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Accounting and Finance Bits

1. Investment Decision : It deals with selection of assets in which funds will be invested by

a firm
2. Wealth Maximization: It refers to maximizing the wealth of a share holder by

maximizing the earnings per share.

3. Time value of money: It means that the value of a unit of money is different in different

time periods.
4. Discounting: It is a process of determining the Present valve of a future amount. 5. Compounding: It is process of determining the future amount. 6. A stream of equal cash flows is called Annuity 7. Risk: It is the variability of actual return from the expected return associated with a given

8. Portfolio: It is a collection /combination / group of assets/ securities. 9.

Systematic and Non systematic Risk: Systematic risk refers to the over all market risk that affects all securities and cannot be diversified away. Non Systematic risk is firm specific and can be avoided by diversification.

10. Efficient Frontier: It is a set of all efficient Portfolios which gives maximum return at a

given level of risk or which minimizes risk at a given level of return

11. Capital Market Line : It is a line which explains the relationship between standard

deviation and expected return on a security. Security Market Line is a line which explains the relationship between Beta and expected return on a security.
12. Beta is one which measures the risk of an individual asset relative to market Portfolio. 13. Coupon rate is the rate of interest specified on the face value of the Bond. 14. Yield to Maturity is the rate of return an investor earns on a bond held till the maturity.

15. Cash Flow statement shows the causes for the changes in cash and cash equivalents

where as funds flow statement shows the causes of changes in net working capital.
16. Break Even Point is the sales volume at which revenue equals cost or a point where

fixed cost is equal to Contribution or a point where there is no profit/Loss.

17. PV ratio (Price Volume ratio) tells about the profitability of business Operations. 18. Margin of safety is the excess of actual sales revenue over the Break Even sales revenue. 19. Capital Budgeting is the process of evaluating and selecting long term investments that

are consistent with the goal of shareholders wealth maximization.

20. Capital Expenditure vs. Revenue Expenditure: The expenditure incurred in acquiring

a fixed asset is called Capital Expenditure. An expenditure incurred in the course of regular business transactions of a concern is called Revenue expenditure.
21. Deferred Revenue expenditure: Expenditure whose benefit is enjoyed not in one year

but over a number of years is known as deferred revenues expenditure.

22. Capital Rationing is the financial situation in which a firm has only fixed amount to

allocate among competing capital expenditures.

23. Payback Period is the exact amount of time required for a firm to recover its initial

investment in a project from cash inflows.

24. Net present value: The difference between the present value of cash inflows and the

present value of cash outflows. It is used in capital budgeting to analyze the profitability of an investment or project.
25. Internal Rate of return: it is the discount rate that equates the present value of cash on

flows with the initial investment associated with the project.

26. Profitability Index: It measures the Present value of returns per rupee invested. 27. Cost of Capital: It is the minimum required rate of return that a firm must earn on its

project investments to maintain its market value.

28. Business Risk: it is the risk to the firm of being unable to cover fixed operating costs. 29. Financial Risk: It is the risk of being unable to cover required financial obligations such

as interest & preference dividends.

30. Debenture: It is an acknowledgement of debt. 31. Cost of Equity: It is the rate at which investors discount the expected dividends of the

firm to determine its share value.

32. Networking capital: Gross Working capital Current Liabilities or It is the capital that

is required to meet day to day requirements of the firms.

33. Operating Cycle / Circulating Cycle/Working capital cycle: It the continuing flow

from cash to suppliers, to inventory to accounts receivable and back in to cash.

34. Marketable Securities: These are short term interest earning money market instruments

used by firms to obtain a return on idle funds.

35. Liquidity: It is the ability to transform a security in to cash. 36. Commercial Paper: It is a short term, unsecured promissory note issued by a firm that

has high credit rating.

37. Economic Order Quantity: It is the optimum order quantity which minimizes the total

of its order and carrying cost.

38. Lock Box: Under the service, the payments made by customers are directed to a special

post office box, rather than going to the company. The bank will then go to the box, retrieve the payments, process them and deposit the funds directly into the company bank account.
39. Leverage: It is the employment of an asset/source of finance for which firm pays fixed

cost /fixed return.

40. Operating Leverage: It is the firms ability to use fixed operating costs to magnify the

effects of changes in sales on its EBIT.

41. Financial Leverage: It is the ability of a firm to use fixed financial charges to magnify

the effects of changes in EBIT on the EPS.

