Business Digest: Writers and Compilers

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Business Digest 1 Introduction

Business Digest
One Stop Solution For Business and Economics Graduates
(সকল ভাইভা এবং লললিত পরীক্ষার লবষয়লভলিক পূর্ ণাঙ্গ প্রস্তুলতর জন্য)

Special Thanks to:


Md. Sajib Hossain,CFA
Assistant Professor
Department of Finance, University of Dhaka
MBA (University of Dhaka)
MSF ( Syracuse University, USA)

Writers and Compilers:


M. Bodruddoza Parvez
MBA,BBA (Finance), University of Dhaka
Ex- Assistant Director (Finance), BREB, Ministry of Power Energy and Mineral Resources
Ex-Lecturer (Finance and Banking): Sheikh Burhanuddin Post Graduate College
Ex-Senior Researcher: Prime Research and Consultancy

Md. Rukunuzzaman Khan (Rupom) Md. Mahbub Sarker


MBA, BBA (Finance), University of Dhaka BBA, MBA(AIS, DU), CA (Advance Level)
Assistant Manager (Accounts & Finance), NWPGCL Regulatory & Corporate reporting lead
Assistant Director (Accounts/Finance/Audit/Commercial Expo Group (BD) Limited
Operation), (Recommended), BPDB
Ex Lecturer & Course Coordinator, Accounting, UCC
Md. Azahar Akash Asif Mahmud
J.Assistant Manager (Finance) Statistical Officer , BBS
Dhaka Electric Supply Company Limited (Desco) (37th BCS)
MBA, BBA (Finance) Ex-Officer, Titas Gas Distribution Limited
University of Dhaka MBA, BBA (University of Dhaka)

Maruf Ahmed
Ashraful Alam MBA (Marketing) IBA,DU
MSS, BSS (Economics), University of Dhaka BBA, (University of Dhaka)
Assistant Director (Finance), BREB, Ministry of Power Ex-Instructor@ Mentors, UniAid,
Energy and Mineral Resources
Fahad Zeya Mohammad Shahidul Islam
MBA, BBA (Banking), University of Dhaka MBA, BBA (Management), University of Dhaka
Lecturer, Finance & Banking, Comilla University Assistant Manager (Admin and HR), NWPGCL

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Business Digest 2 Introduction

সহয োগিতো এবং পরোমর্শ গিযে বইটিযে অর্শ বহ েযরযেন:

Md. Shafiq Ahmed Shakil Ahmed


Assistant Tax Commissionar (Recommended) BCS, 37th (Education)
(BCS,38th) Lecturer, Mohipal College, Feni
MBA, BBA (University of Dhaka), MBA, BBA (DU)
Ex-Lecturer, Sheikh Burhanuddin Post Graduate College

Tahmina Akter Prodip Kumar Sutra Dhar


Assistant Director, Bangladesh Bank Assistant Director, Bangladesh Bank
MBA, BBA, University of Dhaka MBA, BBA, University of Dhaka

Anik Mahmood Ibne Anwar Md, Kawsar Khan


MBA, BBA (Finance), University of Dhaka Assistant Director (BREB)
Research Associate, UCB Capital Management MBA, BBA (AIS)
Limited Comilla University

Md. Mahbubur Rahman Zohra Akter Shima


MBS, BBS, (Accounting), MBA, BBA (Finance)
National university University of Dhaka

Nazmul Azim Supan Md. Ruhul Amin


MBA, BBA, Shahjalal University of Science & MBA, BBA (Finance), University of Dhaka
Technology, Sylhet Research Associate, Shanta Securities
Assistant Director, BREB

Md. Muhaiminul Naim Dipannita Islam


MBA, BBA (Management) MBA, BBA (Management)
Jagannath University Univeristy of Dhaka

First Edition: September, 2020


Published By: Xclusive Publications
Minimum Retail Price (MRP): BDT
For complaints and suggestions: 01676683637,
01689731971

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Business and Economics Graduates”

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Business Digest 3 Introduction

Business Digest এর উযের্য েী?


