revenue Transactions: The transactions which provide benefits to a business unit for one accounting period only are known as “Revenue Transactions”. Deffered Revenue Expenditure: The expenditure which is of revenue nature but its benefit will be for a very long period is called deffered revenue expenditure. Ex: Advertisement expences A part of such expenditure is shown in P&L a/c and remaining amount is shown on the assests side of B/S. Capital Receipts: The receipts which rise not from the regular course of business are called “Capital receipts”. 3 Revenue Receipts: All recurring incomes which a business earns during normal cource of its activities. Ex: Sale of good, Discount Received, Commission Received. Reserve Capital: It refers to that portion of uncalled share capital which shall not be able to call up except for the purpose of company being wound up. Fixed Assets: Fixed assets, also called noncurrent assets, are assets that are expected to produce benefits for more than one year. These assets may be tangible or intangible. Tangible fixed assets include items such as land, buildings, plant, machinery, etc… Intangible fixed assets include items such as patents, copyrights, trademarks, and goodwill. Current Assets: Assets which normally get converted into cash during the operating cycle of the firm. Ex: Cash, inventory, receivables. Flictitious assets: They are not represented by anything tangible or concrete. Ex: Goodwill, deffered revenue expenditure, etc… Contingent Assets: It is an existence whose value, ownership and existence will depend on occurance or non-occurance of specific act. Fixed Liabilities: These are those liabilities which are payable only on the termination of the business such as capital which is liability to the owner. Longterm Liabilities: These liabilities which are not payable with in the next accounting period but will be payable with in next 5 to 10 years are called longterm liabilities. Ex: Debentures. Current Liabilities: These liabilities which are payable out of current assets with in the accounting period. Ex: Creditors, bills payable, etc… Contingent Liabilities: A contingent liability is one, which is not an actual liability but which will become an actual one on the happening of some event which is uncertain. These are staded on balance sheet by way of a note. Ex: Claims against company, Liability of a case pending in the court. Bad Debts: Some of the debtors do not pay their debts. Such debt if unrecoverable is called bad debt. Bad debt is a business expense and it is debited to P&L account. Capital Gains/losses: Gains/losses arising from the sale of assets. Fixed Cost: These are the costs which remains constant at all levels of production. They do not tend to increase or decrease with the changes in volume of production. Variable Cost: These costs tend to vary with the volume of output. Any increase in the volume of production results in an increase in the variable cost and vice-versa. Semi-Variable Cost: These costs are partly fixed and partly variable in relation to output. Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations, processess or products. This differs from marginal costing where fixed costs are excluded. Operating Costing: It is used in the case of concerns rendering services like transport. Ex: Supply of water, retail trade, etc...

Costing: Cost accounting is the recording classifying the expenditure for the determination of the costs of products.For thepurpuses of control of the costs. Rectification of Errors: Errors that occur while preparing accounting statements are rectified by replacing it by the correct one. Errors like: Errors of posting, Errors of accounting etc… Absorbtion: When a company purchases the business of another existing company that is called absorbtion. Mergers: A merger refers to a combination of two or more companies into one company. Variance Analasys: The deviations between standard costs, profits or sales and actual costs. Profits or sales are known as variances. • Types of variances • Material Variances • Labour Variances • Cost Variances • Sales or ProfitVariances

4 General Reserves: These reserves which are not created for any specific purpose and are available for any future contingency or expansion of the business.

SpecificReserves: These reserves which are created for a specific purpose and can be utilized only for that purpose. Ex: Dividend Equilisation Reserve Debenture Redemption Reserve

Provisions: There are many risks and uncertainities in business. In order to protect from risks and uncertainities, it is necessary to provisions and reserves in every business.

Reserve: Reserves are amounts appropriated out of profits which are not intended to meet any liability, contingency, commitment in the value of assets known to exist at the date of the B/S. Creation of the reserve is to increase the workingcapital in the business and strengthen its financial position. Some times it is invested to purchase out side securities then it is called reserve fund. Types: • Capital Reserve: It is created out of capital profits like premium on the issue of shares, profits and sale of assets, etc…This reserve is not available to distribute as dividend among shareholders. • Revenue Reserve: Any Reserve which is available for distribution as dividend to the shareholders is called Revenue Reserve.

Provisions V/S Reserves: • Provisions are created for some specific object and it must be utilised for that object for which it is created. • Reserve is created for any future liability or loss. • Provision is made because of legal necessity but creating a Reserve is a matter of financial strength. • Provision must be charged to profit and loss a/c before calculating the net profit or loss but Reserve can be made only when there is profit. • Provisions reduce the net profit and are not invested in outside securities Reserve amount can invested in outside securities.

Goodwill: It is the value of repetition of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry. Methods: • Average profits method • Super profits method • Capitalisatioin method

Depreciation: It is a perminant continuing and gradual shrinkage in the book value of a fixed asset. Methods: Fixed Instalment method or Stright line method Dep. = Cost price – Scrap value/Estimated life of asset. Diminishing Balance method: Under this metod, depreciation is calculated at a certain percentage each year on the balance of the asset, which is bought forward from the previous year. Annuity method: Under this method amount spent on the purchase of an asset is regarded as an investment which is assumed to earn interest at a certain rate. Every year the asset a/c is debited with the amount of interest and credited with the amount of depreciation. EOQ: The quantity of material to be ordered at one time is known EOQ. It is fixed where minimum cost of ordering and carryiny . Key Factor: The factor which sets a limit to the activity is known as key factor which influence budgets.

5 Key Factor = Contribution/Profitability Profitability =Contribution/Key Factor Sinking Fund: It is created to have ready money after a particular period either for the replacement of an asset or for the repayment of a liability. Every year some amount is charged from the P&L a/c and is invested in outside securities with the idea, that at the end of the stipulated period, money will be equal to the amount of an asset. Revaluation Account: It records the effect of revaluation of assets and liabilities. It is prepared to determine the net profit or loss on revaluation. It is prepared at the time of reconsititution of partnership or retirement or death of partner. Realisation Account: It records the realisation of various assets and payments of various liabilities. It is prepared to determine the net P&L on realisation. Leverage: - It arises from the presence of fixed cost in a firm capitalstructure. Generally leverage refers to a relationship between two interrelated variables. These leverages are classified into three types. • Operating leverage • Financial Leverage. • Combined leverage or total leverage.

Operating Leverage: It arises from fixed operating costs (fixed costs other than the financing costs) such as depreciation, shares, advertising expenditures and property taxes.

When a firm has fixed operatingcosts, a change in 1% in sales results in a change of more than 1% in EBIT %change in EBIT % change in sales The operaying leverage at any level of sales is called degree. Degree of operatingLeverage= Contribution/EBIT

Significance: It tells the impact of changes in sales on operating income. If operating leverage is high it automatically means that the break- even point would also be reached at a highlevel of sales.

Financial Leverage: It arises from the use of fixed financing costs such as interest. When a firm has fixed cost financing. A change in 1% in E.B.I.T results in a change of more than 1% in earnings per share. F.L =% change in EPS / % change in EBIT Degree of Financial leverage= EBIT/ Profit before Tax (EBT) Significance: It is double edged sword. A high F.L means high fixed financial costs and high financial risks.

Combined Leverage: It is useful for to know about the overall risk or total risk of the firm. i.e, operating risk as well as financial risk. C.L= O.L*F.L = %Change in EPS / % Change in Sales Degree of C.L =Contribution / EBT A high O.L and a high F.L combination is very risky. A high O.L and a low F.L indiacate that the management is careful since the higher amount of risk involved in high operating leverage has been sought to be balanced by low F.L A more preferable situation would be to have a low O.L and a F.L.

Working Capital: There are two types of working capital: gross working capital and net working capital. Gross working capital is the total of current assets. Net working capital is the difference between the total of current assets and the total of current liabilities.

Working Capital Cycle: It refers to the length of time between the firms paying cash for materials, etc.., entering into the production process/ stock and the inflow of cash from debtors (sales)

6 Cash Raw meterials WIP Stock Labour overhead Debtors

Capital Budgeting: Process of analyzing, appraising, deciding investment on long term projects is known as capital budgeting.

Methods of Capital Budgeting:

1. Traditional Methods Payback period method Average rate of return (ARR) 2. Methods or Sophisticated methods (NPV) Internal rate of return (IRR) Profitability index

Pay back period: Required time to reach actual investment is known as payback period. = Investment / Cash flow

ARR: It means the average annual yield on the project. = avg. income / avg. investment Or = (Sum of income / no. of years) / (Total investment + Scrap value) / 2) NPV: The best method for the evaluation of an investment proposal is the NPV or discounted cash flow technique. This metod takes into account the time value of money. The sum of the present values of all the cash inflows less the sum of the present value of all the cash outflows associated with the proposal. NPV = Sum of present value of future cash flows – Investment IRR: It is that rate at which the sum total of cash inflows aftrer discounting equals to the discounted cash outflows. The internal rate of return of a project is the discount rate which makes net present value of the project equal to zero.

Profitability Index: One of the methods comparing such proposals is to workout what is known as the ‘Desirability Factor’ or ‘Profitability Index’. In general terms a project is acceptable if its profitability index value is greater than 1.

Derivatives: A derivative is a whose price ultimately depends on that of another asset. Derivative means a contact of an agreement. Types of Derivatives: • Forward Contracts • Futures • Options • Swaps.

Forward Contracts: - It is a private contract between two parties. An agreement between two parties to exchange an asset for a price that is specified todays. These are settled at end of contract. Future contracts: - It is an Agreement to buy or sell an asset it is at a certain time in the future for a certain price. Futures will be traded in exchanges only.These is settled daily. Futures are four types: • Commodity Futures: Wheat, Soyo, Tea, Corn etc..,. • Financial Futures: Treasury bills, Debentures, Equity Shares, bonds, etc.., • Currency Futures: Major convertible Currencies like Dollars, Founds, Yens, and Euros.

7 • Index Futures: Underline assets are famous stock market indicies. NewYork Stock Exchange.

Options: • An option gives its Owner the right to buy or sell an Underlying asset on or before a given date at a fixed price. • There can be as may different option contracts as the number of items to buy or sell they are, Stock options, Commodity options, Foreign exchange options and interest rate options are traded on and off organized exchanges across the globe. • Options belong to a broader class of assets called Contingent claims. • The option to buy is a call option.The option to sell is a PutOption. • The option holder is the buyer of the option and the option writer is the seller of the option. • The fixed price at which the option holder can buy or sell the underlying asset is called the exercise price or Striking price. • A European option can be excercised only on the expiration date where as an American option can be excercised on or before the expiration date. • Options traded on an exchange are called exchange traded option and options not traded on an exchange are called over-the-counter optios. • When stock price (S1) <= Exercise price (E1) the call is said to be out of money and is worthless. • When S1>E1 the call is said to be in the money and its value is S1-E1.

Swaps: Swaps are private agreements between two companies to exchange casflows in the future according to a prearranged formula. So this can be regarded as portfolios of forward contracts. Types of swaps: • Interest rate Swaps • Currency Swaps.

Interest rate Swaps: The most common type of interest rate swap is ‘Plain Venilla ‘. Normal life of swap is 2 to 15 Years. It is a transaction involving an exchange of one stream of interest obligations for another. Typically, it results in an exchange of ficed rate interest payments for floating rate interest payments. Currency Swaps: - Another type of Swap is known as Currency as Currency Swap. This involves exchanging principal amount and fixed rates interest payments on a loan in one currency for principal and fixed rate interest payments on an approximately equalant loan in another currency. Like interest rate swaps currency swars can be motivated by comparative advantage.

Warrants: Options generally have lives of upto one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called warrants and are generally traded over- the- counter. American Depository Receipts (ADR): It is a dollar denominated negotiable instruments or certificate. It represents non-US companies publicly traded equity. It was devised into late 1920’s. To help American investors to invest in overseas securities and to assist non –US companies wishing to have their stock traded in the American markets. These are listed in American stock market or exchanges. Global DepositoryReceipts (GDR): GDR’s are essentially those instruments which posseses the certain number of underline shares in the custodial domestic bank of the company i.e., GDR is a negotiable instrument in the form of depository receipt or certificate created by the overseas depository bank out side India and issued to non-resident investors against the issue of ordinary share or foreign currency convertible bonds of the issuing company. GDR’s are entitled to dividends and voting rights since the date of its issue.

