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3. Concepts of accounting:
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.
4 Conventions of accounting
A. conservatism
B. full disclosure
C. consistency
D materiality.
6. Systems of accounting
A. cash system accounting
B. mercantile system of accounting.
7. Principles of accounting
c. nominal a/c : Debit all expenses and losses credit all gains and incomes
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.
18. Steale cheque: A stale cheque means not valid of cheque that means
more than six months the cheque is not valid.
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.
30.Intanglbe Assets: Intangible assets mean the assets which is not having
the physical appearance. And its have the real value, it shown on the assets
side of the balance sheet.
31. Accrued Income : Accrued income means income which has been
earned by the business during the accounting year but which has not yet
been due and, therefore, has not been received.
32. Out standing Income : Outstanding Income means income which has
become due during the accounting year but which has not so far been
received by the firm.
38. Equity shares: those shares which are not having pref. rights are called
equity shares.
39. Pref.shares: Those shares which are carrying the pref.rights is called
pref. shares Pref.rights in respect of fixed dividend. Pref.right to repayment
of capital in the even of company winding up.
40. Leverage: It is a force applied at a particular work to get the desired
result.
41. Operating leverage: The operating leverage takes place when a changes
in revenue greater changes in EBIT.
43. Combine leverage: it is used to measure of the total risk of the firm =
operating risk + financial risk.
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.
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.
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.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
68. Secret reserves: secret reserves are reserves the existence of which does
not appear on the face of balance sheet. In such a situation, net assets
position of the business is stronger than that disclosed by the balance sheet.
These reserves are crated by:
1.Excessive dep.of an asset, excessive over-valuation of a liability.
2.Complete elimination of an asset, or under valuation of an asset.
69. Provision: provision usually means any amount written off or retained
by way of providing depreciation, renewals or diminutions in the value of
assets or retained by way of providing for any known liability of which the
amount can not be determinedwith substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for
the purpose it was originally made is also considered as reserve Provision is
charge against profits while reserves is an appropriation of profits Creation
of reserve increase proprietors fund while creation of provisions decreases
his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which
clear investment etc
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.
80. Financial break-even point: It denotes the level at which a firms EBIT is
just sufficient to cover interest and preference dividend.
82. Pay back period: 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.
86. IRR: Internal rate of return is the rate at which the sum total of
discounted cash inflows equals the discounted cash out flow.
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.
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
External sources: (a) Funds from long-term loans (b) Sale of fixed assets
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.
134. Components of total costs: (A) Prime cost (B) Factory cost (C)Total cost
of production (D) Total cost
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.
138. Total cost: Selling and distribution overheads are added to total cost of
production to get the total cost or cost of sales.
142. Standard costing: Standard costing is a system under which the cost of
the product is determined in advance on certain predetermined standards.
144. Derivative: Derivative is product whose value is derived from the value
of one or more basic variables of underlying asset.
147. Options: An option gives the holder of the option the right to do some
thing. The option holder option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation
to buy an asset by a certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to
sell an asset by a certain date for a certain price.
150. Option price: Option price is the price which the option buyer pays to the
option seller. It is also referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called
expiration date.
152. European option: Tt is the option at exercised only on expiration date it
self.
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.
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.
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.
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.
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.
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.
186. AMC : The AMC describes Asset Management Company, it is the business
face of the MF, as it manages all the affairs of the MF.
187. R & T Agents : The R&T agents are responsible for the investor servicing
functions, as they maintain the records of investors in MF.
188. Custodians : Custodians are responsible for the securities held in the
mutual funds portfolio.
189. Scheme take over : If an existing MF scheme is taken over by the another
AMC, it is called as scheme take over.
190.Meaning of load: Load is the factor that is applied to the NAV of a scheme
to arrive at the price.
193.Price earning ratio : The ratio between the share price and the post tax
earnings of company is called as price earning ratio.
194. Dividend yield : The dividend paid out by the company, is usually a
percentage of the face value of a share.
195. Darket risk : It refers to the risk which the investor is exposed to as a
result of adverse
movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk : It the risk which an investor has to face as a result of
a fall in the
interest rates at the time of reinvesting the interest income flows from the
fixed income security.
197. Call risk : Call risk is associated with bonds have an embedded call option
in them. This option hives the issuer the right to call back the bonds prior to
maturity.
198. Credit risk : Credit risk refers to the probability that a borrower could
default on a
commitment to repay debt or band loans
199.Inflation risk :Inflation risk reflects the changes in the purchasing power of
the cash flows
resulting from the fixed income security.
200 Liquid risk : It is also called market risk, it refers to the ease with which
bonds could be traded in the market.
201.Drawings : Drawings denotes the money withdrawn by the proprietor from
the business for his personal use.
204.Closing stock : The term closing stock means goods lying unsold with the
businessman at the end of the accounting year.
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.
Formula :
profits available for Equity shareholders
--------------------------------------------------- X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): It shows the amount of earnings
attributable to each equity share.
Formula : profits available for Equity shareholders
---------------------------------------------------
Number of Equity shares
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.
215.Fixed Assets ratio : This ratio explains whether the firm has raised
adepuate long-term funds to meet its fixed assets requirements.
216 . Quick Ratio : The ratio termed as liquidity ratio. The ratio is ascertained
y comparing the
liquid assets to 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.
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.
219.Creditors Turnover Ratio : It indicates the speed with which the payments
for credit purchases are made to the creditors.
221.Fixed Assets Turnover ratio : This ratio indicates the extent to which
the investments in fixed assets contributes towards sales.
Formula :
Operating profit
----------------------- X 100
Capital employed
224 . Fixed Interest Cover ratio : The ratio is very important from the
lenders point of view. It indicates whether the business would earn
sufficient profits to pay periodically the 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.
226. Debt Service Coverage ratio : This ratio is explained ability of a company
to make payment of principal amounts also on time.
230.Concepts of accounting :
231. Financial analysis : The process of interpreting the past, present, and
future financial condition of a company.
237. Budgeting : The term budgeting is used for preparing budgets and other
producer for
planning,co-ordination,and control of business enterprise.
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.
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.
255. What are the ex-ordinary items in the P&L a/c : The transaction which are
not related to the business is termed as ex-ordinary transactions or ex-
ordinary items. Egg:- profit or losses on the sale of fixed assets, interest
received from other company investments, profit or loss on foreign
exchange, unexpected dividend received.
256 . Share premium : The excess of issue of price of shares over their face
value. It will be showed with the allotment entry in the journal, it will be
adjusted in the balance sheet on the liabilities side under the head of
reserves & surplus.
260. Capital Work In Progress : Expenditure on capital assets which are in the
process of construction as completion.
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.
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.
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 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.
3) Working Capital Cycle: The Cycle of working capital rotates from cash,
raw materials, overheads, work-in-progress, debtors and ends with again
cash.
9)NPV: Net Present Value: The difference between the present value of
cash inflows and the present value of cash outflows. NPV is used in capital
budgeting to analyze the profitability of an investment or project
10) Internal Rate of Return: It is the rate at which the sum totals of cash
inflows after discounting equals to the discounted cash outflows. The IRR of
a project is the discount rate which makes net present value of the project
equal to zero.
13)Profit & loss account Vs Cash flow statement: P & L a/c is a period end
account which gives the details of revenue earned with that of the expenses
charged shows the net profit or loss for the period.