বর্ত মান চাকরিি বাজাি অর্ীব প্ররর্য ারির্াপূ নত। এই প্ররর্য ারির্াপূ র্ত চাকুিীি বাজাযি আশানু রূপ ফলাফল অজতন কিযর্ হযল আপনাি পঠির্
রবষয়সমূ হ ও আপরন য পযেি জনয প্রস্তুরর্ রনযেন যস পে সম্পরকত র্ রবষয়সমূ হ নখেপতযর্ থাকা আবশযক। পঠির্ রবষয়সমূ হ নখেপতযর্ িাখাি
পাশাপারশ আপনাি প্রর্যারশর্ পে সম্পরকত র্ বাস্তব ঘটনা ও সবতযশষ র্থয সম্পযকত অবির্ থাকা বাঞ্চনীয়। এসব কথা রবযবচনা কযিই আমাযেি এই
"Business Digest" বইটি িচনা কিা হযয়যে। এই বইটিি উযেশয হল বযবসায় রশক্ষা অনু ষযেি অন্তিতর্ রশক্ষাথীযেি পঠির্ রবষয়সমূ যহি
রশক্ষাথীযেি পঠির্ যমৌরলক ও গুরুত্বপূ র্ত টরপকগুযলা মযন করিযয় যেয়া এবং ািা বাংলাযেশ বযাংক, সিকািী বযাংক, যবসিকািী বযাংকসহ রবরিন্ন
স্বায়ত্তশারসর্ প্ররর্ষ্ঠানসমূ যহি রহসাব বা অথত এবং প্রশাসন বা মানব সম্পে পে সম্পরকত র্ রবষয়সমূ যহি one-stop সমাধান যেয়া। অথতযাৎ সকল
যমৌরখক এবং রলরখর্ পিীক্ষায় বারর্জয রবিাযিি রবষয়রিরত্তক পিীক্ষায় িাযলা কিাি জনয বইটি সযবতাত্তম া িচনা কিা হযয়যে প্রায় ৪০০-৫০০ টি রিযয়ল
িাইিা রবযেষর্ কযি। বইটি আপনাযক মাত্র ২-৩ রেযন রবির্ ৪-৬ বেযিি রশক্ষাজীবযন া রশযখযেন র্া মযন করিযয় রেযব । অথতযাৎ আপনাি
রবষয়রিরত্তক রশক্ষাযক মযন কযি যেয়া-ই বইটিি উযেশয।
বইটিযত েী আযে ?
বইটি িচনা কিা হযয়যে মূ লর্ বযবসায় রশক্ষা অনু ষে-এি অন্তিতর্ রবরিন্ন রবষয় য মন: রফনযান্স, রহসাবরবজ্ঞান, বযাংরকং, মাযকত টিং, মযাযনজযম্ট এবং
অথতনীরর্ এি উপি। বইটিযর্ উক্ত রবষয়সমূ যহি যমৌরলক ও গুরুত্বপূ র্ত টরপকসমূ হ সু ন্দি ও সাবলীল িাষায় পু ঙ্খানু পুঙ্খিাযব আযলাচনা কিা হযয়যে ।
বইটি প্রনয়যনি সময় এসব রবষয় যথযক য টরপকগুযলা রলরখর্ পিীক্ষায় যবরশ আযস বা আসাি সম্ভাবনা িযয়যে এবং িাইিাযর্ প্রায়ই প্রশ্ন কিা হয়
যসগুযলাি উপি যজাি যেয়া হযয়যে। এি পাশাপারশ রফনযান্স, রহসাবরবজ্ঞান, বযাংরকং, মাযকত টিং, মযাযনজযম্ট এবং অথতনীরর্ি বহুল বযবহৃর্
টারমতযনাযলারজগুযলা অর্ীব সংরক্ষপ্ত আকাযি এই বইটিযর্ র্ুযল ধিা হযয়যে। বইটিযর্ আিও িযয়যে বযবসায় রশক্ষা রবষয়সমূ যহি সাযথ সম্পরকত র্