8 Capital account and Current account: The capital account of international purchase or sale of assets. The assets include any form which wealth may be held. Money held as cash or in the form of bank deposits, shares, debentures, debt instruments, real estate, land, antiques, etc… The current account records all income related flows. These flows could arise on account of trade in goods and services and transfer payment among countries. A net outflow after taking all entries in current account is a current account deficit. Govt. expenditure and tax revenues do not fall in the current account. Dividend Yield: It gives the relationship between the current price of a stock and the dividend paid by its issuing company during the last 12 months. It is caliculated by aggregating past year’s dividend and dividing it by the current stock price. Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield is considered to be evidence that a stock is under priced, where as a low dividend yield is considered evidence that a stock is over priced. Bridge Financing: It refers to loans taken by a company normally from commercial banks for a period, pending disbursement of loans sanctioned by financial institutions. Generally, the rate of interest on bridge finance is higher as compared with term loans.

Shares and Mutual Funds Company: Sec.3 (1) of the Companys act, 1956 defines a ‘company’. Company means a company formed and registered under this Act or existing company”. Public Company: A corporate body other than a private company. In the public company, there is no upperlimit on the number of share holders and no restriction on transfer of shares. Private Company: A corporate entity in which limits the number of its members to 50. Does not invite public to subscribe to its capital and restricts the member’s right to transfer shares. Liquidity: A firm’s liquidity refers to its ability to meet its obligations in the short run. An asset’s liquidity refers to how quickly it can he sold at a reasonable price. : The minimum rate of the firm must earn on its investments in order to satisfy the expectations of investors who provide the funds to the firm. : The composition of a firm’s financing consisting of equity, preference, and debt. Annual Report: The report issued annually by a company to its shareholders. It primarily contains financial statements. In addition, it represents the management’s view of the operations of the previous year and the prospects for future. Proxy: The authorization given by one person to another to vote on his behalf in the shareholders meeting. Joint Venture: It is a temporary partenership and comes to an end after the compleation of a particular venture. No limit in its. Insolvency: In case a debtor is not in a position to pay his debts in full, a petition can be filled by the debtor himself or by any creditors to get the debtor declared as an insolvent. Long Term Debt: The debt which is payable after one year is known as long term debt. Short Term Debt: The debt which is payable with in one year is known as short term debt. Amortisation: This term is used in two senses 1. Repayment of loan over a period of time 2.Write-off of an expenditure (like issue cost of shares) over a period of time. Arbitrage: A simultaneous purchase and sale of security or currency in different markets to derive benefit from price differential. Stock: The Stock of a company when fully paid they may be converted into stock. Share Premium: Excess of issue price over the face value is called as share premium. Equity Capital: It represents ownership capital, as equity shareholders collectively own the company. They enjoy the rewards and bear the risks of ownership. They will have the voting rights. Authorized Capital: The amount of capital that a company can potentially issue, as per its memorandum, represents the authorized capital. Issued Capital: The amount offered by the company to the investors. Subscribed capital: The part of issued capital which has been subscribed to by the investors

9 Paid-up Capital: The actual amount paid up by the investors. Typically the issued, subscribed, paid-up capitals are the same. Par Value: The par value of an equity share is the value stated in the memorandum and written on the share scrip. The par value of equity share is generally Rs.10 or Rs.100. Issued price: It is the price at which the equity share is issued often, the issue price is higher than the Par Value Book Value: The book value of an equity share is = Paid – up equity Capital + Reserve and Surplus / No. Of outstanding shares equity Market Value (M.V): The Market Value of an equity share is the price at which it is traded in the market.

Preference Capital: It represents a hybrid form of financing it par takes some characteristics of equity and some attributes of debentures. It resembles equity in the following ways • Preference dividend is payable only out of distributable profits. • Preference dividend is not an obligatory payment. • Preference dividend is not a tax –deductible payment. Preference capital is similar to debentures in several ways. • The dividend rate of Preference Capital is fixed. • Preference Capital is redeemable in nature. • Preference Shareholders do not normally enjoy the right to vote. Debenture: For large publicly traded firms. These are viable alternative to term loans. Skin to promissory note, debentures is instruments for raising long term debt. Debenture holders are creditors of company. Stock Split: The dividing of a company’s existing stock into multiple . When the Par Value of share is reduced and the number of share is increased. Calls-in-Arrears: It means that amount which is not yet been paid by share holders till the last day for the payment. Calls-in-advance: When a shareholder pays with an instalment in respect of call yet to make the amount so received is known as calls-in-advance. Calls-in-advance can be accepted by a company when it is authorized by the articles. Forfeiture of share: It means the cancellation or allotment of unpaid shareholders. Forfeiture and reissue of shares allotted on pro – rata basis in case of over subscription. Prospectus: Inviting of the public for subscribing on shares or debentures of the company. It is issued by the public companies. The amount must be subscribed with in 120 days from the date of prospects. Simple Interest: It is the interest paid only on the principal amount borrowed. No interest is paid on the interest accured during the term of the loan. Compound Interest: It means that, the interest will include interest caliculated on interest. Time Value of Money: Money has time value. A rupee today is more valuable than a rupee a year hence. The relation between value of a rupee today and value of a rupee in future is known as “Time Value of Money”. NAV: Net Asset Value of the fund is the cumulative market value of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units out standing. Buying and Selling into funds is done on the basis of NAV related prices. The NAV of a mutual fund are required to be published in news papers. The NAV of an open end scheme should be disclosed ona daily basis and the NAV of a closed end scheme should be disclosed atleast on a weekly basis.

Financial markets: The financial markets can broadly be divided into money and capital market. • Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, banker’s acceptance, certificates of deposits, etc. • Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This

10 also includes sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. • Primary Market: It provides the channel for sale of new securities. Primary Market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market. • : It refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. Majority of the trading is done in the secondary market. It comprises of equity markets and the debt markets. Difference between the primary market and the secondary market: In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over- the-Counter (OTC) is a part of the dealer market. SEBI and its role: The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto. Portfolio: A portfolio is a combination of investment assets mixed and matched for the purpose of investor’s goal. Market Capitalisation: The market value of a quoted company, which is caliculated by multiplying its current share price (market price) by the number of shares in issue, is called as market capitalization. Process: It is basically a process used in IPOs for efficient . It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date. Cut off Price: In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut off price”. This is decided by the issuer and LM after considering the book and investors’ appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price. Bluechip Stock: Stock of a recognized, well established and financially sound company. Penny Stock: Penny stocks are any stock that trades at very low prices, but subject to extremely high risk. Debentures: Companies raise substantial amount of longterm funds through the issue of debentures. The amount to be raised by way of loan from the public is divided into small units called debentures. Debenture may be defined as written instrument acknowledging a debt issued under the seal of company containing provisions regarding the payment of interest, repayment of principal sum, and charge on the assets of the company etc… Large Cap / Big Cap: Companies having a large market capitalization For example, In US companies with market capitalization between $10 billion and $20 billion, and in the Indian context companies market capitalization of above Rs. 1000 crore are considered large caps. Mid Cap: Companies having a mid sized market capitalization, for example, In US companies with market capitalization between $2 billion and $10 billion, and in the Indian context companies market capitalization between Rs. 500 crore to Rs. 1000 crore are considered mid caps. Small Cap: Refers to stocks with a relatively small market capitalization, i.e. lessthan $2 billion in US or lessthan Rs.500 crore in India. Holding Company: A holding company is one which controls one or more companies either by holding shares in that company or companies are having power to appoint the directors of

11 those company. The company controlled by holding company is known as the Subsidary Company. Consolidated Balance Sheet: It is the b/s of the holding company and its subsidiary company taken together. Partnership act 1932: Partnership means an association between two or more persons who agree to carry the business and to share profits and losses arising from it. 20 members in ordinary trade and 10 in banking business IPO: First time when a company announces its shares to the public is called as an IPO. (Intial Public Offer) A Further (FPO): It is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. (RI): It is when a listed company which proposes to issue fresh securities to its shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. Preferential Issue: It is an issue of shares or of convertible securities by listed companies to a select group of persons under sec.81 of the Indian companies act, 1956 which is neither a rights issue nor a public issue.This is a faster way for a company to raise equity capital. Index: An index shows how specified portfolios of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upward or downwards. Dematerialisation: It is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his depository participant. Bull and Bear Market: Bull market is where the prices go up and Bear market where the prices come down. Exchange Rate: It is a rate at which the currencies are bought and sold. Forex: The Foreign Exchange Market is the place where currencies are traded. The overall FOREX markets is the largest, most liquid market in the world with an average traded value that exceeds $ 1.9 trillion per day and includes all of the currencies in the world.It is open 24 hours a day, five days a week. Mutual Fund: A mutual fund is a pool of money, collected from investors, and invested according to certain investment objectives. Asset Management Company (AMC): A company set up under Indian company’s act, 1956 primarily for performing as the investment manager of mutual funds. It makes investment decisions and manages mutual funds in accordance with the scheme objectives, deed of trust and provisions of the investment management agreement. Back-End Load: A kind of sales charge incurred when investors redeem or sell shares of a fund. Front-End Load: A kind of sales charge that is paid before any amount gets invested into the mutual fund. Off Shore Funds: The funds setup abroad to channalise foreign investment in the domestic capital markets. Under Writer: The organization that acts as the distributor of mutual funds share to broker or dealers and investors. Registrar: The institution that maintains a registry of shareholders of a fund and their share ownership. Normally the registrar also distributes dividends and provides periodic statements to shareholders. Trustee: A person or a group of persons having an overall supervisory authority over the fund managers. Bid (or Redemption) Price: In newspaper listings, the pre-share price that a fund will pay its shareholders when they sell back shares of a fund, usually the same as the net asset value of the fund. Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/ Scheme

12 An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weightage

13 comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Earning per share (EPS): It is a financial ratio that gives the information regarding earing available to each equity share. It is very important financial ratio for assessing the state of market price of share. The EPS statement is applicable to the enterprise whose equity shares are listed in stock exchange.

Types of EPS: • Basic EPS ( with normal shares) • Diluted EPS (with normal shares and convertible shares)

EPS Statement:

Sales **** Less: variable cost **** Contribution *** Less: Fixed cost ****

EBIT ***** Less: Interest *** EBT **** Less: Tax **** Earnimgs **** Less: preference dividend **** Earnings available to equity Share holders (A) *****

EPS=A/ No of outstanding Shares EBIT and Operating Income are same The higher the EPS, the better is the performance of the company.

Cash Flow Statement: It is a statement which shows inflows (receipts) and outflows (payments) of cash and its equivalents in an enterprise during a specified period of time. According to the revised accounting standard 3, an enterprise prepares a cash flow statement and should present it for each period for which financial statements are presented. Funds Flow Statement: Fund means the net working capital. Funds flow statement is a statement which lists first all the sources of funds and then all the applications of funds that have taken place in a business enterprise during the particular period of time for which the statement has been prepared. The statement finally shows the net increase or net decrease in the working capital that has taken place over the period of time. Float: The difference between the available balance and the ledger balance is referred to as the float. Collection Float: The amount of cheque deposited by the firm in the bank but not cleared. Payment Float: The amount of cheques issued by the firm but not paid for by the bank. Operating Cycle: The operating cycle of a firm begins with the acquisition of raw material and ends with the collection of receivables.

Marginal Costing: Sales – VaribleCost=FixedCost ± Profit/Loss Contribution= Sales –VaribleCost Contribution= FixedCost ± Profit/Loss P / V Ratio= (Contribution / Sales)*100

14 Per 1 unit information is given, P / V Ratio = (Contribution per Unit / Sales per Unit)*100 Two years information is given, P / V Ratio= (Change in Profit / Change in Sales) * 100 Through Sales, P / V Ratio Contribution =Sales * P / v Ratio Through P / V Ratio, Contribution Sales = Contribution / P / VRatio

Break Even Point (B.E.P) IN Value = (Fixed Cost) / (P / v Ratio) OR (Fixed Cost / Contribution) * Sales In Units = Fixed Cost / Contribution OR Fixed Cost / (SalesPrice per Unit – V.C per Unit) Margin of Safety = Total Sales – Sales at B.E.P (OR) Profit / PV Ratio Sales at desired profit (in units) = FixedCost+ DesiredProfit / Contribution per Unit Sales at desired profit (in Value) = FixedCost+ DesiredProfit / PV ratio (OR) Contribution / PV Ratio

RATIO ANALYSIS: A ratio analysis is a mathematical expression. It is the quantitative relation between two. It is the technique of interpretation of financial statements with the help of meaningful ratios. Ratios may be used for comparison in any of the following ways. • Comparison of a firm its own performance in the past. • Comparison of a firm with the another firm in the industry • Comparison of a firm with the industry as a whole Types Of Ratios • Liquidity ratio • Activity ratio • Leverage ratio • profitability ratio

1. Liquidity ratio: These are ratios which measure the short term financial position of a firm. i. Current Ratio: It is also called as working capital ratio. The current ratio measures the ability of the firm to meet its currnt liabilities-current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities. i.e Current assets Current liabilities Ideal ratio is 2:1 ii. Quick or Acid test Ratio: It tells about the firm’s liquidity position. It is a fairly stringent measure of liquidity. =Quick assets/Current Liabilities Ideal ratio is 1:1 Quick Assets =Current Assets – Stock - Prepaid Expenses iii. Absolute Liquid Ratio: A.L.A/C.L AL assets=Cash + Bank + Marketable Securities. 2. Activity Ratios or Current Assets management or Efficiency Ratios: These ratios measure the efficiency or effectiveness of the firm in managing its resources or assets  Stock or Inventory Turnover Ratio: It indicates the number of times the stock has turned over into sales in a year. A stock turn over ratio of ‘8’ is considered ideal. A high stock turn over ratio indicates that the stocks are fast moving and get converted into sales quickly. = Cost of goods Sold/ Avg. Inventory  Debtors Turnover Ratio: It expresses the relationship between debtors and sales. =Credit Sales /Average Debtors

15  Creditors Turnover Ratio: It expresses the relationship between creditors and purchases. =Credit Purchases /Average Creditors  Fixed Assets Turnover Ratio: A high fixed asset turn over ratio indicates better utilization of the firm fixed assets. A ratio of around 5 is considered ideal. = Net Sales / Fixed Assets  Working Capital Turnover Ratio: A high working capital turn over ratio indicates efficiency utilization of the firm’s funds. =CGS/Working Capital =W.C=C.A – C.L.