Cash flow statement is as on date statement which gives the details of flow
of cash through receipts and expenses irrespective of revenues and
expenditure.
14) Operating income Vs Net income: Income generated from the regular
operating activities of the business is called operating income.
Income that is left after taking into consideration of operating income,
expenses, non-operating income and non-operating expenses and income
taxes is called net income.
15) Gross working capital Vs Net working capital: The total of investments
in all current assets is known as gross working capital.
Excess of total current assets over total current liabilities is called net
working capital.
17) Interim dividend Vs Final dividend: Dividend which is paid in the middle
of the fiscal year or before the due date in accordance with the provisions of
the companies act is called as Interim dividend.
Dividend paid as on due date as per the provisions of the companies act is
called final dividend. If the interim dividend is paid then the final dividend
will be paid after excluding the interim dividend.
18)Net worth.: The total of share holders funds and reserves and surplus
after deducting fictitious assets is called as net worth.
20) P/E Ratio: It is the relationship between the contribution and sales
values. It is expressed as a percentage.
Contribution/sales * 100 = (Sales-Variable costs)/Sales * 100.
21) Premium on shares: When the shares are issued at a value more than
the nominal value then it is called shares issued at premium.
22) Discount on shares: When the shares are issued at less than the nominal
value then it is called shares issued at discount.
23) Bull market/Bear market: When stock prices are rising for an extended
period, it is called bull market which is an opposite to that of bear market.
24) Retained Earnings: Which is nothing but the balance carried forward in
the profit and loss account to the next year shown under reserves and
surplus.
OR
The percentage of net earnings not paid out as dividends, but retained by
the company to be reinvested in its core business or to pay debt. It is
recorded under reserves and surplus on the balance sheet.
25) Fixed asset/Financial Asset: The property of the company which aids the
production includes machinery, land, equipment and others.
The assets of the company which earns the revenue to the company in
terms of interest or dividend is called financial asset.
26) Sunk costs: Historical costs incurred in the past are known as sunk costs.
27) SEBI Vs SEC: SEBI: It is called as the stock exchange board of India which
is regulatory authority in India established under the act to safeguard the
interests of the shareholders.
SEC: It is called as the Securities exchange and commission act which is a
regulatory authority in USA established under the act similar to that of SEBI
in India.
29) Gross Profit Vs Net Profit: The surplus balances in the trading account
which is carried forward to the P&L a/c is called as the Gross profit which is
arrived from trading or production activities.
The surplus balance in the P&L account which is reflected in the balance
sheet is called as Net profit arrived after taking into account of operating
and non-operating revenues, operating and non-operating expenses.
30) Equity Vs Preferred: Equity holders are those who are the real owners of
the company and are entitled to ownership rights, preferred holders are
those who are entitled to preferential rights upon the equity holders in
terms of dividends and the distribution of assets at the time of liquidation.
32) Cash flow: It is a statement which gives the details about the cash
generated from various activities like operating, investing and financing and
the cash expended on such activities during the period
33) Minority interest: **Paid up equity capital held by outsider plus share of
reserves and surplus on the date of balance sheet
A significant but non-controlling ownership of less than 50% of a company's
voting shares by either an investor or another company
34) Private vs. public: Private ltd is registered company which is limited by
shares and limited by its no. of members and prohibits to publish the
prospectus
Public is a registered company which is opposite to that as private company
35) Goodwill: It is treated to be intangible assets which is purchased for the
appreciation as the business that is acquired and it is amortized over a
period of time
37) Market capitalization: It is total value as all the outstanding shares with
that as the current market price as the share
38) Annual report: It is the report which is to be field with the register and
companies details the financial results as the company for the year and the
preceding year, the report consists as companys projects and other year
end statistics
38) IPO: When a company initial listing with the stock exchanges board of
India. Then it is called as Initial public offering.
39) SM\AGM\EGM: SM: Every company limited by share and every company
limited by guarantee and having a share capital shall with in a period of not
less than one month or more than six months from the date of which the
company is entitled to commence business , hold a general meeting of the
members of the company. This is called as Statuatory meeting.
AGM: Every company shall in each year hold in addition to any other
meeting a general meeting as its annual general meeting and shall specify
the meeting as such in the notice calling it.
EGM: any meeting other than the two above is called E.G.M. It is conducted
for special and urgent business.
NAV-Net Assets Value: The value of assets applicable to one unit. This is
calculated as total assets minus all prior charges and divided by the number
of the total outstanding units.
Deferred tax asset/ liability: Difference between the tax expense which is
calculated on accrual basis and current tax liability to be paid for particular
period as per income tax act is called deferred tax asset/liability.
Rights issue: Where a company proceeds to issue any further shares after the
expiry of Two years from the date of incorporation of the company
One year after the first allotment of shares. Whichever is earlier.
Such an allotment should be made to the shareholders of the company in
proportion to the capital paid.
Cash flow is a term that refers to the amount of cash being received and
spent by a business during a defined period of time, sometimes tied to a
specific project. Measurement of cash flow can be used
Preferred stock differs from common stock in that it typically does not carry
voting rights but is legally entitled to receive a certain level of dividend
payments before any dividends can be issued to other shareholders.
Nifty, an index for large cap stocks on the National Stock Exchange of India
ROCE It basically can be used to show how much a business is gaining for its
assets, or how much it is losing for its liabilities
Options: are financial instruments that convey the right, but not the
obligation, to engage in a future transaction on some underlying security.
The primary Market : It is that part of the capital markets that deals with the
issuance of new securities.
The secondary market: is the financial market for trading of securities that
have already been issued in an initial private or public offering.
Stock split increases the number of shares in a public company. The price of
adjusted such that the before and after market capitalization of the
company remains the same and dilution does not occur. Options and
warrants are included. Also known as a Stock Divide.
Initial Public Offering (IPO): Its is 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
Zero-based processing one can forget about last year, pretend that the
program is brand-new, and see if one can provide a detail of expenses for
what one would need to fully accomplish the program
Net worth (sometimes "net assets") is the total assets minus total liabilities
of an individual or a company. For a company, this is called shareholders'
equity and may be referred to as book value. Net worth is stated for a
particular point in time
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial
and quasi-executive. It drafts rules in its legislative capacity, it conducts
enquiries and enforcement action in its executive function and it passes
rulings and orders in its judicial capacity. Though this makes it very powerful,
there is an appeals process to create accountability.
CRR :
The reserve requirement (or required reserve ratio) is a bank regulation that
sets the minimum reserves each bank must hold to customer deposits and
notes. These reserves are designed to satisfy withdrawal demands, and
would normally be in the form of fiat currency stored in a bank vault (vault
cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing
the country's economy, borrowing, and interest rates.[
The Federal Reserve System (also the Federal Reserve; informally The Fed) is
the central banking system of the United States. The Federal Reserve
System, created in 1913, is a quasi-public, quasi-private banking system
composed of (1) the presidentially-appointed Board of Governors of the
Federal Reserve System in Washington, D.C.; (2) the Federal Open Market
Committee; (
One major area of criticism focuses on the failure of the Federal Reserve
System to stop inflation; this is seen as a failure of the Fed's legislatively
mandated duty [52] to maintain stable prices.