সাম্প্ররর্ক ঘটনা ও সবতযশষ র্থয। বইটিযর্ সংয াজন কিা হযয়যে রিযয়ল িাইিা। বইটি ৩ ভোযি গবভক্ত:
১। বোংলোযিযর্র বযোংগেং বযবস্থো, মু দ্রো বোজোর, বোযজট সহ সোমগিে অর্শ নীগতর সংগিপ্ত গিত্র।
২। গিনযোন্স, গহসোবগবজ্ঞোন, বযোংগেং, মোযেশটিং, মযোযনজযমন্ট এবং অর্শ নীগত গবষযের গবষেগভগিে আযলোিনো।
৩। গবগভন্ন প্রগতয োগিতোমূ লে গবষেগভগিে গলগিত পরীিোর প্রশ্ন এবং িোগিগতে সমসযোর সমোধোন।
বইটি েোযির জনয ?
১। বযবসোে গর্িো গবষে-সমূ যহ অধযেনরত সেল গর্িোর্ীযির জনয ।
২। গবগসএস/ বযোংলোযির্ বযোংে/ সরেোরী বযোংযের পরীিোর ভোইভো প্রস্তুগতযত।
৩। সেল ববসরেোগর বযোংযের গলগিত/ভোইভো প্রস্তুগতযত।
৪। গবগভন্ন স্বোেির্োগসত প্রগতষ্ঠোযনর গলগিত পরীিো ও ভোইভো প্রস্তুগতযত।
৫। গবগভন্ন এেোযেগমে পরীিোর ভোইভো প্রস্তুগতযত।
৬। গবগভন্ন সরেোগর/ ববসরেোগর িোেগরর গবষেগভগিে গলগিত/ভোইভো পরীিোর প্রস্তুগতযত।
বইটি গেভোযব পড়যবন?
বইটিযর্ রকেু রবষয় খু ব িিীি আযলাচনা কিা হযয়যে। অরর্রিক্ত না পযে খু ব কমন রবষয়গুযলা পেুন। র্যব খু বই প্ররর্য ারির্ামূ লক চাকরি য মন
রবরসএস/বযাংলাযেশ বযাংক/একাযেরমক িাইিাি আযি বইটি িিীি মযনায াি রেযয় পেুন । অবশযই আপরন আপনাি রবষয়টি িাযলা কযি পেযবন ।
য যকাযনা িাইিা রকংবা রবষয়রিরত্তক রলরখর্ পিীক্ষাি আযি বইটি একবাি যচাখ বু রলযয় রনযল আপনাি আত্মরবশ্বাস রফযি পাযবন। অনয রবষয়গুযলা
কম জানযলও সমসযা যনই। অনয রবষয় পযে সবজান্তা হযয় িাইিাযর্ িাযলা কিা ায় না। সু র্িাং আপনাি রবষয়টি খু ব িাযলা কযি পযেন।
বইটি ইংযরগজযত বেন?
বযবসায় রশক্ষা এমন একটি যক্ষত্র য খাযন অরধকাংশ রবষয় ইংযিরজযর্ রশখাযনা হয় রকংবা শব্দগুযলা ইংযিরজযর্ শুনযর্ই শ্রুরর্মধু ি হযয় থাযক।
এোোও রবরবএ/এমরবএ/ রবরবএস রবষয়গুযলা ইংযিরজ রিরত্তক হওয়াযর্ িাইিা যবাযেত প্রশ্নকর্ত া ইংযিরজযর্ প্রশ্ন কযি থাযকন। রবষয়গুযলাি শ্রুরর্
মাধু তর্া বজায় িাখযর্ এবং ু যিি সাযথ র্াল রমরলযয় চলযর্ই বইটি ইংযিরজযর্ যলখা হযয়যে।
বু যলট পযেন্ট বেন ?
বইটিযর্ অরধকাংশ রবষয় খু ব সংরক্ষপ্ত আকাযি রকন্তু খু ব র্ীক্ষ্ণ এবং সূ চারূিাযব উপস্থাপন কিা হযয়যে রবধায় বু যলট পযয়্ট বযবহাি কিা হযয়যে।