3. Leverage Ratio: These ratios are mainly calculated to know the long term solvency position of the company.  Debt Equity Ratio: The debt-equity ratio shows the relative contributions of creditors and owners. = outsiders fund/Share holders fund Ideal ratios 2:1  Proprietary ratio or Equity ratio: It expresses the relationship between networth and total assets. A high proprietary ratio is indicativeof strong financial position of the business. =Share holders funds/Total Assets

= (Equity Capital +Preference capital +Reserves – Fictitious assets) / Total Assets

 Fixed Assets to net worth Ratio: This ratio indicates the mode of financing the fixed assets. The ideal ratio is 0.67 =Fixed Assets (After Depreciation.)/Shareholder Fund

4. Profitability Ratios: Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment.  Return on Capital Employed or Return on Investment (ROI): This ratio reveals the earning capacity of the capital employed in the business. =PBIT /Capital Employed  Return on Proprietors Fund / Earning Ratio: Earn on Net Worth =Net Profit (After tax)/Proprietors Fund  Return on Ordinary shareholders Equity or Return on Equity Capital: It expresses the return earned by the equity shareholders on their investment. =Net Profit after tax and Dividend / Proprietors fund or Paid up equity Capital  Price Earning Ratio: It expresses the relationship between marketprice of share on a company and the earnings per share of that company. =MPS (Market Price per Share) / EPS  Earning Price Ratio/ Earning Yield: = EPS / MPS  EPS= Net Profit (After tax and Interest) / No. Of Outstanding Shares.  Dividend Yield ratio: It expresses the relationship between dividend earned per share to earnings per share. = Dividend per share (DPS) / Market value per share  Dividend pay-out ratio: It is the ratio of dividend per share to earning per share. = DPS / EPS

DPS: It is the amount of the dividend payable to the holder of one equity share. =Dividend paid to ordinary shareholders / No. of ordinary shares

C.G.S=Sales- G.P G.P= Sales – C.G.S G.P.Ratio =G.P/Net sales*100

16 Net Sales= Gross Sales – Return inward- Cash discount allowed

Net profit ratio=Net Profit/ Net Sales*100

Operating Profit ratio=O.P/Net Sales*100

Interest Coverage Ratio= Net Profit (Before Tax & Interest) / Fixed Interest Classes

Return on Investment (ROI): It reveals the earning capacity of the capital employed in the business. It is calculated as, EBIT/Capital employed. The return on capital employed should be more than the cost of capital employed. Capital employed =EquityCapital+Preference sharecapital+Reserves+Longterm loans and Debentures - Fictitious Assets – Non OperatingAssets

01. 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”.

02. Book Keeping: It is mainly concerned with recording of financial data relating to the business operations in a significant and orderly manner.

03. Concepts of accounting: • Separate entity concept • Going concern concept • Money measurement concept • Cost concept • Dual aspect concept • Accounting period concept • Periodic matching of costs and revenue concept • Realization concept.

17 04. Conventions Of Accounting • Conservatism • Full disclosure • Consistency • D materiality.

05. Systems of bookkeeping • Single entry system • Double entry system

06. Systems of accounting • Cash system accounting • Mercantile system of accounting.

07. 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

08. Meaning of journal: Journal means chronological record of transactions.

09. 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. 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.

18 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. Intangible 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.

19 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 point 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.

20 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 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: • Statutory companies • Government company • Foreign company • Registered companies:  Companies limited by shares  Companies limited by guarantee  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

21 • 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: • 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

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: • Excessive dep.of an asset, excessive over- of a liability. • 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.

22 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: • 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.

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.

23 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.

24 101. 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 Depreciation on fixed assets (b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the following items, as they do not increase the funds: Profit on sale of fixed assets, profit on revaluation Of fixed assets

External sources: • Funds from long-term loans • Sale of fixed assets • 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 Deposits made by one company in another company are called ICD.

106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt issued by banks there is no prescribed interest rate on such CDs it is based on the prevailing market conditions.

107. Public deposits: It is very important source of short term and medium term finance. The company can accept PD from members of the public and shareholders. It has the maturity period of 6 months to 3 years.

108. Euro issues: The euro issues means that the issue is listed on a European stock Exchange. The subscription can come from any part of the world except India.

109. GDR (Global depository receipts): A depository receipt is basically a negotiable certificate, dominated in us dollars that represents a non-US company publicly traded in local currency equity shares. 110. ADR (American depository receipts): Depository receipt issued by a company in the USA are known as ADRs. Such receipts are to be issued in accordance with the provisions stipulated by the securities Exchange commission (SEC) of USA like SEBI in India.

25 111. Commercial banks: Commercial banks extend foreign currency loans for international operations, just like rupee loans. The banks also provided overdraft.

112. Development banks: It offers long-term and medium term loans including foreign currency loans.

113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide indirect assistance for obtaining foreign currency.

114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for professionally or technically qualified entrepreneurs and persons possessing relevant experience and skills and entrepreneur traits.

115. Unsecured loans: It constitutes a significant part of 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- • 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

118. 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

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.

26 123. 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: • Material • Labour • Expenses • Overheads

134. Components of total costs: • Prime cost • Factory cost • Total cost of production • 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

27 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: • Job costing • Contract costing • Process costing • Operation costing • Operating costing • Unit costing • Batch costing.

141. Techniques of costing: • Marginal costing • Direct costing • Absorption costing • 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.

28 149. : 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.

29 167. 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.

30 184. 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.

31 201. 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: Unirorm charge methods: • Fixed installment 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.

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

32 210. 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.

33

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.

34 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: • Business entity concepts: According to this concept, the business is treated as a separate entity distinct from its owners and others. • 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.

35 • 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. • 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 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. • 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. • 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.

36 242. 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.

37 256. 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.

38 272. 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

39 incomes of a period with the expenditure of that period, which are both of a revenue nature.

Accounting Glossary

Above the line: This term can be applied to many aspects of accounting. It means transactions, assets etc., that are associated with the everyday running of a business. See below the line. Account: A section in a ledger devoted to a single aspect of a business (eg. a Bank account, Wages account, Office expenses account). Accounting cycle: This covers everything from opening the books at the start of the year to closing them at the end. In other words, everything you need to do in one accounting year accounting wise. Accounting equation: The formula used to prepare a balance sheet: assets=liability+equity. Accounts Payable: An account in the nominal ledger which contains the overall balance of the Purchase Ledger. Accounts Payable Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger. Accounts Receivable: An account in the nominal ledger which contains the overall balance of the Sales Ledger. Accounts Receivable Ledger: A subsidiary ledger which holds the accounts of a business's customers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the sales ledger. Accretive: If a company acquires another and says the deal is 'accretive to earnings', it means that the resulting PE ratio (price/earnings) of the acquired company is less than the acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say, $180,000 (P/E ratio=9 [180,000 valuation/20,000 profit]) then the deal is accretive because company 'A' is effectively increasing its EPS (because it now has more shares and it paid less for them compared with its own share price). (see dilutive) Accruals: If during the course of a business certain charges are incurred but no invoice is received then these charges are referred to as accruals (they 'accrue' or increase in value). A typical example is interest payable on a loan where you have not yet received a bank statement. These items (or an estimate of their value) should still be included in the profit & loss account. When the real invoice is received, an adjustment can be made to correct the estimate. Accruals can also apply to the income side. Accrual method of accounting: Most businesses use the accrual method of accounting (because it is usually required by law). When you issue an invoice on credit (ie. regardless of whether it is paid or not), it is treated as a taxable supply on the date it was issued for income tax purposes (or corporation tax for limited companies). The same applies to bills received from suppliers. (This does not mean you pay income tax immediately, just that it must be included in that year's profit and loss account). Accumulated Depreciation Account: This is an account held in the nominal ledger which holds the depreciation of a fixed asset until the end of the asset's useful life (either because it has been scrapped or sold). It is credited each year with that year's depreciation, hence the balance increases (ie. accumulates) over a period of time. Each fixed asset will have its own accumulated depreciation account.

40 Advanced Corporation Tax (ACT - UK only - no longer in use): This is corporation tax paid in advance when a limited company issues a dividend. ACT is then deducted from the total corporation tax due when it has been calculated at year end. ACT was abolished in April 1999. See Corporation Tax. Amortization: The depreciation (or repayment) of an (usually) intangible asset (eg. loan, mortgage) over a fixed period of time. Example: if a loan of 12,000 is amortized over 1 year with no interest, the monthly payments would be 1000 a month. Annualize: To convert anything into a yearly figure. Eg. if profits are reported as running at £10k a quarter, then they would be £40k if annualized. If a credit card interest rate was quoted as 1% a month, it would be annualized as 12%. Appropriation Account: An account in the nominal ledger which shows how the net profits of a business (usually a partnership, limited company or corporation) have been used. Arrears: Bills which should have been paid. For example, if you have forgotten to pay your last 3 months rent, then you are said to be 3 months in arrears on your rent. Assets: Assets represent what a business owns or is due. Equipment, vehicles, buildings, creditors, money in the bank, cash are all examples of the assets of a business. Typical breakdown includes 'Fixed assets', 'Current assets' and 'non-current assets'. Fixed refers to equipment, buildings, plant, vehicles etc. Current refers to cash, money in the bank, debtors etc. Non-current refers to any assets which do not easily fit into the previous categories (such as Deferred expenditure). At cost: The 'at cost' price usually refers to the price originally paid for something, as opposed to, say, the retail price. Audit: The process of checking every entry in a set of books to make sure they agree with the original paperwork (eg. checking a journal's entries against the original purchase and sales invoices). Audit Trail: A list of transactions in the order they occurred.

Bad Debts Account: An account in the nominal ledger to record the value of un-recoverable debts from customers. Real bad debts or those that are likely to happen can be deducted as expenses against tax liability (provided they refer specifically to a customer). Bad Debts Reserve Account: An account used to record an estimate of bad debts for the year (usually as a percentage of sales). This cannot be deducted as an expense against tax liability. Balance Sheet: A summary of all the accounts of a business. Usually prepared at the end of each financial year. Balancing Charge: When a fixed asset is sold or disposed of, any loss or gain on the asset can be reclaimed against (or added to) any profits for income tax purposes. This is called a balancing charge. Bankrupt: If an individual or unincorporated company has greater liabilities than it has assets, the person or business can petition for, or be declared by its creditors, bankrupt. In the case of a limited company or corporation in the same position, the term used is insolvent. Below the line: This term is applied to items within a business which would not normally be associated with the everyday running of a business. See above the line. Bill: A term typically used to describe a purchase invoice (eg. an invoice from a supplier). Bought Ledger: See Purchase Ledger. Burn Rate: The rate at which a company spends its money. Example: if a company had cash reserves of $120m and it was currently spending $10m a month, then you could say that at the current 'burn rate' the company will run out of cash in 1 year.