42. Operating Risk: It is the risk of not able to cover fixed operating costs by firm. 43. Financial BEP: It is the Level of EBIT which is equal to firms fixed financial cost. 44. Capital Structure: It is the Proportion of debt and preference and equity shares on a

firms balance sheet. It Specifies the structure of long term liabilities

45. Financial Structure: It specifies the structure of long term liabilities and Short term

46. Arbitrage: It is a process of buying a security in a market where price is low and selling

where it is high.
47. Market capitalization: It is calculated by multiplying a company's shares outstanding by

the current market price of one share.

48. Dividend Payout ratio: It is the % of earnings distributed to shareholders

49. Bonus shares: Payment to existing owners of dividend in the form of shares. 50. Stock Split: It is a method of increasing the number of shares belonging to each

shareholder or A method in which a company's existing shares are divided into multiple shares.
51. Reverse Stock Split: A method of reduction in the number of a companys shares

outstanding that increases the par value of its stock or its earnings per share.
52. Floating stock: Shares of a company that are freely available for purchase by investors

on the secondary market.

53. Record date: It is the specified future date by the directors on which all persons whose

names are recorded as shareholders receive the declared dividend.

54. Money Market Vs. Capital Market: It is a market where short term funds are raised

which are required for less than one year. Capital Market is a market where Long term funds are raised which are required for more than one year.
55. New Issues Market (Primary Market) Vs. Secondary Market : It is a market which

deals in new securities i: e securities which were not previously available are offered to the investors for the first time in this market. Secondary Market is market where buying and selling of share takes place.
56. Underwriting: It is an agreement by the under writer who agrees to take shares which

are left unsubscribed by the public.

57. Preference shares: A preferred share generally have a fixed rate of dividend and is given

first preference at the time of payment of dividend and repayment of capital.

58. Equity Shares: They are ownership securities and they receive dividend and have a right

to vote in the Annual General Meeting.

59. Convertible Debentures & Non convertible Debentures: Debentures which can be

convertible in to equity shares after a certain period of time are called Convertible Debentures. Debentures which cannot be convertible in to equity shares after a certain period of time are called Non Convertible Debentures.
60. Redeemable & Non Redeemable Debentures: Debenture which are redeemed after a

certain period of time are called Redeemable debentures and those debentures which cannot be redeemed after a certain period are called Non redeemable debentures.
61. Warrant: It is a security which entitles the holders to purchase no of shares at a stated

price before a stated period.

62. Initial Public Offer: A company which comes to the public issue for the first time is

called Initial Public Offer

63. Follow on public offer: FPO is essentially a stock issue of supplementary shares made

by a company that is already publicly listed and has gone through the IPO process.

64. Book building Method: The process by which an underwriter attempts to determine at

what price to offer an IPO based on demand from institutional investors.

65. Rights Issue: When new shares offered to existing stockholders in proportion to their

current stock/shareholding, for a specified period and at a specified price, then it is called Rights issue. The right of an equity shareholder to receive such shares is called Preemptive right.
66. Green shoe option: A provision contained in an underwriting agreement that gives the

underwriter the right to sell investors more shares than originally planned by the issuer.
67. Listing: It means the admission of securities of a company to trading privileges on the

floor of a stock exchange.

68. Merchant Banker: Any person who is engaged in the business of issue management is

called Merchant banker.

69. Dematerialization Vs. Rematerialisation: A process of converting physical share

certificates in to electronic form. Rematerialization is a process of converting electronic form certificates in to physical share certificates.
70. Repo rate : Repo rate is the rate at which our banks borrow rupees from RBI 71. Reverse Repo: Reverse Repo rate is the rate at which Reserve Bank of India (RBI)

borrows money from banks.

72. Mutual Fund: A mutual fund is a professionally managed type of collective investment

scheme that pools money from many investors and invests typically in investment securities.
73. Asset Management Company: An Asset Management Company (AMC) is an

investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives.
74. Investment company: An investment company is a company whose main business is