The Federal Reserve System was created via the Federal Reserve Act of
December 23rd, 1913.[17] The Reserve Banks opened for business on
November 16, 1914. Federal Reserve Notes were created as part of the
legislation, to provide a supply of currency. The notes were to be issued to
the Reserve Banks for subsequent transmittal to banking institutions.
The Federal Reserve System tries to control the size of the money supply by
conducting open market operations, in which the Federal Reserve lends or
purchases specific types of securities with authorized participants, known as
primary dealers, such as the United States Treasury.
The Indian stock market mainly consists of the Bombay Stock Exchange and
the National Stock Exchange. The market is one of the fast growing
emerging markets in the world, and the BSE is the oldest stock exchange in
Asia. More than 6500 scripts are traded at the BSE and more than 2500
scripts are traded at the NSE. It contains different kind of markets: 1 metal
market 2 oil market 3 banking stock market and lots more
Debentures:
A type of debt instrument that is not secured by physical asset or
collateral. Debentures are backed only by the
general creditworthiness and reputation of the issuer. Both corporations
and governments frequently issue this type of bond in order to secure
capital. Like other types of bonds, debentures are documented in an
indenture.
Private companies may issue stock and have shareholders. However, their
shares do not trade on public exchanges and are not issued through an
initial public offering. In general, the shares of these businesses are less
liquid and the values are difficult to determine.
Public Co:
A company that has issued securities through an initial public offering and
which are traded on at least one stock exchange or over-the-counter
market. These companies must file documents and meet stringent reporting
requirements set out by the Securities and Exchange Commission, including
the public disclosure of financial statements. Any company whose shares are
available to the public is a public company.
Director:
Margin of safety: Is a concept used in many areas of life, not just finance.
For example, consider engineers building a bridge that must support 100
tons of traffic. Would the bridge be built to handle exactly 100 tons?
Probably not. It would be much more prudent to build the bridge to handle,
say, 130 tons, to ensure that the bridge will not collapse under a heavy load.
The same can be done with securities. If you feel that a stock is worth $10,
buying it at $7.50 will give you a margin of safety in case your analysis turns
out to be incorrect and the stock is really only worth $9.
There is no universal standard to determine how wide the "margin" in
margin of safety should be. Each investor must come up with his or her own
methodology.
BEP:
Put Option:
An option contract giving the owner the right, but not the obligation, to sell
a specified amount of an underlying security at a specified price within a
specified time. This is the opposite of a call option, which gives the holder
the right to buy shares.
Call Option:
An agreement that gives an investor the right (but not the obligation) to buy
a stock, bond, commodity, or other instrument at a specified price within a
specific time period.
It may help you to remember that a call option gives you the right to "call in"
(buy) an asset. You profit on a call when the underlying asset increases in
price.
Intanigible Asset:
An asset that is not physical in nature. Corporate intellectual property (items
such as patents, trademarks, copyrights, business methodologies), goodwill
and brand recognition are all common intangible assets in today's
marketplace. An intangible asset can be classified as either indefinite or
definite depending on the specifics of that asset. A company brand name is
considered to be an indefinite asset, as it stays with the company as long as
the company continues operations. However, if a company enters a
legal agreement to operate under another company's patent, with no plans
of extending the agreement, it would have a limited life and would be
classified as a definite asset.
Tanigible Asset:
An asset that has a physical form such as machinery, buildings and land. This
is the opposite of an intangible asset such as a patent or trademark.
Whether an asset is tangible or intangible isn't inherently good or bad. For
example, a well-known brand name can be very valuable to a company. On
the other hand, if you produce a product solely for a trademark, at some
point you need to have "real" physical assets to produce it.
Rights issue:
Rights:
A security giving stockholders entitlement to purchase new shares issued by
the corporation at a predetermined price (normally less than the current
market price) in proportion to the number of shares already owned. Rights
are issued only for a short period of time, after which they expire.
The payment of stock in lieu of cash for services provided .This is a common
method used by corporations to compensate executives. The theory is that
executives will work harder since they want their own stock to rise in value
and, therefore, have the best interests of shareholders in mind.
Insider Trading:
Insider trading is the trading of a corporation's stock or other securities (e.g.
bonds or stock options) by corporate insiders such as officers, directors, or
holders of more than ten percent of the firm's shares. Insider trading may be
perfectly legal, but the term is frequently used to refer to a practice, illegal
in many jurisdictions, in which an insider or a related party trades based on
material non-public information obtained during the performance of the
insider's duties at the corporation, or otherwise misappropriated.[1]
All insider trades must be reported in the United States. Many investors
follow the summaries of insider trades, published by the United States
Securities and Exchange Commission (SEC), in the hope that mimicking these
trades will be profitable. Legal "insider trading" may not be based on
material non-public information. Illegal insider trading in the US requires the
participation (perhaps indirectly) of a corporate insider or other person who
is violating his fiduciary duty or misappropriating private information, and
trading on it or secretly relaying it. Insider trading is believed to raise the
cost of capital for securities issuers, thus decreasing overall economic
growth.[2]
Venture Capital:
Venture capital can also include managerial and technical expertise. Most
venture capital comes from a group of wealthy investors, investment banks
and other financial institutions that pool such investments or partnerships.
This form of raising capital is popular among new companies, or ventures,
with limited operating history, who cannot raise funds through a debt issue.
The downside for entrepreneurs is that venture capitalists usually get a say
in company decisions, in addition to a portion of the equity.
Seed Capital: The initial equity capital used to start a new venture or
business. This initial amount is usually quite small because the venture is still
in the idea or conceptual stage. Also, there's a high risk that the venture will
fail.
One reason as to why stock splits are performed is that a company's share
price has grown so high that to many investors the shares are too expensive
to buy in round lots.
For example, if a XYZ Corp's shares were worth $1,000 each, investors would
need to purchase $100,000 in order to own 100 shares. Whereas, if each
share was worth $10 each, investors only need to pay $1,000 to own 100
shares.
With this type of merger, the private company does not need to pay the
expensive fees associated with arranging an initial public offering. The
problem, however, is the company does not acquired any additional funds
through the merger and it must have enough funds to complete the
transaction on its own.
Deep-Discounted bonds:
Factoring:
Calculated as:
For example, if a company is currently trading at $43 a share and earnings
over the last 12 months were $1.95 per share, the P/E ratio for the stock
would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can
be taken from the estimates of earnings expected in the next four quarters
(projected or forward P/E). A third variation uses the sum of the last two
actual quarters and the estimates of the next two quarters.
It is important that investors note an important problem that arises with the
P/E measure, and to avoid basing a decision on this measure alone. The
denominator (earnings) is based on an accounting measure of
earnings that is susceptible to forms of manipulation, making the quality of
the P/E only as good as the quality of the underlying earnings number.
Return on Investments: A performance measure used to evaluate the
efficiency of an investment or to compare the efficiency of a number of
different investments. To calculate ROI, the benefit (return) of an
investment is divided by the cost of the investment; the result is expressed
as a percentage or a ratio.
Market Capitalization:
A measure of a company's total value. It is estimated by determining the
cost of buying an entire business in its current state. Often referred to as
"market cap", it is the total dollar value of all outstanding shares. It is
calculated by multiplying the number of shares outstanding by the current
market price of one share.