41 CAGR: (Compound Annual Growth Rate) The year on year growth rate required to show the change in value (of an investment) from its initial value to its final value. If a $1 investment was worth $1.52 over three years, the CAGR would be 15% [(1 x 1.15) x 1.15 x 1.15] Called-up Share capital: The value of unpaid (but issued shares) which a company has requested payment for. See Paid-up Share capital. Capital: An amount of money put into the business (often by way of a loan) as opposed to money earned by the business. Capital account: A term usually applied to the owner’s equity in the business. Capital Allowances (UK specific): The depreciation on a fixed asset is shown in the Profit and Loss account, but is added back again for income tax purposes. In order to be able to claim the depreciation against any profits the Inland Revenue allow a proportion of the value of fixed assets to be claimed before working out the tax bill. These proportions (usually calculated as a percentage of the value of the fixed assets) are called Capital Allowances. Capital Assets: See Fixed Assets. Capital Employed (CE): Gross CE=Total assets, Net CE=Fixed assets plus (current assets less current liabilities). Capital Gains Tax: When a fixed asset is sold at a profit, the profit may be liable to a tax called Capital Gains Tax. Calculating the tax can be a complicated affair (capital gains allowances, adjustments for inflation and different computations depending on the age of the asset are all considerations you will need to take on board). Cash Accounting: This term describes an accounting method whereby only invoices and bills which have been paid are accounted for. However, for most types of business in the UK, as far as the Inland Revenue are concerned as soon as you issue an invoice (paid or not), it is treated as revenue and must be accounted for. An exception is VAT: Customs & Excise normally require you to account for VAT on an accrual basis, however there is an option called 'Cash Accounting' whereby only paid items are included as far as VAT is concerned (eg. if most of your sales are on credit, you may benefit from this scheme - contact your local Customs & Excise office for the current rules and turnover limits). Cash Book: A journal where a business's cash sales and purchases are entered. A cash book can also be used to record the transactions of a bank account. The side of the cash book which refers to the cash or bank account can be used as a part of the nominal ledger (rather than posting the entries to cash or bank accounts held directly in the nominal ledger - see 'Three column cash book'). Cash Flow: A report which shows the flow of money in and out of the business over a period of time. Cash Flow Forecast: A report which estimates the cash flow in the future (usually required by a bank before it will lend you money, or take on your account). Cash in Hand: See Undeposited funds account. Charge Back: Refers to a credit card order which has been processed and is subsequently cancelled by the cardholder contacting the credit card company directly (rather than through the seller). This results in the amount being 'charged back' to the seller (often incurs a small penalty or administration fee to the seller). Chart of Accounts: A list of all the accounts held in the nominal ledger. CIF (Cost, Insurance, Freight [c.i.f.]): A contract (international) for the sale of goods where the seller agrees to supply the goods, pay the insurance, and pay the freight charges until the goods reach the destination (usually a port - rather than the actual buyers address). After that point, the responsibility for the goods passes to the buyer.

42 Circulating assets: The opposite to Fixed assets. Circulating assets describe those assets that turn from cash to goods and back again (hence the term circulating). Typically, you buy some raw materials, start to manufacture a product (the asset is called work in progress at this point), produce a product (it is now stock), sell it (it is now back to cash again). Closing the books: A term used to describe the journal entries necessary to close the sales and expense accounts of a business at year end by posting their balances to the profit and loss account, and ultimately to close the profit & loss account too by posting its balance to a capital or other account. Companies House (UK only): The title given to the government department which collects and stores information supplied by limited companies. A limited company must supply Companies House with a statement of its final accounts every year (eg. trading and profit and loss accounts, and balance sheet). Compensating error: A double-entry term applied to a mistake which has cancelled out another mistake. Compound interest: Apply interest on the capital plus all interest accrued to date. Eg. A loan with an annually applied rate of 10% for 1000 over two years would yield a gross total of 1210 at the end of the period (year 1 interest=100, year two interest=110). The same loan with simple interest applied would yield 1200 (interest on both years is 100 per year). Contra account: An account created to offset another account. Eg: a Sales contra account would be Sales Discounts. They are accounts included in the same section of a set of books, which when compared together, give the net balance. Example: Sales=10,000 Sales Discounts=1,000 therefore Net Sales=9,000. This example, affecting the revenue side of a business, is also referred to as Contra revenue. The tell-tale sign of a contra account is that it has the oposite balance to that expected for an account in that section (in the above example, the Sales Discounts balance would be shown in brackets - eg. it has a debit balance where Sales has a credit balance). Control Account: An account held in a ledger which summarises the balance of all the accounts in the same or another ledger. Typically each subsidiary ledger will have a control account which will be mirrored by another control account in the nominal ledger (see 'Self- balancing ledgers'). Cook the books: Falsify a set of accounts. See also creative accounting. Corporation Tax (CT - UK only): The tax paid by a limited company on its profits. At present this is calculated at year end and due within 9 months of that date. From April 1999 Advanced Corporation Tax was abolished and large (UK) companies now pay CT in instalments. Small and medium-sized companies are exempted from the instalment plan. Cost accounting: An area of management accounting which deals with the costs of a business in terms of enabling the management to manage the business more effectively. Cost-based pricing: Where a company bases its pricing policy solely on the costs of manufacturing rather than current market conditions. Cost-benefit: Calculating not only the financial costs of a project, but also the cost of the effects it will have from a social point of view. This is not easy to do since it requires valuations of intangible items like the cost of job losses or the effects on the environment. Genetically modified crops are a good example of where cost-benefits would be calculated - and also impossible to answer with any degree of certainty! Cost centre: Splitting up your expenses by department. Eg. Rather than having one account to handle all power costs for a company, a power account would be opened for each department. You can then analyse which department is using the most power, and hopefully find of way of reducing those costs. Cost of finished goods: The value (at cost) of newly manufactured goods shown in a business's manufacturing account. The valuation is based on the opening raw materials balance, less direct costs involved in manufacturing, less the closing raw materials balance,

43 and less any other overheads. This balance is subsequently transferred to the trading account. Cost of Goods Sold (COGS): A formula for working out the direct costs of your stock sold over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases - closing stock. Cost of Sales: A formula for working out the direct costs of your sales (including stock) over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases + direct expenses - closing stock. Also, see Cost of Goods Sold. Creative accounting: A questionable! means of making a companies figures appear more (or less) appealing to shareholders etc. An example is 'branding' where the 'value' of a brand name is added to intangible assets which increases shareholders funds (and therefore decreases the gearing). Capitalizing expenses is another method (ie. moving them to the assets section rather than declaring them in the Profit & Loss account). Credit: A column in a journal or ledger to record the 'From' side of a transaction (eg. if you buy some petrol using a cheque then the money is paid from the bank to the petrol account, you would therefore credit the bank when making the journal entry). Credit Note: A sales invoice in reverse. A typical example is where you issue an invoice for £100, the customer then returns £25 worth of the goods, so you issue the customer with a credit note to say that you owe the customer £25. Creditors: A list of suppliers to whom the business owes money. Creditors (control account): An account in the nominal ledger which contains the overall balance of the Purchase Ledger. Current Assets: These include money in the bank, petty cash, money received but not yet banked (see 'cash in hand'), money owed to the business by its customers, raw materials for manufacturing, and stock bought for re-sale. They are termed 'current' because they are active accounts. Money flows in and out of them each financial year and we will need frequent reports of their balances if the business is to survive (eg. 'do we need more stock and have we got enough money in the bank to buy it?'). Current cost accounting: The valuing of assets, stock, raw materials etc. at current market value as opposed to its historical cost. Current Liabilities: These include bank overdrafts, short term loans (less than a year), and what the business owes its suppliers. They are termed 'current' for the same reasons outlined under 'current assets' in the previous paragraph. Customs and Excise: The government department usually responsible for collecting sales tax (eg. VAT in the UK). Days Sales Outstanding (DSO): How long on average it takes a company to collect the money owed to it. See: ratios.html (the first item in the list). Debenture: This is a type of share issued by a limited company. It is the safest type of share in that it is really a loan to the company and is usually tied to some of the company's assets so should the company fail, the debenture holder will have first call on any assets left after the company has been wound up. Debit: A column in a journal or ledger to record the 'To' side of a transaction (eg. if you are paying money into your bank account you would debit the bank when making the journal entry). Debtors: A list of customers who owe money to the business. Debtors (control account): An account in the nominal ledger which contains the overall balance of the Sales Ledger. Deferred expenditure: Expenses incurred which do not apply to the current accounting period. Instead, they are debited to a 'Deferred expenditure' account in the non-current

44 assets area of your chart of accounts. When they become current, they can then be transferred to the profit and loss account as normal. Depreciation: The value of assets usually decreases as time goes by. The amount or percentage it decreases by is called depreciation. This is normally calculated at the end of every accounting period (usually a year) at a typical rate of 25% of its last value. It is shown in both the profit & loss account and balance sheet of a business. See straight-line depreciation. Dilutive: If a company acquires another and says the deal is 'dilutive to earnings', it means that the resulting P/E (price/earnings) ratio of the acquired company is greater than the acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say, $220,000 (P/E ratio=11 [220,000 valuation/20,000 profit]) then the deal is dilutive because company 'A' is effectively decreasing its EPS (because it now has more shares and it paid more for them in comparison with its own share price). (see Accretive) Dividends: These are payments to the shareholders of a limited company. Double-entry book-keeping: A system which accounts for every aspect of a transaction - where it came from and where it went to. This from and to aspect of a transaction (called crediting and debiting) is what the term double-entry means. Modern double-entry was first mentioned by G Cotrugli, then expanded upon by L Paccioli in the 15th century. Drawings: The money taken out of a business by its owner(s) for personal use. This is entirely different to wages paid to a business's employees or the wages or remuneration of a limited company's directors (see 'Wages'). EBIT: Earnings before interest and tax (profit before any interest or taxes have been deducted). EBITA: Earnings before interest, tax and amortization (profit before any interest, taxes or amortization have been deducted). EBITDA: Earnings before interest, tax, depreciation and amortization (profit before any interest, taxes, depreciation or amortization have been deducted). Encumbrance: A liability (eg. a mortgage is an encumbrance on a property). Also, any money set aside (ie. reserved) for any purpose. Entry: Part of a transaction recorded in a journal or posted to a ledger. Equity: The value of the business to the owner of the business (which is the difference between the business's assets and liabilities). Error of Commission: A double-entry term which means that one or both sides of a double- entry has been posted to the wrong account (but is within the same class of account). Example: Petrol expense posted to Vehicle maintenance expense. Error of Ommission: A double-entry term which means that a transaction has been ommitted from the books entirely. Error of Original Entry: A double-entry term which means that a transaction has been entered with the wrong amount. Error of Principle: A double-entry term which means that one or both sides of a double- entry has been posted to the wrong account (which is also a different class of account). Example: Petrol expense posted to Fixtures and Fittings. Expenses: Goods or services purchased directly for the running of the business. This does not include goods bought for re-sale or any items of a capital nature (see Stock and Fixed Assets). FIFO: First In First Out. A method of valuing stock.

45 Fiscal year: The term used for a business's accounting year. The period is usually twelve months which can begin during any month of the calendar year (eg. 1st April 2001 to 31st March 2002). Fixed Assets: These consist of anything which a business owns or buys for use within the business and which still retains a value at year end. They usually consist of major items like land, buildings, equipment and vehicles but can include smaller items like tools. (see Depreciation) Fixtures & Fittings: This is a class of fixed asset which includes office furniture, filing cabinets, display cases, warehouse shelving and the like. Flash earnings: A news release issued by a company that shows its latest quarterly results. Flow of Funds: This is a report which shows how a balance sheet has changed from one period to the next. FOB: An abbreviation of Free On Board. It generally forms part of an export contract where the seller pays all the costs and insurance of sending the goods to the port of shipment. After that, the buyer then takes full responsibility. If the goods are to travel by train, it's called FOR (Free on Rail). Freight collect: The buyer pays the shipping costs. Gearing (AKA: leverage): The comparison of a company's long term fixed interest loans compared to its assets. In general two different methods are used: 1. Balance sheet gearing is calculated by dividing long term loans with the equity (or proprietor's net worth). 2. Profit and Loss gearing: Fixed interest payments for the period divided by the profit for the period. General Ledger: See Nominal Ledger. Goodwill: This is an extra value placed on a business if the owner of a business decides it is worth more than the value of its assets. It is usually included where the business is to be sold as a going concern. Gross loss: The balance of the trading account assuming it has a debit balance. Gross profit: The balance of the trading account assuming it has a credit balance. Growth and Acquisition (G&A): Describes a way a company can grow. Growth means expanding through its normal operations, Acquisition means growth through buying up other companies. Historical Cost: Assets, stock, raw materials etc. can be valued at what they originally cost (which is what the term 'historical cost' means), or what they would cost to replace at today's prices (see Price change accounting). Impersonal Accounts: These are accounts not held in the name of persons (ie. they do not relate directly to a business's customers and suppliers). There are two types, see Real and Nominal. Imprest System: A method of topping up petty cash. A fixed sum of petty cash is placed in the petty cash box. When the petty cash balance is nearing zero, it is topped up back to its original level again (known as 'restoring the Imprest'). Income: Money received by a business from its commercial activities. See 'Revenue'. Inland Revenue: The government department usually responsible for collecting your tax. Insolvent: A company is insolvent if it has insufficient funds (all of its assets) to pay its debts (all of its liabilities). If a company's liabilities are greater than its assets and it continues to trade, it is not only insolvent, but in the UK, is operating illegally (Insolvency act 1986). Intangible assets: Assets of a non-physical or financial nature. An asset such as a loan or an endowment policy are good examples. See tangible assets. Integration Account: See Control Account.