holding securities of other companies purely for investment purposes


Hire purchase and Lease financing: Hire purchase is a purchase of an asset in which customer makes down payment and finance rest of the amount through financial institution or bank. On Lease on the other hand is an agreement of using asset for certain period and paying rent on it at a pre-described rate of interest Bank Reconciliation statement: This is a statement explaining any difference between bank book balance kept by the business and the bank statement issued by the banker Deferred payment : A debt which has been incurred and will be paid back at some point in the future. Debt service Coverage ratio: it is the amount of cash flow available to meet annual interest and principal payments on debt. Hedge Funds: A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. Venture capital : A method of financing of startup and early stage businesses as well as businesses in "turn around" situations. Reserved Capital & Capital Reserve: Reserve Capital is the Part of the authorized capital of a firm which has not yet called up and is available for drawing in case of need. Capital Reserve is the Reserve created by the accumulated capital surplus of the firm. Income and Revenues: Income represents how much money the company has left over, if any, after its paid the costs of doing business. Revenue refers to all the money a company takes in from doing what it does whether making goods or providing services. ADR & GDR: ADR is American Depository Receipts, it is issued by a company in the USA .ADR are bought and sold in USA markets .It can be listed & traded on a exchange of USA. Whereas GDR refers to Global Depository Receipts, the local currency shares of a company are delivered to the depository banks. The depository banks issues depository receipts against these shares. Such receipts denominated in US dollars. Amortization: It is a process of finding the decrease in the value of an intangible asset.










85. 86.

Depletion: It is the actual physical reduction of natural resources by companies. Forfeited shares: Shares in a no-liability company which are forfeited (cancelled) to the previous owner because of non-payment of a call on the shares. Euro Bond: A bond issued in a currency other than the currency of the country or market in which it is issued Foreign Bond: A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency. Speculator and hedger: The main motive of the hedger is to hedge(minimize)




the risk from the occurrence of some events. The motive of the speculator is to gamble in the market in order to make the profit by buying/selling the derivative products.

Journal and Ledger: Journal is a book of original Entry, Ledger is a book of Short selling: a short sale is the sale of a security that isn't owned by the seller,

final entry.

but that

is promised to be delivered.

Asset and Liability: An asset puts money into your pocket, an asset should generate income on a regular basis. Liabilities are the opposite of assets. Liabilities take money out of your pocket Diluted EPS : Earnings per share is calculated by dividing the company's profit by the number of shares outstanding which includes Warrants, stock options, convertible preferred shares, etc. Deferred Tax : represents a company's liability for taxes owed that is postponed to future periods Debit and Credit: A debit is a bookkeeping entry that results in the increase of an asset or a decrease in a liability or owners equity. A credit is a bookkeeping entry that results in the decrease of an asset or a increase in a liability. Trial Balance: It is a list of all the nominal ledger (general ledger) accounts contained in the ledger of a business. Balance sheet: A balance sheet is a statement which show the solvency position of the firm. Income Statement: It states the amount of profit earned by a firm during a particular period.







99. Golden Rules of Accounting : Personal Account : debit receiver , credit giver Real Account: Debit what comes in Credit what goes out Nominal Account : Debit- all expenses &Losses, credit Incomes and gains

List of all Financial Ratios:

S.NO Ratio 1 Working capital 2 Acid Test or Quick Ratio

Current Assets Current Liabilities Cash + Marketable Securities + Accounts Receivable Current Liabilities Cash Equivalents + Marketable Securities Current Liabilities Net Income Net Sales Net Income (Beginning + Ending Total Assets) / 2 Net Sales

Significance of ratio short-term solvency of a business liquidity position of the business

Cash Ratio

conservative view of liquidity

4 5

Net Profit Margin Return on Assets

measure of net income Measures the company's ability to utilize its assets to create profits. A measure of the operating income generated by each Rupee of sales. Measures the income earned on the invested capital Measures the income earned on the shareholder's investment in the business.

Operating Income Margin Operating Income


Net Income Long-term Liabilities + Equity Net Income Equity

Net Income Sales Sales Asset Asse s x x ts Equit y

8 9

Return on Equity Du Pont Return on Assets

provides an understanding of how the company generates its return

10 11

Gross Profit Margin Total Debts to Assets

Gross Profit Net Sales Total Liabilities Total Assets

Indicates the relationship between net sales revenue and the cost of goods sold Provides information about the company's ability to absorb asset reductions arising from losses without jeopardizing the interest of creditors Indicates long-term debt usage


Capitalization Ratio

Long-Term Debt Long-Term Debt + Owners' Equity Total Debt Total Equity EBIT Interest Expense

13 14

Debt to Equity Interest Coverage Ratio

Indicates the long term solvency position of the business Indicates a company's capacity to meet interest payments. Uses EBIT (Earnings Before Interest and Taxes) Provides insight into the ability to pay long term debt from current assets after paying


Long-term Debt to Net Long-term Debt Working Capital

Current Assets - Current