Derivatives: In finance, a security whose price is dependent upon or derived
from one or more underlying assets. The derivative itself is merely a
contract between two or more parties. Its value is determined by
fluctuations in the underlying asset. The most common underlying assets
include stocks bonds, commodities, currencies, interest rates and market
indexes. Most derivatives are characterized by high leverage.
Zero based budget: Method of budgeting in which all expenditures must be
justified each new period, as opposed to only explaining the amounts
requested in excess of the previous period's funding.
For example, if an organization used ZBB, each department would have to
justify its funding every year. That is, funding would have a base at zero. A
department would have to show why its funding efficiently helps the
organization toward its goals.
ZBB is especially encouraged for Government budgets because expenditures
can easily run out of control if it is automatically assumed what was spent
last year must be spent this year.
Profitability Ratios
Note: Some investors add interest expense back into net income when
performing this calculation because they'd like to use operating returns
before cost of borrowing.
ROA tells you what earnings were generated from invested capital (assets).
ROA for public companies can vary substantially and will be highly
dependent on the industry. This is why when using ROA as a comparative
measure, it is best to compare it against a company's previous ROA numbers
or the ROA of a similar company
The assets of the company are comprised of both debt and equity. Both of
these types of financing are used to fund the operations of the company.
The ROA figure gives investors an idea of how effectively the company is
converting the money it has to invest into net income. The higher the ROA
number, the better, because the company is earning more money on less
investment. For example, if one company has a net income of $1 million and
total assets of $5 million, its ROA is 20%; however, if another company earns
the same amount but has total assets of $10 million, it has an ROA of 10%.
Based on this example, the first company is better at converting its
investment into profit. When you really think about it, management's most
important job is to make wise choices in allocating its resources. Anybody
can make a profit by throwing a ton of money at a problem, but very few
managers excel at making large profits with little investment.
Calculated as:
ROCE should always be higher than the rate at which the company borrows,
otherwise any increase in borrowing will reduce shareholders' earnings.
There are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the
formula above by subtracting preferred dividends from net income and
subtracting preferred equity from shareholders' equity, giving the following:
return on common equity (ROCE) = net income - preferred dividends /
common equity.
RevPOR may also be expressed as "total RevPOR", which includes not only
the room rate itself, but also any extra services such as room service,
laundry services and in-room movie viewing, among others.
For many hotel operators, the total revenue received per room can be much
more than the per-day "boilerplate" rate, and is a more full expression of
how much the company is receiving per customer. RevPOR is used by
analysts to determine the total revenue and profit potential of a company;
occupancy rates will rise and fall with the general and local economy, but
RevPOR is a metric that stands independent of how full the hotel is at any
point in time.
Capital Reserve:
A type of account on a municipality's or company's balance sheet that is
reserved for long-term capital investment projects or any other large and
anticipated expense(s) that will be incurred in the future. This type of
reserve fund is set aside to ensure that the company or municipality has
adequate funding to at least partially finance the project.
Contributions to the capital reserve account can be made from government
subsidies, donated funds, or can be set aside from the firm's or
municipalities regular revenue-generating operations. Once recorded on the
reporting entity's balance sheet, these funds are only to be spent on the
capital expenditure projects for which they were initially intended, excluding
any unforeseen circumstances
Reserve Fund:
Embedded Value:
Mutual funds pay out (distribute) virtually all of their income and capital
gains. As a result, changes NAV are not the best gauge of mutual fund
performance, which is best measured by their annual total return.
Because exchange-traded funds and closed-end funds trade like stocks, their
shares trade at market value, which can be a dollar value above (trading at a
premium) or below (trading at a discount) their net asset values.
Book Value:
The initial outlay for an investment. This number may be net or gross of
expenses such as trading costs, sales taxes, service charges and so on.
1.) It is the total value of the company's assets that shareholders would
theoretically receive if a company were liquidated.
2.) By being compared to the company's market value, the book value can
indicate whether a stock is under- or overpriced.
3.) In personal finance, the book value of an investment is the price paid for
a security or debt investment. When a stock is sold, the selling price less the
book value is the capital gain (or loss) from the investment.
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.
Leverage Ratio:
Debt Ratio:
A ratio that indicates what proportion of debt a company has relative to its
assets. The measure gives an idea to the leverage of the company along with
the potential risks the company faces in terms of its debt-load.
A debt ratio of greater than 1 indicates that a company has more debt than
assets, meanwhile, a debt ratio of less than 1 indicates that a company has
more assets than debt. Used in conjunction with other measures of financial
health, the debt ratio can help investors determine a company's level of risk.
Debt/Equity Ratio:
The debt/equity ratio also depends on the industry in which the company
operates. For example, capital-intensive industries such as
auto manufacturing tend to have a debt/equity ratio above 2, while
personal computer companies have a debt/equity of under 0.5.
Debt-To-Capital Ratio
Calculated as:
Operating Ratio
A ratio that shows the efficiency of management by comparing operating
expense to net sales:
The smaller the ratio, the greater the organization's ability to generate profit
if revenues decrease. When using this ratio, however, investors should be
aware that it doesn't take into account debt repayment or expansion.
Net Sales
The amount of sales generated by a company after the deduction
of returns, allowances for damaged or missing goods and any discounts
allowed. The sales number reported on a company's financial statements is
a net sales number, reflecting these deductions..
Asset Turnover
The amount of sales generated for every dollar's worth of assets. It is
calculated by dividing sales in dollars by assets in dollars.
Formula:
One of the most famous and successful users of fundamental analysis is the
Oracle of Omaha, Warren Buffett, who has been well known for successfully
employing fundamental analysis to pick securities. His abilities have turned
him into a billionaire.
Types Of EPS :
Gertrude Stein said, "A rose is a rose is a rose," but the same cannot be said
about earnings per share (EPS).
While the math may be simple, there are many varieties of EPS being used
these days, and investors must understand what each one represents if
they're to make informed investment decisions. For example, the EPS
announced by the company may differ significantly from what is reported in
the financial statements and in the headlines. As a result, a stock may
appear over- or undervalued depending on the EPS being used. This article
will define some of the varieties of EPS and discuss their pros and cons.
Primary EPS is calculated using the number of shares that have been issued
and held by investors. These are the shares that are currently in the market
and can be traded.
Diluted EPS entails a complex calculation that determines how many shares
would be outstanding if all exercisable warrants, options, etc. were
converted into shares at a point in time, generally the end of a quarter. We
prefer diluted EPS because it is a more conservative number that calculates
EPS as if all possible shares were issued and outstanding. The number of
diluted shares can change as share prices fluctuate (as options fall into/out
of the money), but generally the Street assumes the number is fixed as
stated in the 10-Q or 10-K.
Companies report both primary and diluted EPS, and the focus is generally
on diluted EPS, but investors should not assume this is always the case.
Sometimes, diluted and primary EPS are the same because the company
does not have any "in-the-money" options, warrants or convertible bonds
outstanding. Companies can discuss either, so investors need to be sure
which is being used.
Earnings
As has been evident in recent headlines, EPS can be whatever the company
wants it to be, depending on assumptions and accounting policies.