46 Inventory: A subsidiary ledger which is usually used to record the details of individual items of stock. Inventories can also be used to hold the details of other assets of a business. See Perpetual, Periodic. Invoice: A term describing an original document either issued by a business for the sale of goods on credit (a sales invoice) or received by the business for goods bought (a purchase invoice). Journal(s): A book or set of books where your transactions are first entered. Full details Journal entries: A term used to describe the transactions recorded in a journal. Journal Proper: A term used to describe the main or general journal where other journals specific to subsidiary ledgers are also used. K - no entries Landed Costs: The total costs involved when importing goods. They include buying, shipping, insuring and associated taxes. Ledger: A book in which entries posted from the journals are re-organised into accounts. Full details Leverage: See Gearing. Liabilities: This includes bank overdrafts, loans taken out for the business and money owed by the business to its suppliers. Liabilities are included on the right hand side of the balance sheet and normally consist of accounts which have a credit balance. LIFO: Last In Last Out. A method of valuing stock. Long term liabilities: These usually refer to long term loans (ie. a loan which lasts for more than one year such as a mortgage). Loss: See Net loss. Management accounting: Accounts and reports are tailor made for the use of the managers and directors of a business (in any form they see fit - there are no rules) as opposed to financial accounts which are prepared for the Inland Revenue and any other parties not directly connected with the business. See Cost accounting. Manufacturing account: An account used to show what it cost to produce the finished goods made by a manufacturing business. Matching principle: A method of analysing the sales and expenses which make up those sales to a particular period (eg. if a builder sells a house then the builder will tie in all the raw materials and expenses incurred in building and selling the house to one period - usually in order to see how much profit was made). Maturity value: The (usually projected) value of an intangible asset on the date it becomes due. MD&A: Management Discussion and Analysis. Usually seen in a financial report. The information disclosed has deen derived from analysis and discussions held by the management (and is presented usually for the benefit of shareholders). Memo billing (aka memo invoicing): Goods ordered and invoiced on approval. There is no obligation to buy. Memorandum accounts: A name for the accounts held in a subsidiary ledger. Eg. the accounts in a sales ledger. Minority interest: A minority interest represents a minority of shares not held by the holding company of a subsidiary. It means that the subsidiary is not wholly owned by the holding company. The minority shareholdings are shown in the holding company accounts as long term liabilities. Moving average: A way of smoothing out (i.e. removing the highs and lows) of a series of figures (usually shown as a graph). If you have, say, 12 months of sales figures and you

47 decide on a moving average period of 3 months, you would add three months together, divide that by three and end up with an average for each month of the three month period. You would then plot that single figure in place of the original monthly points on your graph. A moving average is useful for displaying trends. See Normalize. Multiple-step income statement (aka Multi-step): An income statement (aka Profit and Loss) which has had its revenue section split up into sub-sections in order to give a more detailed view of its sales operations. Example: a company sells services and goods. The statement could show revenue from services and associated costs of those revenues at the start of the revenue section, then show goods sold and cost of goods sold underneath. The two sections totals can then be amalgamted at the end to show overall sales (or gross profit). See Single-step income statement. Narrative: A comment appended to an entry in a journal. It can be used to describe the nature of the transaction, and often in particular, where the other side of the entry went to (or came from). Net loss: The value of expenses less sales assuming that the expenses are greater (ie. if the profit and loss account shows a debit balance). Net of Tax: The price less any tax. Eg. if you sold some goods for $12 inclusive of $2 sales tax, then the 'net of tax' price would be $10 Net profit: The value of sales less expenses assuming that the sales are greater (ie. if the profit and loss account shows a credit balance). Net worth: See Equity. Nominal Accounts: A set of accounts held in the nominal ledger. They are termed 'nominal' because they don't usually relate to an individual person. The accounts which make up a Profit and Loss account are nominal accounts (as is the Profit and Loss account itself), whereas an account opened for a specific customer is usually held in a subsidiary ledger (the sales ledger in this case) and these are referred to as personal accounts. Nominal Ledger: A ledger which holds all the nominal accounts of a business. Where the business uses a subsidiary ledger like the sales ledger to hold customer details, the nominal ledger will usually include a control account to show the total balance of the subsidiary ledger (a control account can be termed 'nominal' because it doesn't relate to a specific person). Full details Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of figures so they are more consistent with the general trend of the business. This is usually done using a Moving average. Opening the books: Every time a business closes the books for a year, it opens a new set. The new set of books will be empty, therefore the balances from the last balance sheet must be copied into them (via journal entries) so that the business is ready to start the new year. Ordinary Share: This is a type of share issued by a limited company. It carries the highest risk but usually attracts the highest rewards. Original book of entry: A book which contains the details of the day to day transactions of a business (see Journal). Overheads: These are the costs involved in running a business. They consist entirely of expense accounts (eg. rent, insurance, petrol, staff wages etc.). Paid-up Share capital: The value of issued shares which have been paid for. See Called-up Share capital. P.A.Y.E (UK only): 'Pay as you earn'. The name given to the income tax system where an employee's tax and national insurance contributions are deducted before the wages are paid.

48 Pareto optimum: An economic theory by Vilfredo Pareto. It states that the optimum allocation of a society's resources will not happen whilst at least one person thinks he is better off and where others perceive themselves to be no worse. Pay on delivery: The buyer pays the cost of the goods (to the carrier) on receipt of them. Periodic inventory: A Periodic Inventory is one whose balance is updated on a periodic basis, ie. every week/month/year. See Inventory. PE ratio: An equation which gives you a very rough estimate as to how much confidence there is in a company's shares (the higher it is the more confidence). The equation is: current share price multiplied by earnings and divided by the number of shares. 'Earnings' means the last published net profit of the company. Perpetual inventory: A Perpetual Inventory is one whose balance is updated after each and every transaction. See Inventory. Personal Accounts: These are the accounts of a business's customers and suppliers. They are usually held in the Sales and Purchase Ledgers. Petty Cash: A small amount of money held in reserve (normally used to purchase items of small value where a cheque or other form of payment is not suitable). Petty Cash Slip: A document used to record petty cash payments where an original receipt was not obtained (sometimes called a petty cash voucher). Point of Sale (POS): The place where a sale of goods takes place, eg. a shop counter. Post Closing Trial Balance: This is a trial balance prepared after the balance sheet has been drawn up, and only includes balance sheet accounts. Posting: The copying of entries from the journals to the ledgers. Preference Shares: This is a type of share issued by a limited company. It carries a medium risk but has the advantage over ordinary shares in that preference shareholders get the first slice of the dividend 'pie' (but usually at a fixed rate). Pre-payments: One or more accounts set up to account for money paid in advance (eg. insurance, where part of the premium applies to the current financial year, and the remainder to the following year). Price change accounting: Accounting for the value of assets, stock, raw materials etc. by their current market value instead of the more traditional Historic Cost. Prime book of entry: See Original book of entry. Profit: See Gross profit, Net profit, and Profit and Loss Account. Profit and Loss Account: An account made up of revenue and expense accounts which shows the current profit or loss of a business (ie. whether a business has earned more than it has spent in the current year). Full details Profit margin: The percentage difference between the costs of a product and the price you sell it for. Eg. if a product costs you $10 to buy and you sell it for $20, then you have a 100% profit margin. This is also known as your 'mark-up'. Pro-forma accounts (pro-forma financial statements): A set of accounts prepared before the accounts have been officially audited. Often done for internal purposes or to brief shareholders or the press. Pro-forma invoice: An invoice sent that requires payment before any goods or services have been despatched. Provisions: One or more accounts set up to account for expected future payments (eg. where a business is expecting a bill, but hasn't yet received it). Purchase Invoice: See Invoice.

49 Purchase Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger. Q no entries Raw Materials: This refers to the materials bought by a manufacturing business in order to manufacture its products. Real accounts: These are accounts which deal with money such as bank and cash accounts. They also include those dealing with property and investments. In the case of bank and cash accounts they can be held in the nominal ledger, or balanced in a journal (eg. the cash book) where they can then be looked upon as a part of the nominal ledger when compiling a balance sheet. Property and investments can be held in subsidiary ledgers (with associated control accounts if necessary) or directly in the nominal ledger itself. Realisation principle: The principle whereby the value of an asset can only be determined when it is sold or otherwise disposed of, ie. its 'real' (or realised) value. Rebate: If you pay for a service, then cancel it, you may receive a 'rebate'. That is, you may be refunded some of the money you paid for the service. (eg. if you cancel a 1 year insurance policy after 3 months, you may get a rebate for the remaining 9 months) Receipt: A term typically used to describe confirmation of a payment - if you buy some petrol you will normally ask for a receipt to prove that the money was spent legitimately. Reconciling: The procedure of checking entries made in a business's books with those on a statement sent by a third person (eg. checking a bank statement against your own records). Refund: If you return some goods you have just bought (for whatever reason), the company you bought them from may give you your money back. This is called a 'refund'. Reserve accounts: Reserve accounts are usually set up to make a balance sheet clearer by reserving or apportioning some of a business's capital against future purchases or liabilities (such as the replacement of capital equipment or estimates of bad debts). A typical example is a company where they are used to hold the residue of any profit after all the dividends have been paid. This balance is then carried forward to the following year to be considered, together with the profits for that year, for any further dividends. Retail: A term usually applied to a shop which re-sells other people's goods. This type of business will require a trading account as well as a profit and loss account. Retained earnings: This is the amount of money held in a business after its owner(s) have taken their share of the profits. Retainer: A sum of money paid in order to ensure a person or company is available when required. Retention ratio: The proportion of the profits retained in a business after all the expenses (usually including tax and interest) are taken into account. The algorithm is retained profits divided by profits available for ordinary shareholders (or available for the proprietor/partners in the case of unincorporated companies). Revenue: The sales and any other taxable income of a business (eg. interest earned from money on deposit). Run Rate: A forecast for the year based on the current year to date figures. If a company's 1st quarter profits were, say, $25m, they may announce that the run rate for the year is $100m. Sales: Income received from selling goods or a service. See Revenue. Sales Invoice: See Invoice. Sales Ledger: A subsidiary ledger which holds the accounts of a business's customers. A control account is held in the nominal ledger (usually called a debtors' control account) which shows the total balance of all the accounts in the sales ledger.

50 Self Assessment (UK only): A new style of income tax return introduced for the 1996/1997 tax year. If you are self-employed, or receive an income which is un-taxed at source, you will need to register with the Inland Revenue so that the relevant self assessment forms can be sent to you. The idea of self assessment is to allow you to calculate your own income tax. Self-balancing ledgers: A system which makes use of control accounts so that each ledger will balance on its own. A control account in a subsidiary ledger will be mirrored with a control account in the nominal ledger. Self-employed: The owner (or partner) of a business who is legally liable for all the debts of the business (ie. the owner(s) of a non-limited company). Selling, General & Administrative expense (SG&A): The expenses involved in running a business. Service: A term usually applied to a business which sells a service rather than manufactures or sells goods (eg. an architect or a window cleaner). Shareholders: The owners of a limited company or corporation. Share premium: The extra paid above the face value of a share. Example: if a company issues its shares at $10 each, and later on you buy 1 share on the open market at $12, you will be paying a share premium of $2 Shares: These are documents issued by a company to its owners (the shareholders) which state how many shares in the company each shareholder has bought and what percentage of the company the shareholder owns. Shares can also be called 'Stock'. Shares issued (aka Shares outstanding): The number of shares a company has issued to shareholders. Simple interest: Interest applied to the original sum invested (as opposed to compound interest). Eg. 1000 invested over two years at 10% per year simple interest will yield a gross total of 1200 at the end of the period (10% of 1000=100 per year). Single-step income statement: An income statement where all the revenues are shown as a single total rather than being split up into different types of revenue (this is the most common format for very small businesses). See Profit and Loss, Multiple-step income statement. Sinking fund: An account set up to reduce another account to zero over time (using the principles of amortization or straight line depreciation). Once the sinking fund reaches the same value as the other account, both can be removed from the balance sheet. SME: Small and Medium Enterprises (ie. small and medium size businesses): The distinction between what is 'small' and what is 'medium' varies depending on where you are and who you talk to. Sole trader: See Sole-proprietor. Sole-proprietor: The self-employed owner of a business (see Self-employed). Source document: An original invoice, bill or receipt to which journal entries refer. Stock: This can refer to the shares of a limited company (see Shares) or goods manufactured or bought for re-sale by a business. Stock control account: An account held in the nominal ledger which holds the value of all the stock held in the inventory subsidiary ledger. Stockholders: See Shareholders. Stock Taking: Physically checking a business's stock for total quantities and value. : Valuing a stock of goods bought for manufacturing or re-sale. Straight-line depreciation: Depreciating something by the same (ie. fixed) amount every year rather than as a percentage of its previous value. Example: a vehicle initially costs

