1. 2. 3. 4.

Difference between reserve and provisions. What is contingent liability. What is mutual funds. Difference between depreciation, amortization, appreciation and revaluation. 5. What is cash flow and what is operating , investing and financing activities. 6. What is goodwill and where it will come. 7. What is fictitious assets. 8. Types of mutual funds. 9. If a company buy back its share from market what would be the effect on the company financial position. 10. If a company buy a computer or any assets but not fixed assets in which head it will come under cash flow. 11. What is break even point. 12. What is authorized share capital it can be increased or not. If no why. 13. What is preliminary expenses. 14. Difference between current and acid test ratio. 15. Difference between profit and loss account and income and expenditure account.

ANSWER 1:

Distinction between provisions and reserves

Reserves
1. It is created by debiting the profit and loss appropriation account. 2. It is created to meet an unknown liability, or to strengthen the financial position of the company or for equalization of dividends etc. 3. A reserve is created only when there is profit in the business. 4. It can be distributed among shareholders as dividend. 5. The reserve is created without taking into consideration the actual amount required except in the case of redemption of debentures when a definite sum is set aside. 6. Creation of reserve depends upon the financial policy of the business and discretion of its management. 7. It is usually shown on the liability side of the balance sheet as it is not a specific reserve.

Provisions
1. It is created by debiting the profit and loss account. 2. It is created to meet a known liability or a specific contingency, e.g.. provision for bad and doubtful debts, or provision for depreciation etc. 3. A provision is created irrespective of whether there is profit or loss in the business. 4. It is not available for distribution as dividend among shareholders. 5. A provision is made for a definite amount and, therefore, a definite sum is set aside every year to meet the known contingency. 6. Making of a provision is a must to meet known liability or contingency. 7. The provision is generally shown on the assets side of the balance sheet.

Distinction between general reserve and specific reserve

General reserve
1. It is created for a specific purpose. 2. It is utilized for that specific purpose, for which it was created. 3. Whether profit or no profits, it must be created. 4. It is necessary to create in order to ascertain profit. 5. It is shown on the debit side of profit and loss account. 6. Net profits are reduced because of it.

Specific Reserve
1. It is created not for any specific purpose but for meeting future contingencies. 2. It can be utilized for meeting any future loss. 3. It is created only when there are sufficient profit. 4. They are created only when there are profits i.e. they depend upon profits. 5. It is shown on the debit side of profit and loss appropriation account. 6. Only distributable profits are reduced because of it.

Reserve Fund
Profit set aside and used in the business is a reserve. But profit set aside and invested outside the business is a reserve fund. Thus, the use of the term 'fund' indicates investment of reserve outside the business.

Sinking Fund
A sinking fund is a fund built up by annual contributions. The contributions are invested outside the business in readily realizable securities. Interest received on investments is reinvested in the same securities. A sinking fund may be (i) for replacement of fixed assets or (ii) for the redemption of debentures or repayment of loan. A sinking fund for the replacement of a fixed asset is a provision. But a sinking fund for redemption of debentures or repayment of loan is an appropriation of profits. A sinking fund represents amount invested outside the business.

Distinction between reserve fund and sinking fund

Reserve fund
1. Investments are not for definite period. 2. It is created always out of divisible profits. 3. Interest received on investments representing reserve fund may not be re-invested.

Sinking fund
1. Investments are for a definite period. 2. It is not always out of divisible profit e.g. sinking fund for replacement of asset is provision for depreciation, it must be created even if there are no profits. 3. In case of sinking fund, interest is always re-invested.

ANSWER 2:
In a layman's language, a contingent liability is a liability which "may or may not arise". Contingent Liability is not an actual liability therefore it is not recorded in b/s. they appear as a footnote to b/s. Ex: Bill Discounting Contingent liabilities are off balance sheets items which can become potential outstandings or liability for a comapny depending on or contingent to a situation or a circumstance. A good example: COntractor A goes to Indian GOvt and wants to participate in a tender on road construction - he wins the tender - the govt asks him to get a bank guarantee for 1 crore with the condition that they will invoke it if he cannot complete the road in 1 year. The contactor comes to a bank and gets a guarantee this is now a contingent liability as we do not know yet if the govt will invoke it.

What is Bill discounting? Business activities across borders are done through letter of credit. Letter of credit is an instrument issued in the favor of the seller by the buyer bank assuring that payment will be made after certain timer frame depending upon the terms and conditions agreed, it could be either sight, 30 days from the Bill of Lading or 120 days from the date of bill of lading. Now when the seller receives the letter of credit through bank, seller prepares the documents and presents the same to the bank. The most important element in the same is the bill of exchange which is used to negotiate a letter of credit. Seller discounts that bill of exchange with the bank and gets money. Discounting bill terminology is used for this purpose. Now it is seller's bank responsibility to send documents and bill of exchange to buyer's bank for onward forwarding to the buyer for the acceptance and the buyer finally, accepts bill of exchange drawn by the seller on buyer's bank because he has opened that LC. Buyers bank than get that signed bill of exchange from the buyer as guarantee and release payment to the sellers bank and waits for the time span.

How does this account then differ from a Cash Credit Account? The difference is very subtle and relates to the operation of the account. In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the other hand, is allowed against a host of other securities including financial instruments like shares, units of mutual funds, surrender value of LIC policy and debentures etc. Some overdrafts are even granted against the perceived "worth" of an individual. Such overdrafts are called clean overdrafts. Bill Discounting Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his(borrower's) customer and pay him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a pre-determined interest depending upon the terms of transaction. Term Loan Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, pre-determined installments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year).

Purchases of plant and machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category. Classification of loans Another way to classify the loans is through the activity being financed. Viewed from this angle, bank loans are bifurcated into :

Priority sector lending Commercial lending

Cash credit Account This account is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit facility" in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank. Overdraft The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it.

What is the difference between amortization and depreciation?

Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally expensed based on the time period over which the asset was used. Both depreciation and amortization (as well as depletion) are methods that are used to prorate the cost of a specific type of asset to the asset's life. It is important to mention that these methods are calculated by subtracting the asset's salvage value from its original cost. Amortization usually refers to spreading an intangible asset's cost over that asset's useful life. For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment is spread out over the life of the patent, with each portion being recorded as an expense on the company's income statement. Depreciation, on the other hand, refers to prorating a tangible asset's cost over that asset's life. For example, an office building can be used for a number of years before it becomes run down and is sold. The cost of the building is spread out over the predicted life of the building, with a portion of the cost being expensed each accounting year. Depletion refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs are spread out over the predicted life of the oil well. It is important to note that in some places, such as Canada, the terms amortization and depreciation are often to used interchangeably to refer to both tangible and intangible assets.

Goodwill Intangible assets relating to a company's business practices. Goodwill includes assets with value that are exceptionally difficult to quantify. Examples include brand recognition, customer loyalty, and employee happiness. Goodwill helps a company remain competitive in the long term, even if the company does not produce the best product. For example, a customer will be more likely to buy peanut butter from one company and pay more for it, if he/she thinks the company produces better-tasting peanut butter, regardless of whether or not this is the case. When a company buys another company, it will often pay above the target company's book value to account for goodwill.

Intangible 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 ... Read More Negative Goodwill A gain occurring when the price paid for an acquisition is less than the fair value of its net tangible assets. Negative goodwill implies a bargain purchase. Negative goodwill may be ... Read More 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.

Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset such as buildings and equipment. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.

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