Corporate spin-doctors focus media attention on the number the company
wants in the news, which may or may not be the EPS reported in documents
filed with the Securities & Exchange Commission (SEC). Based on a set of
assumptions, a company can report a high EPS, which reduces the P/E
multiple and makes the stock look undervalued. The EPS reported in the
10Q, however, can result in a much lower EPS and an overvalued stock on a
P/E basis. This is why it is critical for investors to read carefully and know
what type of earnings is being used in the EPS calculation.
We will focus on five types of EPS and define them in the context of the type
of "earnings" being used.
Ongoing EPS :
This EPS is calculated based upon normalized or ongoing net income and
excludes anything that is an unusual one-time event. The goal is to find the
stream of earnings from core operations which can be used to forecast
future EPS. This can mean excluding a large one-time gain from the sale of
equipment as well as an unusual expense. Attempts to determine an EPS
using this methodology is also called "pro forma" EPS.
Headline EPS :
The headline EPS is the EPS number that is highlighted in the company's
press release and picked up in the media. Sometimes it is the pro forma
number, but it could also be an EPS number that has been calculated by the
analyst/pundit that is discussing the company. Generally, soundbites do not
provide enough information to determine which EPS number is being used.
Cash EPS :
Cash EPS is operating cash flow (not EBITDA) divided by diluted shares
outstanding. We think cash EPS is more important than other EPS numbers
because it is a "purer" number. Cash EPS is better because operating cash
flow cannot be manipulated as easily as net income and represents real cash
earned, calculated by including changes in key asset categories such as
receivables and inventories. For example, a company with reported EPS of
$0.50 and cash EPS of $1.00 is preferable to a firm with reported EPS of
$1.00 and cash EPS of $0.50. Although there are many factors to consider in
evaluating these two hypothetical stocks, the company with cash is
generally in better financial shape.
Other EPS numbers have overshadowed cash EPS, but we expect it to get
more attention because of the new GAAP rule (FAS 142), which allows
companies to stop amortizing goodwill. Companies may start talking about
"cash EPS" in order to differentiate between pre-FAS 142 and post-FAS 142
results; however, this version of "cash EPS" is more like EBITDA per share
and does not factor-in changes in receivables and inventory. Consequently, I
think it is not as good as operating-cash-flow EPS, but is better in certain
cases than other forms of EPS.
Net Debt
A metric that shows a company's overall debt situation by netting the value
of a company's liabilities and debts with its cash and other similar liquid
assets.
Calculated as:
When investing in a company, one of the most important factors you need
to consider is how much debt the company is carrying. Here are some
questions to ask yourself when analyzing a company's debt: How much debt
really exists? What kind of debt is it (long/short-term maturities)? What is
the debt for (repay or refinance old debts)? Can the company afford the
debt if it runs into financial trouble? And, finally, how does it compare to the
debt levels of competing companies?
Acid-Test Ratio:
A stringent test that indicates whether a firm has enough short-term assets
to cover its immediate liabilities without selling inventory. The acid-test ratio
is far more strenuous than the working capital ratio, primarily because the
working capital ratio allows for the inclusion of inventory assets.
Calculated by:
Companies with ratios of less than 1 cannot pay their current liabilities and
should be looked at with extreme caution. Furthermore, if the acid-test ratio
is much lower than the working capital ratio, it means current assets are
highly dependent on inventory. Retail stores are examples of this type of
business.
The term comes from the way gold miners would test whether their findings
were real gold nuggets. Unlike other metals, gold does not corrode in acid; if
the nugget didn't dissolve when submerged in acid, it was said to
have passed the acid test. If a company's financial statements pass the
figurative acid test, this indicates its financial integrity.
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
The ratio is mainly used to give an idea of the company's ability to pay
back its short-term liabilities (debt and payables) with its short-term assets
(cash, inventory, receivables). The higher the current ratio, the more
capable the company is of paying its obligations. A ratio under 1 suggests
that the company would be unable to pay off its obligations if they came
due at that point. While this shows the company is not in good financial
health, it does not necessarily mean that it will go bankrupt - as there are
many ways to access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating
cycle or its ability to turn its product into cash. Companies that have trouble
getting paid on their receivables or have long inventory turnover can run
into liquidity problems because they are unable to alleviate their
obligations. Because business operations differ in each industry, it is always
more useful to compare companies within the same industry.
Discretionary Cash Flow:
Discretionary cash flow is any money left over once
all possible capital projects with positive net present values have been
financed, and all mandatory payments have been paid. The capital can be
used to pay for other responsibilities such as giving out cash dividends to
stockholders, buying back common stock and paying off any outstanding
debt.
Formula:
The operating cash flow ratio can gauge a company's liquidity in the short
term. Using cash flow as opposed to income is sometimes a better indication
of liquidity simply because, as we know, cash is how bills are normally paid
off.
Operating cash flow is the cash that a company generates through running
its business.
You can also use OCF as a check on the quality of a company's earnings. If a
firm reports record earnings but negative cash, it may be using aggressive
accounting techniques.
Operating Income
The amount of profit realized from a business's own operations, but
excluding operating expenses (such as cost of goods sold) and
depreciation from gross income.
Also referred to as "operating profit" or "recurring profit".
Calculated as:
While laying off employees and reducing product quality can initially boost
earnings and may even be necessary in cases where a company has lost its
competitiveness, there are only so many operating expenses
that management can cut before the quality of business operations is
damaged.
Operating Profit
The amount of profit earned from a firm's normal core business operations.
This value does not include any profit earned from the firm's investments
(such as earnings resulting from firms that the company has partial interest
in) and the effects of interest and taxes.
For example, suppose ABC Printing Company earned $50 million from its
core printing related operations, $10 million from its 40% stake in XYZ Corp
and $3.5 million from interest earned from its money market and bank
accounts. Also, the company spent $10 million in production related costs as
well.
Overall the company's operating profit is: $40 million, calculated as the $50
million operating revenues million minus the $10 million in production costs.
The other $10 million and $3.5 million in earnings are not included in
operating income, since they are investment income.
Earnings:
The amount of profits that a company produces during a specific period,
which is usually defined as a quarter (three calendar months) or a
year. Earnings typically refer to after-tax net income.Ultimately, a business's
earnings are the main determinant of its share price, because earnings and
the circumstances relating to them can indicate whether the business will be
profitable and successful in the long run.
Amortization
1. The paying off of debt in regular installments over a period of time.
Depreciation
1. In accounting, an expense recorded to allocate a tangible asset's cost over
its useful life. Because depreciation is a non-cash expense, it increases free
cash flow while decreasing reported earnings.
EBITDAX is used when reporting earnings for oil and mineral exploration
companies. It excludes costly exploration expenses and gives the true
EBITDA of the firm.
Badwill
The negative effect felt by a company when shareholders and the
investment community find out that is has done something that is not in
accordance with good business practices. Although typically not expressed
in a dollar amount, badwill can play out in the form of decreased revenue,
loss of clients or suppliers, loss of market share and federal indictments for
any crimes committed.
Non-Cash Charge
A charge off, made by a company against earnings, that does not require an
initial outlay of cash.
Any sort of charge will usually result in lower earnings in the period when
the charge was made.
Write-Down
Reducing the book value of an asset because it is overvalued compared to
the market value.
Write-Off
A reduction in the value of an asset or earnings by the amount of
an expense or loss. Companies are able to write off certain expenses that
are required to run the business, or have been incurred in the operation of
the business and detract from retained revenues.