51 $10,000. If you depreciate it at a rate of $2000 a year, it will depreciate to zero in exactly 5 years. See Depreciation. : If a company is liquidated (i.e. becomes insolvent), the secured creditors are paid first. If any money is left, the unsecured creditors are then paid. The amount of money owed to the unsecured creditors is termed the 'subordinated debt' of the company. Subsidiary ledgers: Ledgers opened in addition to a business's nominal ledger. They are used to keep sections of a business separate from each other (eg. a Sales ledger for the customers, and a Purchase ledger for the suppliers). (See Control Accounts) Suspense Account: A temporary account used to force a trial balance to balance if there is only a small discrepancy (or if an account's balance is simply wrong, and you don't know why). A typical example would be a small error in petty cash. In this case a transfer would be made to a suspense account to balance the cash account. Once the person knows what happened to the money, a transfer entry will be made in the journal to credit or debit the suspense account back to zero and debit or credit the correct account. T Account: A particular method of displaying an account where the debits and associated information are shown on the left, and credits and associated information on the right. Tangible assets: Assets of a physical nature. Examples include buildings, motor vehicles, plant and equipment, fixtures and fittings. See Intangible assets. Three column cash book: A journal which deals with the day to day cash and bank transactions of a business. The side of a transaction which relates directly to the cash or bank account is usually balanced within the journal and used as a part of the nominal ledger when compiling a balance sheet (ie. only the side which details the sale or purchase needs to be posted to the nominal ledger). Total Cost of Ownership (TCO): The real amount an asset will cost. Example: An accounting application retails at $1000. Support - which is mandatory, costs a further $200 per annum. Assuming the software will be in use for 5 years, TCO will be $2000 (1000+5x200=2000). Trading account: An account which shows the gross profit of a manufacturing or retail business. Transaction: Two or more entries made in a journal which when looked at together reflect an original document such as a sales invoice or purchase receipt. Trial Balance: A statement showing all the accounts used in a business and their balances. Full details Turnover: The income of a business over a period of time (usually a year). Undeposited Funds Account: An account used to show the current total of money received (ie. not yet banked or spent). The 'funds' can include money, cheques, credit card payments, bankers drafts etc. This type of account is also commonly referred to as a 'cash in hand' account. Value Added Tax (VAT - applies to many countries): Value Added Tax, or VAT as it is usually called is a sales tax which increases the price of goods. At the time of writing the UK VAT standard rate is 17.5%, there is also a rate for fuel which is 5% (this refers to heating fuels like coal, electricity and gas and not 'road fuels' like petrol which is still rated at 17.5%). VAT is added to the price of goods so in the UK, an item that sells at £10 will be priced £11.75 when 17.5% VAT is added. Wages: Payments made to the employees of a business for their work on behalf of the business. These are classed as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings). Work in Progress: The value of partly finished (ie. partly manufactured) goods. Write-off: Depreciating an asset to zero in one go.

52 X no entries Y no entries Zero Based Account (ZBA): Usually applied to a personal account (checking) where the balance is kept as close to zero as possible by transferring money between that account and, say, a deposit account. Zero Based Budget (ZBB): Starting a budget at zero and justifying every cost that increases that budget.

1)Commercial paper: These are the short term obligations issued by the corporation or a bank to meet the short term needs like b/r,accurued exp.

2)Money market: The money market is the for short-term borrowing and lending, typically up to one year. This contrasts with the capital market for longer-term funds. In the money markets, banks lend to and borrow from each other, short-term financial instruments such as certificates of deposit

3)Intangible assest Something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent. opposite of tangible asset.

4)operating asset Asset which contributes to the regular income from a company's operations

5)Fictitious assest FICTITIOUS ASSET is debit balance includes on balance sheets as assets that do not conform to the definition of an asset.

6)Fixed asset FIXED ASSETS are those assets of a permanent nature required for the normal conduct of a business, and which will not normally be converted into cash during the ensuring fiscal period.

7)Wasting asset A fixed asset, such as a mine or an oil well, that diminishes in value over time

8)Contingent liability It is a type of liability the ultimate outcome of which depends upon the occurrence or non- occurrence of some future event

9)Earnings per share

53 Earnings available to the equity share holders divided by no of share

10)Good will It is excess of consideration paid over net worth of the assets acquired

11)Capital expenditure Any expenditure incurred for acquiring fixed asset, for reducing the cost of production and increasing the earning capacity of a business

12) Revenue expenditure Any expenditure incurred for day to day running of the business and the maintaining the life of capital asset.

13) Deferred revenue expenditure: It is basically a form of revenue expenditure but the benefit from it continues more than a year

14) Holding company A company is said to be the holding company of other if it holds more than 50% of the total voting power, controls the composition of board of directors further for the subsidiary of subsidiary company

15) Public company A company which has a minimum paid up share capital of RS 5 lakhs and which is not a pvt company is called a public company. Further the subsidiary of a public company is also a public company even though it is incorporated as a pvt company

16) Private company A company which has a minimum paid up share capital of RS 1lakhs, which restricts the right to transfer the shares, which limits the number of members to 50,which prohibits from making an invitation for the acceptance of shares or debentures,

17) Minority interest: Minority interest in business is ownership of a company that is less than 50% of outstanding shares.

18) Earnings per share

Calculated by dividing a company’s net profit by the number of common shares outstanding.

EPS = net profit after taxes – preferred dividends / number of common shares outstanding.

19) Diluted EPS

Diluted EPS is a company's EPS figure as calculated using fully diluted shares outstanding

54 20)current asset Cash and other assets that are capable of being converted into cash within a relatively short time period, usually one year or less.

21)cost of capital The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt.

22)reserve: that portion of current earnings set aside to take care of possible future losses or for other specified purposes.

23) cash flow statement a part of a company's financial reports that records the amounts of cash and equivalents entering and leaving a company.

24) Deferred taxes Deferred taxes arise from temporary differences, due to differences between accounting methods for tax and financial statement purposes.

25)Financial statement A report of basic accounting data that helps investors understand a firm's financial history and activities.

26)Income statement (statement of operations) A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

27)Balance sheet Also called the statement of financial condition, it is a summary of a company's assets, liabilities, and owners' equity.

28)Explanatory notes The explanatory notes communicate additional information regarding items included and excluded from the body of the statement. These normally include: Ex:Accounting policies ,Detailed disclosure regarding individual elements ,Commitments and contingencies

29)Funds from opearations A figure used by real estate investment trusts (REITS) to define the cash flow from their operations. It is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis

30)Under writer: One that guarantees the purchase of a full issue of stocks or bonds.

31)Prepaid expenditure: An asset that arises on a balance sheet because of the payment of something in advance

32)Accured expenses or outstanding exp:

Costs that have been incurred during an accounting period but have not yet been paid.

33)Price earnings ratio:

55 P/E Ratio is calculated by dividing the market price of common stock by its annual earnings per share. p/e ratio = market value/earnings per share

34)Market price: The actual reported price at which the stock or is currently sold in the open market

35)Market value: The total value of a company’s outstanding shares, which is computed by multiplying the market price of the stock by the number of shares outstanding

36)Opportunity cost: The cost of an alternative that must be forgone in order to pursue a certain action.

37)Sunk cost: A cost that has been incurred and cannot be reversed. Also referred to as "stranded cost."

38)Share: A share is a unit of account for various financial instruments including stocks, mutual funds.

39)Mutual fund:

40)Ordinary resolution: A resolution passed by a majority vote by shareholders at a general meeting

41)Special resolution: A resolution passed by a majority of not less than three-fourths of members or share holders.

42)Variable overheads: These are the expenditures that changes according to the volume of production.

43)Fixed exp: These are the expenditures that do not change according to the volume of production.

44)Semivariable exp:

45)Capital: Money or other assets owned or used in operating a business.

46)Asset: Anything an individual or corporation owns is considered an asset.

47)Liability: Debt owed by the company such as bank loans or accounts payable.

48)Budget: An itemized listing, usually prepared annually, of anticipated revenue and projected expenses.

49)sensex-sensitive index

50)NCLT- national company law tribunal

51)CLB-Company law board

56 52)IRDA- insurance regulatory development authority

53)NIFTY-

54)BSE-bombay stock exchange

55)NSE-national stock exchange

56)preliminary expenditure: Expenditure incurred before the incorporation of a company

57)Debenture:a document issued in acknowledgement of a debt.

58)LIBOR: London inter bank offer rate

59)MIBOR :Mumbai inter bank offer rate

60)Book value: The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation.

61)Net-worth: Net worth (sometimes "net assets") is the total assets minus total liabilities of an individual or company. For a company, this is called shareholders' equity or net assets.

62) Assets = Liabilities + Shareholders' Equity

63) assets - liabilities = shareholders' equity

64)Bills receivable:

Money which is owed to a company by customers who have bought goods and services on credit. It is a current asset that will repeatedly turn into cash as customers pay their bills. Also known as receivables.

65)Bills payable:

The money a company owes for goods, services and supplies purchased for use in a company’s operations.

66)Notes payable: Short-term obligations that are payable in a year or less.

1)Certificate required for incorporation of a pvt company is CERTIFICATE OF INCORPORATION

57 2)Certificate required for incorporation of a public company is CERTIFICATE OF COMMENCEMENT OF BUSINESS

3)Maximum number of directors in a pvt ltd company is SEVEN

4)Maximum number of directors in Public Ltd Company is NO LIMIT

5)The persons who form the company are called PROMOTERS

6)Articles of association: It is a document containing rules and regulations for internal management of a company.

7)Prospectus: Any document issued as a prospectus and includes any notice or advertisement inviting applications from public for subscription of shares and debentures of a company.(chapter: 6 page no:1)

8)Red herring prospectus: It is a prospectus issued before the issue of final prospectus to test and finalise ISSUE SIZE and ISSUE PRICE.

9)Book building: It is a process under which investor has given an option to choose the price from the given price band.

10)Shelf prospectus: It means a prospectus issued by financial institution or bank for one or more issues of the securities mentioned in prospectus.

11)Information memorandum(tell in your own words): At the second and subsequent stages of issue of securities the company will have to file information memorandum to explain the new charges created and to show the change in financial position.

12)Allotment of share: When a share application is accepted it is called allotment.

13)Equity shares: Equity shares are those which are not preference shares.

14)Preference shares: Preference shares means the shares which has preference in respect of payment of dividends and repayment of share capital in case of winding up of a company.

15)Equity shares VS preference shares: Equity shares have voting rights but preference shares have no voting rights. Preference shares are repaid after certain period but equity shares are repaid at the time winding up

58 of the company only. Preference share holders are given priority in case of payment of dividend and repayment of capital.

16)Sweat equity shares: Equity shares issued by the company to the employees or the directors at a discount or for a consideration other than cash.

17)Accounting assumptions: a) going concern: as per this it is assumed that the company has no necessity or intention of closing the business in a near future. b)consistency: as per this it is assumed that the accounting policies are followed consistently (with out any change) c)accrual:costs and revenues are recognized when they are incurred or earned but not when the money is received.

18)Reserve: It is the amount set aside from the current profits to meet any unforeseen contingencies. No amount is transferred to reserves incase the company is in losses.

19)Provision: It is a charge against the profits to meet

20)Quoram: Minimum number of persons required to conduct a meeting. Quoram for Pvt Ltd Co is 2 members and for a public company is 5 members.

21) Minimum number of members for a pvt ltd company is 2 and for public ltd company is 3.

22)Maximum number of members for a pvt ltd company is 50 and for public ltd company there is no limit.

23)Minimum number of directors for a pvt ltd company is 2 and for public ltd company is 3.

24)Minimum subscription: It is minimum amount that must be raised through the issue of shares for meeting preliminary expenses, commission, Working capital etc.

25)Proxy: Proxy refers to the person representing a member and also the form in which the person is appointed.

26)Minutes:

59 It is official recording of the proceedings of the meeting.

27) Capital reserve: Capital reserve means any reserve other than the revenue reserve.EX: premium on issue of shares,profit on redemption of debentures, Premium on issue of debentures.

28)Reserve capital: It is the part of the uncalled capital of the company which can be called up in the event of winding up of the company.

29)Revenue reserve: A reserve which is available for distribution as a dividend through profit and loss a/c.

30)Minority interests: Minority interest is the ownership in a company that is less than 50% of outstanding shares. Understand this line: revenue and expenses from the minority interest is shown in the income statement.

31)Depriciation: Decrease in the value of an asset due to wear & tear, usage and passage of time.

32)Amortization: Write off of the intangible assets.

Materiality concept: The term materiality means important. An item is considered material if it’s omission or mis- statement will misrepresent the view given by the financial statement.

Conservatism principle: Anticipate no profits but anticipate every loss.

Deferred revenue expenditure: Deferred revenue expenditure is an expenditure which is basically revenue in nature but the benefit from it continues even after the expiry of period in which it is incurred. Treatment: It should be written off over the period during which the benefit will araise. ii)Exceptional losses suffered due to natural calamities, social disturbances etc. Treatment: carried forward and written off against future profits.

Depreciation: Depreciation means decrease in the value of an asset due to wear & tear,obsolescence and Passage of time. It is related to fixed assets. It is a non-cash revenue expenditure.

General reserve: A reserve which is created out of revenue profits is a general reserve. It is appropriation of the profits. Therefore no transfer is made to this in the year of loss. Objectives:

60 To strengthen the financial position of a company. To meet any unknown expenditure. For the expansion of the business.

Capital reserve: A reserve which is created out of capital profits is a capital reserve. Ex: premium received on issue of debentures and shares. Sale of the fixed assets above the cost.

Specific reserve: A reserve which is created for meeting any specific need is called specific reserve. Ex:Debenture redemption reserve, business expansion reserve etc.

Reserve VS provision: i) reserve is created by debiting profit & loss appropriation account whereas provision is created by debiting profit & loss a/c. ii)reserve is appropriation of profits where as provision is charge against profits. iii)Creations of the reserves depend up on the profits where as provision does not depend up on the profits. So provision must be created in the year of loss. iv)Reserves are shown under reserves and surplus head on the liability side of balance sheet where as the provisions are shown under current liabilities.

Voucher: A voucher is defined as any documentary evidence in support of a transaction.

 Non cash expenditure:depreciation,amotization.  Schedule vi contains the form of balance sheet.  Contribution=sales – variable expenditure OR profit + fixed expenditure.

Matching concept: Income should be properly matched with the expenses of a given accounting period.

Break even point: The point at which there are no profits or loss OR value of the sales necessary to cover the fixed costs

Direct costs: The costs that are traceable to a particular product.

Indirect costs: The costs that are not traceable to a particular product.

Memorandum of association: It is constitutional document of a company that deals with the matters like company name, registered office, capital etc.

Retained profits: Retained profits are those profits that not have been paid as dividends but retained for future investment of the company.

61 Sunk cost: Sunk costs are those costs that are already incurred.

Working capital cycle: Cash  work in progress finished goods debtors cash

Accounting policies:

Accounting principles:

Cash profit: It is the profit before deducting non cash expenditure such as depreciation,amortisation. Cash profit=net profit+non cash expenditure OR gross profit-cash expenses.

Share premium: It is the excess of the consideration paid or payable over the face value of the share.

Cash discount:

Trade discount: A discount on the list price granted by a manufacturer or wholesaler to buyers in the same trade.

Operating income: The profit realised from a business own operations.It does not include income from things such as investments in other firms.

Bad debts:

Three main type of accounts: Personal account:debit the receiver Credit the giver Real account:debit what comes in Credit what goes out Nominal account:expenses &losses debit Income & profits credit

62 AS 1: Disclosure of Accounting Policies

1) The Accounting policies refer to the  Specific accounting principles and  the methods of applying those principles Accounting policies will be adopted by the enterprise in the preparation and presentation of financial statements.

2) Examples of the areas in which different accounting policies may be adopted by different enterprises. • Methods of depreciation, depletion and amortization • Treatment of expenditure during construction • Conversion or translation of foreign currency items • Valuation of inventories • Treatment of goodwill • Valuation of investments • Treatment of retirement benefits • Recognition of profit on long-term contracts • Valuation of fixed assets

3) Fundamental Accounting Assumptions Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. The following have been generally accepted as fundamental accounting assumptions:— a. Going Concern The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. b. Consistency It is assumed that accounting policies are consistent from one period to another. c. Accrual Revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this Statement.)

4) Major considerations governing the selection and application of accounting policies are:— a. Prudence In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. b. Substance over Form The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. c. Materiality Financial statements should disclose all "material" items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements.

5) ACCOUNTING STANDARD

63 a. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. b. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. c. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. d. If the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.

AS- 6 : Accounting for Depreciation

Depreciation is a measure of the loss of value of a depreciable asset arising from  Use  Effluxion of time  Obsolescence through technology and market changes.

Change of Method of Depreciation: The depreciation method selected should be applied consistently from period to period. A change from one method of providing depreciation to another should be made only if,  The adoption of the new method is required by statute or for compliance with an accounting standard  If it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.

When such a change in the method of depreciation is made,  Depreciation should be recalculated in accordance with the new method from the date of the asset coming into use.  The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus should be credited to the statement of profit and loss. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

Some important concepts

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. Branches of accounting a. financial accounting b. management accounting

4. Concepts of accounting:

64 A. separate entity concept B. going concern concept 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.

5 Conventions of accounting A. conservatism B. full disclosure C. consistency D materiality.

6. Systems of book keeping: A. single entry system B. double entry system

7. Systems of accounting A. cash system accounting B. mercantile system of accounting. - 65 - 8. 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 9. Meaning of journal: journal means chronological record of transactions.

10 Meaning of ledger: ledger is a set of accounts. It contains all accounts of the business enterprise whether real, nominal, personal.

11. Posting: it means transferring the debit and credit items from the journal to their respective accounts in the ledger.

12. Trial balance: trial balance is a statement containing the various ledger balances on a particular date.

13. 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.

14. 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.

15. Contra entry: which accounting entry is recorded on both the debit and credit side of the cash book is known as the contra entry.

16. Petty cash book: petty cash is maintained by business to record petty cash expenses of the business, such as postage, cartage, stationery, etc.

17.promisory 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.

18. Cheque: a bill of exchange drawn on a specified banker and payable on demand.

19. 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 pass book 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.

65 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 means 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 point 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

66 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

67 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 68 • 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 centre.

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.

69 94. Venture capital: It refers to the financing of high risk ventures promoted by new qualified entrepreneurs who require funds to give shape to their ideas.

95. Debt securitization: It is a mode of financing, where in securities are issued on the basis of a package of assets (called asset pool).

96. Lease financing: Leasing is a contract where one party (owner) purchases assets and permits its views by another party (lessee) over a specified period

97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of business.

98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed to overdraw from his account.

99. Cash credit: It is an arrangement under which a customer is allowed an advance up to certain limit against credit granted by bank.

100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any tangible security.

101. Share capital: The sum total of the nominal value of the shares of a company is called share capital.

102. Funds flow statement: It is the statement deals with the financial resources for running business activities. It explains how the funds obtained and how they used.

103. Sources of funds: There are two sources of funds Internal sources and external sources.

Internal source: Funds from operations is the only internal sources of funds and some important points add to it they do not result in the outflow of funds (a)Depreciation on fixed assets (b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the following items as they do not increase the funds: Profit on sale of fixed assets, profit on revaluation of fixed assets

External sources: (a) Funds from long term loans (b) Sale of fixed assets (c) Funds from increase in share capital

104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of tax liability (d) Payment of fixed liability

105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For example 6 months or less from another company which have surplus liquidity. Such deposits made by one company in another company are called ICD.

106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt issued by banks there is no prescribed interest rate on such CDs it is based on the prevailing market conditions.

107. Public deposits: It is very important source of short term and medium term finance. The company can accept PD from members of the public and shareholders. It has the maturity period of 6 months to 3 years.

108.Euro issues: The euro issues means that the issues 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.

70 111.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.

71 131. 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.

72 152. 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

73 172.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.

74 194. 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

75 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 X 100 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.

76 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 X 100 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 Interest + Principal payment installment 1- Tax rate

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.

77  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

78 236.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.

79 256 . 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 cumulates 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.

80 279. 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

Mutual Funds

Mutual Fund

A security that gives small investors access to a well- diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed.

The fund's net asset value (NAV) is determined each day. Each mutual fund portfolio is invested to match the objective stated in the prospectus.

It has been shown in study after study that a majority of mutual funds fail to beat the market. Also, picking mutual funds purely on the basis of past performance usually does not work.

81 Closed-End Investment

When an investment company issues a fixed number of shares in an actively managed portfolio of securities. The shares are traded in the market just like common stock.

Most mutual funds are open-end funds, not closed-end. The main difference with closed-end funds is that market price of the shares is determined by supply and demand and not by net-asset value (NAV).

Also known as a "closed-end mutual fund" or "closed-end fund".

Open-End Fund

A mutual fund that continues to sell shares to investors, and will buy back shares when investors wish to sell.

Open-end funds have no limit to the number of shares they can issue. The majority of mutual funds are open end.

Units are bought and sold at their current NAV.

NAV – Funds & Investment Trusts

"Net asset value," or "NAV," of an investment company is the company’s total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, the investment company’s NAV will be $90 million. Because an investment company’s assets and liabilities change daily, NAV will also change daily. NAV might be $90 million one day, $100 million the next, and $80 million the day after.

Mutual funds and Unit Investment Trusts (UITs) generally must calculate their NAV at least once every business day, typically after the major U.S. exchanges close. A closed-end fund, whose shares generally are not "redeemable"—that is, not required to be repurchased by the fund—is not subject to this requirement.

An investment company calculates the NAV of a single share (or the "per share NAV") by dividing its NAV by the number of shares that are outstanding. For example, if a mutual fund has an NAV of $100 million, and investors own 10,000,000 of the fund’s shares, the fund’s per share NAV will be $10. Because per share NAV is based on NAV, which changes daily, and on the number of shares held by investors, which also changes daily, per share NAV also will change daily. Most mutual funds publish their per share NAVs in the daily newspapers.

The share price of mutual funds and traditional UITs is based on their NAV. That is, the price that investors pay to purchase mutual fund and most UIT shares is the approximate per share NAV, plus any fees that the fund imposes at purchase (such as sales loads or purchase fees). The price that investors receive on redemptions is the approximate per share NAV at redemption, minus any fees that the fund deducts at that time (such as deferred sales loads or redemption fees).

82 For the statutory and regulatory provisions relating to net asset value (NAV), refer to the Investment Company Act of 1940 and the rules adopted under that Act, in particular Section 2(a)(41), and Rules 2a-4 and 22c-1.

FINANCIAL STATEMENTS

FASB Statement of Financial Accounting Concepts (SFAC) No. 5 "Recognition and Measurement in Financial Statements of Business Enterprises"

Statement Topics A full set of financial statements for a period should show: Financial position at the end of the period SFAC Earnings (net income) for the period No.5 Comprehensive income (total nonowner changes in equity) for the period Cash flows during the period Investments by and distributions to owners during the period Comprehensive income is a broad measure of the effects of transactions and other SFAC events on an equity, comprising all recognized changes in equity (net assets) of the No.5 entity during a period from transactions and other events and circumstances except those resulting from investments by owners and distributions to owners. Primary Financial Statements Balance Sheet: Reports the financial position at the end of the period. Income Statement: Reports the results of operations for the period. Statement of Cash Flows: Reports cash inflows and outflows during the period. Statement of Stockholders' Equity: Reports the changes in stockholders' equity during the period. Components of Balance Sheet Assets: Represents future economic benefits. Liabilities: Represents future economic sacrifices. Stockholders' Equity: Represents the residual portion of the assets after subtracting liabilities. (Stockholders' Equity = Assets - Liabilities) Accounting Equation Assets = Liabilities + Stockholders' Equity Components of Income Statement Revenues Expenses Net Income = Revenues - Expenses Components of the Statement of Cash Flows Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Components of the Statement of Stockholders' Equity Common Stock Additional Paid-in Capital (Paid-in capital in excess of par value) Retained Earnings

What are Basic Earnings Per Share?

83 Basic Earnings per share (Basic EPS) tells an investor how much of the company's profit belongs to each share of stock. If company ABC reported earnings of $100 million dollars and had 20 million shares outstanding, the basic EPS would be $5 ($100 million earnings ÷ 20 million shares outstanding = $5 per share). The figure is important because it allows analysts to value the stock based on the price to earnings ratio (or p/e ratio for short).

Basic EPS are not as accurate as Diluted EPS.

What are Diluted Earnings Per Share?

Diluted earnings per share (Diluted EPS) takes the basic earnings per share figure one step further. Basic EPS only takes into account the number of shares outstanding at the time. Diluted EPS, on the other hand, estimates how many shares could theoretically exist after all stock options, warrants, preferred stock and / or convertible bonds have been exercised.