For example, if you spend money on dinner to take out a client, that meal is
a possible write-off towards your income because you presumably discussed
business opportunities during the dinner. Suppose, for another
example, you made a sale on credit to a customer, but two weeks later the
client's business declared bankruptcy and became completely unable to pay
off the credit account with you. This uncollectible debt would then be
written off by your company and recorded as an expense by accountants.
Write-Up
An increase made to the book value of an asset because it is undervalued
compared to market values.
Equity Method
An accounting technique used by firms to assess the profits earned by their
investments in other companies. The firm reports the income earned on the
investment on its income statement and the reported value is based on the
firm's share of the company assets. The reported profit is proportional to
the size of the equity investment. This is the standard technique used when
one company has significant influence over another.
That said, keep in mind that GAAP is only a set of standards. There is plenty
of room within GAAP for unscrupulous accountants to distort figures. So,
even when a company uses GAAP, you still need to scrutinize its financial
statements.
Securitization:
Securitization is a structured finance process in which assets, receivables or
financial instruments are acquired, classified into pools, and offered as
collateral for third-party investment.[1] It involves the selling of financial
instruments which are backed by the cash flow or value of the underlying
assets.[2]
Securitization typically applies to assets that are illiquid (i.e. cannot easily be
sold). It is common in the real estate industry, where it is applied to pools of
leased property, and in the lending industry, where it is applied to lenders'
claims on mortgages, home equity loans, student loans and other debts.
Securitization utilizes a special purpose vehicle (SPV) (alternatively known as
a special purpose entity [SPE] or special purpose company [SPC]) in order to
reduce the risk of bankruptcy and thereby obtain lower interest rates from
potential lenders. A credit derivative is also generally used to change the
credit quality of the underlying portfolio so that it will be acceptable to the
final investors.]
Corporate governance:
Corporate governance is the set of processes, customs, policies, laws and
institutions affecting the way in which a corporation is directed,
administered or controlled. Corporate governance also includes the
relationships among the many players involved (the stakeholders) and the
goals for which the corporation is governed. The principal players are the
shareholders, management and the board of directors. Other stakeholders
include employees, suppliers, customers, banks and other lenders,
regulators, the environment and the community at large.
Recently there has been considerable interest in the corporate governance
practices of modern corporations, particularly since the high-profile
collapses of a number of large U.S. firms such as Enron Corporation and
Worldcom.
Board members and those with a responsibility for corporate governance
are increasingly using the services of external providers to conduct anti-
corruption auditing, due diligence and training.
Definition
Relevant rules include applicable laws of the land as well as internal rules of
a corporation. Relationships include those between all related parties, the
most important of which are the owners, managers, directors of the board,
regulatory authorities and to a lesser extent employees and the community
at large. Systems and processes deal with matters such as delegation of
authority.
The corporate governance structure specifies the rules and procedures for
making decisions on corporate affairs. It also provides the structure through
which the company objectives are set, as well as the means of attaining and
monitoring the performance of those objectives.
Corporate governance is used to monitor whether outcomes are in
accordance with plans and to motivate the organization to be more fully
informed in order to maintain or alter organizational activity. Corporate
governance is the mechanism by which individuals are motivated to align
their actual behaviors with the overall participants
The concept in accounting of recognizing expenses in the same accounting
period when the related revenues are recognized
The concept in accounting of recognizing expenses in the same accounting
period when the related revenues are recognized
Wasting asset: An asset which has a limited life and therefore decreases in
value over time, such as an option which is out of the money.
Wasting assets are held for too long, they will ultimately lose all their value.
Derivatives such as options are thought of as wasting assets since they have
fixed expiration dates and lose value as the time gap until expiration
narrows. An asset which has a limited life and therefore decreases in value
over time, such as an option which is out of the money.
Marginal Cost (MC)
The marginal cost of an additional unit of output is the cost of the additional
inputs needed to produce that output. More formally, the marginal cost is
the derivative of total production costs with respect to the level of
output.Marginal cost and average cost can differ greatly. For example,
suppose it costs $1000 to produce 100 units and $1020 to produce 101
units. The average cost per unit is $10, but the marginal cost of the 101st
unit is $20 Marginal costs are defined as the change in total costs resulting
from a one unit change in output. They are the variable costs associated
with increasing output in the short run. A change in marginal costs might
come about for example because of a change in the prices of essential raw
materials or an increase in the wage rate paid to part-time employees.
PerpetualSuccession:
A company does not die or cease to exist unless it is specifically wound up or
the task for which it was formed has been completed. Membership of a
company may keep on changing from time to time but that does not affect
life of the company. Death or insolvency of member does not affect the
existence of the company.
SeparateLegalEntity:
On incorporation under law, a company becomes a separate legal entity as
compared to its members. The company is different and distinct from its
members in law. It has its own name and its own seal, its assets and
liabilities are separate and distinct from those of its members. It is capable
of owning property, incurring debt, and borrowing money, having a bank
account, employing people, entering into contracts and suing and being
sued separately.
LimitedLiability:
The liability of the members of the company is limited to contribution to the
assets of the company up to the face value of shares held by him. A member
is liable to pay only the uncalled money due on shares held by him when
called upon to pay and nothing more, even if liabilities of the company far
exceeds its assets. On the other hand, partners of a partnership firm have
unlimited liability i.e. if the assets of the firm are not adequate to pay the
liabilities of the firm, the creditors can force the partners to make good the
deficit from their personal assets. This cannot be done in case of a company
once the members have paid all their dues towards the shares held by them
in the company.
Types of Companies
1.Public Company means a company which not a private company.
2.Private Company means a company which by its articles of association :-
a. Restricts the right of members to transfer its shares
b. Limits the number of its members to fifty. In determining this
number of 50, employee-members and ex-employee members
are not to be considered.
c. Prohibits an invitation to the public to subscribe to any shares in
or the debentures of the company.
Venture Capital
Money made available for investment in innovative enterprises or research,
especially in high technology, in which both the risk of loss and the potential
for profit may be considerable. Also called risk capital.
3 Institutional investor?
For example, a company has 100 shares of stock each with a price of $50.
The market capitalization is 100 $50 = $5000. The company splits its stock
"2-for-1". There are now 200 shares of stock and each shareholder holds
twice as many shares. The price of each share has been adjusted to $25. The
market capitalization is 200 $25 = $5000, the same as before the split.
Reverse stock split, or reverse split, is just the same but in reverse: a
reduction in number of shares and an accompanying increase in the share
price. The ratio is also reversed: 1-for-2, or 1-for-3.
7 Merchant banking
Merchant banking----A bank that deals mostly in (but is not limited to)
international finance, long-term loans for companies and underwriting.
Merchant banks do not provide regular banking services to the general
public.
8 Can share holders offer its share price at premium during the IPO?
Reverse split
Prime rate :The lowest rate of interest on bank loans at a given time and
place, offered to preferred borrowers. Also called prime interest rate.
Convertible Debentures:
Any type of debenture that can be converted into some other security.
AGM Vs EGM
Dumping, selling goods at less than the normal price, usually as exports in
international trade. It may be done by a producer, a group of producers, or a
nation. Dumping is usually done to drive competitors off the market and
secure a monopoly, or to hinder foreign competition. To counterbalance
international dumping, nations often resort to flexible tariffs. In
international trade, acute competition from foreign producers often leads to
charges of dumping. A policy of dumping depends for its effectiveness on
the possibility of maintaining separate domestic and foreign markets, on
monopolistic influences maintaining a high price in the home market, on
export bounties, or on low import duties in the foreign market. Dumping
disturbs those markets that receive dumped goods, and it may drive local
producers out of business. Governments may condone, or even sponsor,
dumping in other markets for either political reasons or to achieve a more
favorable balance of payments.
Net Present Value - NPV ----The difference between the present value of
cash inflows and the present value of cash outflows. NPV is used in capital
budgeting to analyze the profitability of an investment or project.
The internal rate of return (IRR) is defined as the discount rate that gives a
net present value (NPV) of zero. The NPV is calculated from an annualized
cash flow by discounting all future amounts to the present.
Intellectual Property:
Has not been employed by Occidental within the last five years;
Has not been an employee or affiliate of any present or former
internal or external auditor of Occidental within the last three years;
Has not received more than $60,000 in direct compensation from
Occidental, other than director and committee fees, during the
current fiscal year or any of the last three completed fiscal years;
Has not been an executive officer or employee of a company that
made payments to, or received payments from, Occidental for
property or services in an amount exceeding the greater of $1 million
or 2 percent of such other company's consolidated gross revenues
during the current fiscal year or any of the last three completed fiscal
years;
BSE: The BSE SENSEX (also known as the BSE 30) is a value-weighted index
composed of 30 scrips, with the base April 1979=100. The set of companies
which make up the index has been changed only a few times in the last 20
years. These companies account for around one-fifth of the market
capitalization of the BSE.
Disinvestment:
The action of an organization or government selling or liquidating an asset
or subsidiary. Also known as "divestiture". A reduction in capital
expenditure, or the decision of a company not to replenish depleted capital
goods
Underwriter:
1. A person or firm engaged in the insurance business.
2. An insurance agent who assesses the risk of enrolling an applicant for
coverage or a policy.
3. One that guarantees the purchase of a full issue of stocks or bonds.
Insurance Vs Reinsurance:
Preferred Stock:
Rights
Unlike common stock, preferred stock usually has several rights attached to
it.
----Preferred stock has a par value or liquidation value associated with it.
This represents the amount of capital that was contributed to the
corporation when the shares were first issued.
----Almost all preferred shares have a fixed dividend amount. The dividend is
usually specified as a percentage of the par value or as a fixed amount. For
example Pacific Gas & Electric 6% Series A preferred.
GDP :The total market value of all the goods and services produced within
the borders of a nation during a specified period.
Option----A privilege, for which a person has paid money that grants that
person the right to purchase or sell certain commodities or certain specified
securities at any time within an agreed period for a fixed price.
OTC Over-the-Counter : Over-The-Counter, method of buying and selling
securities outside the organized stock exchange.
Going Private
While SEC rules don't prevent companies from going private, they do require
companies to provide information to shareholders about the transaction
that caused the company to go private. The company may have to file a
merger proxy statement or a tender offer document with the SEC. In
addition, if the transaction is initiated by an affiliate (an insider) of the
company, Rule 13e-3 of the Securities Exchange Act of 1934 requires the
affiliate to file a Schedule 13E-3 with the SEC.
Going private transactions require shareholders to make difficult decisions.
To protect shareholders, some states have adopted corporate takeover
statutes that provide shareholders with dissenter's rights. These statutes
provide shareholders the opportunity to sell their shares on the terms
offered, to challenge the transaction in court, or to hold on to the shares.
Once the transaction is concluded, remaining shareholders may find it very
difficult to sell their retained shares because of a limited trading market.
Futures : -Contracts that promise to purchase or sell standard commodities
at a forthcoming date and at a fixed price. This type of contract is an
extremely speculative transaction and ordinarily involves such standard
goods as rice or soybeans. Profit and loss are based upon promises to
deliveras opposed to possession ofthe actual commodities.
Exit Strategy:
Book Building is a process of fixing the share price based on the demand at
various price levels.
Portfolio Management
The science of making decisions about investment mix and policy.
Spread: Difference between bid and offer prices; also, difference between
high and low prices of a particular security over a given period.
Revenue:
Revenue is the value of out put supplied to customers
Gross inflow of assets or the gross decrease in liabilities
Operating revenue:
Arising from the main operations or business (sale of products
manufactured by a company)
Non-operating revenue:
Indirect to the main operations of the firm (sale of an old equipment
similarly dividend and interest from temporary investments)
Expenditure:
The cost of earning revenue. When assets or consumed or liabilities are
increased.
Operating expenses:
Relating to the main operations (manufacturing expenses)
Non-operating expenses:
Which are indirect to the main operations (legal expenses)
Capital expenditure:
Money spent to acquire physical assets, which are buildings, machinery, and
land.
Company:
Is a voluntary and autonomous association of certain persons which capital
divided into numerous transferable shares formed to carry out a particular
purpose. Company formed and registered under the companys act 1956.
Kinds of companies:
Charted companies: East India company
Statutory companies: RBI, IFC
Registered companies: Incorporated under companys act 1956.
Difference between Private limited company and Public limited company:
Equity shares:
Represent the ownership position in a company; equity shareholders will get
dividend and repayment of capital after meeting the claims of preference
shareholders.
Equity shareholders have the voting right.
Preference shares:
Preference shareholders will get dividend and repayment of capital in the
winding up of the company over the equity shareholders
Types:
Cumulative preference shares, Non-cumulative preference shares
Redeemable preference shares (usually non-redeemable)
Participating and non-participating preference shares (on surplus profits)
Debentures:
Acknowledgement of debt, certificate issued by a company under its seal as
an evidence of a debt due from the company
Types:
Naked or simple debentures (no security)
Mortgage debentures (security)
Redeemable, Irredeemable debentures
Convertible, Non-convertible debentures
Share premium:
Value greater than its face value
Bank account Dr
To share application account
(Being application money along with premium received)
Share application account Dr
To share capital account
To share premium account
(Share application money transferred to share capital account)
Share allotment account Dr
To share capital account
To share premium account
(The allotment money and share premium money due on shares)
Bank account Dr
To share allotment account
(Share allotment money received)
Share discount:
Value less than its face value
Share discount account Dr
Discount on the issue of share account Dr
To share capital account
Primary market: Initial public offering of securities (IPO), newly floated shares,
first issue of shares
Secondary market Buying and selling of securities (shares) is traded in secondary
market
OTCI: Over the counter exchange of India (no particular place to buy and selling of
shares)
Memorandum of association: It determines the scope of the activities of the
company and defines the relations of the Company with out side world.
Registered office, company name, objectives, 7 members have to promise to
take at least one share each, their names and addresses.
Articles of association: Rules and regulations of the internal management of the
company and very important to the Shareholders, because they determine
the relation between the company and its members.