The theory goes that because some or all of these investments could be converted or exercised, the number of shares outstanding could increase at any time. This reduces the amount of a company's earnings each share is entitled to. In doing so, the price to earnings ratio becomes higher, and the stock appears more expensive.

In most cases, the diluted earnings-per-share figure is far more accurate estimation of the total earnings per share and receive special attention when valuing a company.

Ratios for Financial Statement Analysis

Liquidity Analysis Ratios Current Ratio Current Assets Current Ratio = ------Current Liabilities

Quick Ratio Quick Assets Quick Ratio = ------Current Liabilities

Quick Assets = Current Assets - Inventories

Net Working Capital Ratio Net Working Capital Net Working Capital ------Ratio = Total Assets Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios

Return on Assets (ROA) Net Income Return on Assets ------(ROA) =

84 Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets)/2

Return on Equity (ROE) Net Income Return on Equity ------(ROE) = Average Stockholders' Equity

Average Stockholders' Equity = (Beginning Stockholders' Equity + Ending Stockholders' Equity)/2

Return on Common Equity (ROCE) Net Income Return on Common ------Equity (ROCE) = Average Common Stockholders' Equity

Average Common Stockholders' Equity=(Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity)/2

Profit Margin Net Income Profit Margin = ------Sales

Earnings Per Share (EPS) Net Income Earnings Per ------Share (EPS) = Weighted Average Number of Common Shares Outstanding

Activity Analysis Ratios

Assets Turnover Ratio Sales Assets Turnover Ratio = ------Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Accounts Receivable Turnover Ratio Sales Accounts Receivable Turnover ------Ratio = ------Average Accounts Receivable Average Accounts Receivable= (Beginning Accounts Receivable + Ending Accounts Receivable)/2

Inventory Turnover Ratio Cost of Goods Sold Inventory Turnover Ratio ------= Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories)/2

85 Capital Structure Analysis Ratios

Debt to Equity Ratio Total Liabilities Debt to Equity Ratio = ------Total Stockholders' Equity

Interest Coverage Ratio Income Before Interest and Income Tax Expenses Interest Coverage ------Ratio = Interest Expense

Income Before Interest and Income Tax Expenses= Income Before Income Taxes + Interest Expense

Capital Market Analysis Ratios

Price Earnings (PE) Ratio Market Price of Common Stock Per Share Price Earnings (PE) Ratio ------= - Earnings Per Share

Market to Book Ratio Market Price of Common Stock Per Share Market to Book ------Ratio = Book Value of Equity Per Common Share

Book Value of Equity Per Common Share= Book Value of Equity for Common Stock/Number of Common Shares

Dividend Yield Annual Dividends Per Common Share ------Dividend Yield = ------Market Price of Common Stock Per Share

Book Value of Equity Per Common Share= Book Value of Equity for Common Stock/Number of Common Shares

Dividend Payout Ratio Cash Dividends Dividend Payout Ratio = ------Net Income

ROA = Profit Margin X Assets Turnover Ratio

ROA = Profit Margin X Assets Turnover Ratio Net Income Net Income Sales ------ROA = ------Average Total Average Total Sales Assets Assets Profit Margin = Net Income/Sales Assets Turnover Ratio = Sales/Averages Total Assets

86 Stock Indexes

Stock indices are benchmarks that are used to gauge the performance of a group of stocks. There are many different types of indices and each of them is unique in its own way. This section will take a look at the major stock indices that investors use and why they use them.

Dow Jones Industrial Average

The Dow Jones Industrial average is by far the most famous of all the stock indices. It is composed of 30 widely traded blue chip stocks (large, well-established companies that are leaders in their respective industries). The 30 stocks are chosen by the editors of the Wall Street Journal (which is published by Dow Jones & Company), a practice that dates back to the beginning of the century. The Dow was officially started by Charles Dow in 1896, at which time it consisted of only 11 stocks.

The Dow is computed using a price-weighted indexing system. Simply put, the editors at WSJ add up the prices of all the stocks and then divide by the number of stocks in the index. (In actuality, the divisor is much higher today in order to account for stock splits that have occurred in the past.) The Dow is highly regarded for its simplicity and its history.

However, there are some disadvantages in using the Dow as a benchmark. First of all, the Dow only includes prices for 30 stocks, yet there are thousands of publicly traded stocks on the market. Critics of the Dow therefore question whether or not the Dow is a representative snapshot of the market as a whole. Another problem with the Dow is that it is weighted by price, instead of market capitalization. So, for example, a stock that trades at $100 but has a market cap of only $1 billion will receive more weight than a stock that trades at $50 but has a market cap of $5 billion. Most experts agree that market capitalization-weighted indices better reflect the market's performance than price-weighted indexes.

Nasdaq Composite

Not surprisingly, the Nasdaq Composite tracks all of the stocks listed on the Nasdaq exchange. The index dates back to 1971, which is when the Nasdaq exchange was first formalized. The index is used mainly to track technology stocks, and thus it is not a good indicator of the market as a whole. Unlike the Dow, the Nasdaq is market capitalization-weighted, so it takes into account the total market value of the companies it tracks and not just their prices. Since the index tracks all of the 5000+ stocks listed on the Nasdaq, it includes more than just a representative sample of the technology industry.

87 Critics charge, however, that the index tracks too many small companies whose performance increases the index's .

About indices

A stock market index is a listing of stocks, and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalizations. Many indices compiled by news or financial services firms are used to benchmark the performance of portfolios such as mutual funds.

Types of indices

Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock market— and by proxy, reflects investor sentiment on the state of the economy. The most regularly quoted market indices are broad- base indices including the largest listed companies on a nation's largest stock exchange, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40, the German DAX and the Japanese Nikkei 225.

The concept may be extended well beyond an exchange. The Dow Jones Wilshire 5000 Total Stock Market Index, as its name implies, represents the stocks of nearly every publicly traded company in the United States, including all stocks traded on the New York Stock Exchange and most traded on the NASDAQ and American Stock Exchange. The Europe, Australia, and Far East Index (EAFE), published by Morgan Stanley Capital International, is a listing of large companies in developed economies in the Eastern Hemisphere.

More specialized indices exist tracking the performance of specific sectors of the market. The Morgan Stanley Biotech Index, for example, consists of 36 American firms in the biotechnology industry. Other indices may track companies of a certain size, a certain type of management, or even more specialized criteria— one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linux operating environment.

Weighting

An index may also be classified according to the method used to determine its price. In a Price-weighted index such as the Dow Jones Industrial Average, the price of each component

88 stock is the only consideration when determining the value of the index. Thus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively highly valued issue, and moreover ignoring the relative size of the company as a whole. In contrast, a market-value weighted or capitalization-weighted index such as the Hang Seng Index factors in the size of the company. Thus, a relatively small shift in the price of a large company will heavily influence the value of the index. In a market-share weighted index, price is weighted relative to the number of shares, rather than their total value.

Traditionally, capitalization- or share-weighted indices all had a full weighting i.e. all outstanding shares were included. Recently, many of them have changed to a float- adjusted weighting which helps indexing. Indices and passive investment management

There has been an accelerating trend in recent decades to create passively managed mutual funds that are based on market indices, known as index funds. Advocates claim that index funds routinely beat a large majority of actively managed mutual funds; one study claimed that over time, the average actively managed fund has returned 1.8% less than the S&P 500 index. Since index funds attempt to replicate the holdings of an index, they obviate the need for— and thus many costs of— the research entailed in active management, and have a lower "churn" rate (the turnover of securities which lose favor and are sold, with the attendant cost of commissions and capital gains taxes). Indices are also a common basis for a related type of investment, the exchange-traded fund or ETF. Unlike an index fund, which is priced daily, an ETF is priced continuously, is optionable, and can be sold short.

Ethical stock market indices

A notable specialized index type is those for ethical investing indices that include only those companies satisfying ecological or social criteria, e.g. those of The Calvert Group, Domini, Dow Jones Sustainability Index and Wilderhill Clean Energy Index.

Another important trend is strict mechanical criteria for inclusion and exclusion to prevent market manipulation, e.g. as in Canada when Nortel was permitted to rise to over 50% of the TSE 300 index value. Ethical indices have a particular interest in mechanical criteria, seeking to avoid accusations of ideological bias in selection, and have pioneered techniques for inclusion and exclusion of stocks based on complex criteria. Another means of mechanical selection is mark-to-future methods that exploit scenarios produced by multiple analysts weighted according to probability, to

89 determine which stocks have become too risky to hold in the index of concern.

Critics of such initiatives argue that many firms satisfy mechanical "ethical criteria", e.g. regarding board composition or hiring practices, but fail to perform ethically with respect to shareholders, e.g. Enron. Indeed, the seeming "seal of approval" of an ethical index may put investors more at ease, enabling scams. One response to these criticisms is that trust in the corporate management, index criteria, fund or index manager, and securities regulator, can never be replaced by mechanical means, so "market transparency" and "disclosure" are the only long-term-effective paths to fair markets.

Investment Bank & Institutional Investor

Investment Bank

A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.

The role of the investment bank begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice.

Investment Banker

A person representing a financial institution that is in the business of raising capital for corporations and municipalities.

An investment banker may not accept deposits or make commercial loans. Investment bankers are the people who do the grunt work for IPOs and bond issues.

Institutional Investor

A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face less protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.

90 Watching what the big money is buying can sometimes be a good indicator, as they (supposedly) know what they are doing. Some examples of institutional investors are pension fund and life insurance companies.

Public Offerings

Initial Public Offering - IPO

The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately- owned companies looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.

Also referred to as a "public offering".

IPOs can be a risky investment. For the individual investor it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data to analyze the company with. Also, most IPOs are of companies going through a transitory growth period and are therefore subject to additional uncertainty regarding their future value.

Follow-On Offering

An offering of additional shares after a company has had an .

This sometimes means the company is strapped for cash. So they need to issue more shares to pay bills or finance a new project.

Secondary Offering

A sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The underwriting proceeds are paid to the stockholders, rather than to the corporation.

Typically, such an offering occurs when the founder of a business (and perhaps some of the original financial backers) determine that there is more to be gained by going public than

91 by staying private. The offering does not increase the number of shares of stock outstanding.

Prospectus

1. A formal legal document describing details of a corporation. The prospectus is generally created for a proposed offering (usually an IPO), but they can still be obtained from existing businesses as well. The prospectus includes company facts that are vitally important to potential investors.

2. In this case of mutual funds, a prospectus describes the fund's objectives, history, manager background, and financial statements.

The prospectus is a document that makes investors aware of the risks of an investment.

Underwriting

1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).

2. The process of issuing insurance policies.

The word "underwriter" is said to have come from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment.

Underwriter

A company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer and sells them to investors via the underwriter's distribution network.

Underwriters generally receive underwriting fees from their issuing clients, but they also usually earn profits when selling the underwritten shares to investors. However, underwriters assume the responsibility of distributing a securities issue to the public. If they can't sell all of the securities at the specified offering price, they may be forced

92 to sell the securities for less than they paid for them, or retain the securities themselves.

Lead managers and co-managers are those companies that administer more than the other underwriters.

Greenshoe Option

An option that allows the underwriting of an IPO to sell additional shares to the public if the demand is high.

The name comes from the fact that the Green Shoe Company was the first to issue this type of option.

Overallotment Option

The option given to the underwriters to sell more securities than are available in an IPO.

Investors (on a so-called waiting list) hope that some orders will not be confirmed so they can then get in.

Lock-Up Agreement

A legally binding contract between the underwriters and insiders of a company prohibiting these individuals from selling any shares of stock for a specified period of time. Lock-up periods typically last 180 days (six months) but can on occasion last for as little as 120 days or as long as 365 days (one year).

Underwriters will have company executives, managers, employees and venture capitalists sign lock-up agreements to ensure an element of stability in the stock's price in the first few months of trading. When lock-ups expire, restricted people are permitted to sell their stock, which sometimes (if these insiders are looking to sell their stock) results in a drastic drop in share price due to the huge increase in supply of stock.

Lock-Up Shares

The number of shares that are prohibited from any sale or exchange for a specified period of time

A man was seated next to a kid in an airplane.

The man turned to him and said,"Let's Talk."

Kid: Ok,What do we talk about?

93 Man(Making fun of the kid): How about nuclear power?

Kid: Very interesting topic. But let me ask you a question ..

Horse Cow & Deer, all eat grass. Yet deer excretes pellets, cow flat potty & horse clumps. Why?

Man: I don't know.

Child: Do you really feel qualified enough to discuss nuclear issues when you dont Even know shit?

Child Rocked, Man Shocked.

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