Subsidiary company: A company that is completely control by the company
EBIT: earning before interest and tax, Contribution: sales variable cost
Financial leverage: Defines as tendency of the residual income to vary
disproportionately with operating profit
Degree of financial leverage: %change in EPS/ %change in EBIT
EPS: earnings per share, PBT: profit before tax
Combination of operating and financial leverage: %Change in EPS/ %
change in sales
Discounted cash flow technique: time value of money concept NPV, IRR, PI
Bankruptcy: becoming insolvent
IRR: Is that the rate of which the sum of discounted cash inflow equals the
sum of discounted cash outflow. Where NPV is 0
Shareholder: one who owns share of stock in a corporate or mutual funds
Liquidate: To convert into cash (or) to sell all of a company assets pay
outstanding debts and distribute the remaining to shareholders and then go
out of business.
Savings account: A deposit account at a bank or savings and loan which
pays interest but cannot be withdrawn by check writing
Transaction: An agreement between a buyer and a seller to exchange an
asset for payment
Credit: the borrowing capacity of an individual or company
Accounts payable: Money which is owned to vendors for products and
services purchased on credit
Accounts receivables: Money which is owned to a company by a customer
for products and services provided on credit.
Broker: An individual or firm acting as intermediary between a buyer and
seller, usually charging a commission.
Dual trading: The practice by a broker of acting as an agent and
simultaneously acting as a dealer (buying and selling of ones own account)
Loan-value ratio: The amount borrowed dividend by the appraised value of
the collateral (securities) in %
Common-stock ratio: A companys common stock divided by its total
capitalization
Tax: A fee charged (levied) by a government on a product, income or activity
If tax is levied directly a personal or corporation income its called as direct
tax.
If tax is levied on price of goods or services is called as indirect tax
Income Tax: Annual tax levied by the federal government on an individual or
corporations net profit
Earnings report: An official quarterly or annually final document published
by a public company
Shows earnings, expenses and net profit
Net profit: gross sales (taxes + interest + depreciation + other expenses)
Retail price: price charged to retail customers
Whole sage: the purchase of goods in quantity for resale purpose
Retail: selling directly to consumers or customers
Credit card: Any card that may be used repeatedly to borrow money or buy
products and services on credit issued by bank
Debit card: A card, which allows customer to access their funds immediately
electronically
Profit: the positive gain from an investment or business operations
Face value: the nominal $ amount assigned to a security by the issuer
AMEX: (American stock exchange)
Second largest stock exchange in the US after NYSE (Newyork stock
exchange) largest representation of stock and bonds issued by smaller
companies than the NYSE
In 1998 the NASDAQ purchased the AMEX
Compound interest:
Interest which is calculated not only on the initial principal but also the
accumulated interest of prior period.
Capitalization: the sum of corporations long-term debt stock and retained
earnings
ADS: American depositary shares the share issued under American
depositary agreement, which is actually traded
GATT: General agreement on tariffs and trade affiliate with the United
Nations, to facilitate international trade
Tariff: A tax imposed on a product when it is imported into a country or
company
EBITDA: earning before interest tax dividend and amortization
Exchange ratio: The number of shares of the acquiring company that
shareholders will receive for one share of the acquired company
Form S 1: a registration statement used in the initial public offering of
securities
Pooling of interest: In which the balance sheet of the two companies
combined line by line without a tax impact
Capital budgeting decisions: operating, administration and strategic
Decision tree: Define investment, identify decision alternatives, draw
decision tree, and analyze data
Concept of cash flow: Initial investment, annual net cash flow, terminal cash
flow
Investment evaluation: Estimation of cash flow, estimation of required rate
of return decision rule for making the choice.
Financial analysis: It is the process of identifying the financial strength and
weakness of the firm by properly establishing relationship between the
items of the balance sheet and the profit and loss a/c
Liquidity: Refers to the firms ability to pay debts as they mature
Solvency: refers to the firms ability to meet eventually all its long-term and
short-term debt
Accounting system: A source of financial information of a firm should know
the financial implications of its operations
Treasurer: auditing cost control
Controller: planning and budgeting, inventory management, accounting
1. Investment decision
2. Dividend decision
3. Liquidity decision
4. Financing decision
Accounting conventions:
Convention of disclosure:
Accounts must be honestly prepared and all material information must be
disclosed there in
Contingent liabilities appearing as a note, market value of investments
appearing as a note
Convention of materiality:Material and immaterial matters
Value of stock: loss of markets due to competition or government
regulations, increase in wage bill
Allocation of cost: allocated to every one of the three years
Convention of consistency: Important conclusions regarding the working of
a company over a number of years, accounting procedures, and policies
should be consisting.
Convention of conservatism: (playing sage)
Considering of all prospective losses but leaves all prospective profits
Make the provision of all prospective losses but leaves all prospective profits
Make the provision for doubtful debts
Valuation of stock, provision for fluctuation of investments
Amortization
Financial accounting: To ascertain the financial results
Profit & loss in the operations of the business during the accounting period
Cost accounting:
To analyze the expenditure
To ascertain the cost of various products manufacture by the company
Management accounting: To assist the management in taking rational
policy decisions
Financial statements: It contains summarized information of the firms
financial affairs organized systematically
Financial statements are prepared from the accounting records maintained
by the firm
Generally accepted accounting principles (GAAP) and procedures are
followed to prepare those statements
It presents firms financial situation to users
Preparation for the purpose of external reporting to owners investors and
creditors
Objective: 1) For decision making To provide reliable financial information
about economic resources and obligations of business enterprise.2) For
estimating the earnings potential of the enterprise
Types of financial statements:
Income statement (P & L a/c):
Periodic statement FPO (for the period of)
It presents the summary of revenues, expenses and net income or net loss
of a firm
Measure the firms profitability; it is a scoreboard for a period of time
Subsidiary books:
Special books:
Sales book purchase book
Returns book sales, purchases
Bills book payable receivables
Cashbook : General books: Opening entries adjusting and closing post
entries, correcting entries :
Personal accounts: Proprietors, suppliers, creditors
Artificial persons limited company a/c, insurance company a/c,
government company a/c
Representative persons common title, salaries outstanding, rent prepaid
Real accounts: Tangible land, buildings, machinery
Intangible goodwill, patents, intellectual properties,
Nominal accounts:
Salaries, rent, commission, discount, insurance
Debit credit
Personal accounts: Is the receiver Is the giver
Real accounts: what comes in what goes out
Nominal accounts: all losses and exp all gains
Ledger: is a set of accounts, ledger is the important book of the double entry
system
Posting: process of entering in the ledger
Journal entry: The book of first entry (original entry) chronological record
Trail balance: All the accounts of a concern are thus balanced off then they
are put in a list
Debit side trail to credit side
Debit side: Losses, expenses, and assets
Credit side: Gains, revenues, liabilities
To find out the figures arithmetically correct or not
Trading account: To find out the gross profit
Debit side: wages, carriage, and royalties if it is used for production
Factory expenses, package goods are incomplete such as biscuits
consumable stores (cotton waste, grease, engine oil) factory rent salaries
Gross profit: sales cost of goods sold
Inventories:
Raw materials, work in progress, finished goods
Need for holding inventories:
Transaction motive smooth production
Precautionary motive risk, unpredictable changes
Speculative motive price fluctuations
Methods:
First-in first-out method (FIFO)
Last-in first-out method (LIFO)
Weighted average method
Specific identification method
Ordering cost: entire cost of acquiring raw materials
Carrying cost: incurred for maintaining storage, insurance, taxes
Capital structure:Refers the mix of long-term sources of funds, preference
capital and equity capital and retained earnings
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