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Business Digest 4 Introduction

ভাইভা লবষয়ক পরামর্ণ


ভাল লললিত পরীক্ষা দেয়া দুজন পরীক্ষার্থী ভাইভা লেয়য় দবর হয়য়য়ে। প্রর্থম জন প্রায় সবগুয়লা প্রয়েরই সঠিক উির লেয়য়য়ে;
অপরলেয়ক ২য় জন ৬০-৬৫% প্রয়ের উির লেয়ত দপয়রয়ে। প্রর্থম জন খুব উল্ললসত ; ২য় জন স্বাভালবকভায়বই একটু লবমষ ণ। লকন্তু
দরজায়ের লেন দেিা দেল, সব প্রয়ের উির দেয়া পরীক্ষার্থীর চাকলর হয়লন, অর্থচ ২য় জয়নর চাকলর হয়য়য়ে। ভাইভা দবায়ড ণ সকল
প্রয়ের উির প্রোনই আসল মূল্যায়ন নয়, একটা প্রয়ের উির না দপয়রও কীভায়ব দসটায়ক উপস্থাপন করা হয়ে-দসটাই অলিকতর
গুরুত্বপূর্ ণ। তাই বয়ল প্রস্তুলতর কমলত রািার সুয় াে দনই। লনয়জর আত্মলবশ্বাস বৃলি করয়ত ভাইভার লকছু দমৌললক লবষয় অবশ্যই
দজয়ন লনয়ত হয়ব।
জানা আবশ্যক
১। পঠিত লবষয় এবং লনজ লর্ক্ষা প্রলতষ্ঠান:
ভাইভা দবায়ড ণ সব ণালিক প্রে করা হয় এই অংর্ দর্থয়ক। ভাইভা দবায়ড ণর মুয়িামুলি হওয়ার জন্য লবশ্বলবদ্যালয়য় পঠিত লবষয়য়র
দমৌললক ইসুুগুয়লা ভায়লাভায়ব আয়ি করয়ত হয়ব। দ দসক্টয়র ভাইভা লেয়বন ,আপনার পঠিত লবষয় লকভায়ব প্রয়য়াে করা হয় আ
অবশ্যই জানয়ত হয়ব।
২। লনজ এলাকা:
লনজ এলাকার মুলিয় ািা, কলব-সালহলতুক, রাজননলতক লকংবা অন্যান্য লবলর্ষ্ট ব্যলি, নে-নেী, প্রাকৃলতক ও ঐলতহালসক স্থান,
টুুলরস্ট স্পট সম্পলকণত তয়ের ওপর লনয়জর েিল রািা আবশ্যক।
৩। লনজ চাকলর এবং প্রতুালর্ত পে ও প্রলতষ্ঠান:
দ পয়ের ভাইভা লেয়বন, দস পয়ের কমণকতণার োয়-োলয়ত্ব, সুয় াে-সুলবিা এবং দস পে সম্পয়কণ মূল্যায়ন আয়ে দর্থয়কই দজয়ন
ায়বন। বতণমায়ন দকায়না চাকলরয়ত বহাল র্থাকয়ল তা দেয়ে দকন নতুন চাকলরয়ত আসয়ত চায়েন, এ ব্যাপায়রও প্রে করা হয়ত
পায়র। এ োো প্রলতষ্ঠায়নর গুরুত্বপূর্ ণ পয়ে র্থাকা ব্যলিয়ের নাম, লভর্ন, লমর্ন, উয়ল্লিয় াগ্য অজণন ইতুালে দজয়ন রািা ভায়লা।
ঐ দসক্টয়রর লবস্তালরত তে।
৪। অর্থ ণনীলত সম্পলকণত:
দ য়কান ভাইভায়তই অর্থ ণনীলতর একবায়র দমৌললক ইসুু দ মন— বা,য়জট, লজলডলপ, লজএনলপ, মার্থালপছু আয় মলনটালর পলললস,
লিয়েল পলললস, , িয়রন্স লরজাভণ, ববয়েলর্ক দরলমট্যান্স, মুদ্রাস্ফীলত, মুদ্রা সংয়কাচন, মালন মায়কণট, কুালপটাল মায়কণট, ববয়েলর্ক
লবলনয়য়াে, আমোলন, রপ্তালন ইতুালে সম্পয়কণ লজজ্ঞাসা করয়ত পায়র।। এ োো আমায়ের প্রিান অর্থ ণননলতক িাত ও উপিাত
সম্পয়কণ িারর্া রািয়ত হয়ব।
৫। পলিকা:
লনয়লমত ইংয়রলজ ও বাংলা পলিকা পেয়ত হয়ব। লবয়র্ষ কয়র পরীক্ষার আয়ের লেন ও পরীক্ষার লেয়নর গুরুত্বপূর্ ণ সংবাে দচাি
বুললয়য় লনয়ত হয়ব।
৬। সাম্প্রলতক ঘটনাবলল:
দের্ীয় ও আন্তজণালতক গুরুত্বপূর্ ণ সাম্প্রলতক ঘটনা সম্পয়কণ পলরষ্কার ও লবস্তালরত িারর্া র্থাকয়ত হয়ব।
৭। জাতীয় গুরুত্বপূর্ ণ লবষয়:
বাংলায়েয়র্র সংলবিান, জালতর লপতা বঙ্গবন্ধু দর্ি মুলজবুর রহমান, জাতীয় ৪ দনতা, মুলিযুি, প্রিানমন্ত্রী, অজণন ইতুালে
গুরুত্বপূর্ ণ লবষয় ভালভায়ব আয়ত্ত্ব করয়ত হয়ব।

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Business Digest 5 Introduction

দেস দকাড ও অন্যান্য


১.ভাইভার আয়ের লেনই েরকালর কােজ গুলেয়য় রাখুন।
২.ভাইভার আয়ের রায়ত দ ন প ণাপ্ত ঘুম হয়, দসলেয়ক দিয়াল রাখুন।
৩. দেয়লরা সুুট-টাইসহ সম্পূর্ ণ অলিলর্য়াল দেস পরার দচষ্টা করুন। দময়য়রা মালজণত লডজাইয়নর র্ালে বা লিলপস পরুন।
অলতলরি অলংকার ও দমকআপ পলরহার করুন।
ভাইভা দবায়ড ণর মুয়িামুলি
১ ভাইভা দবায়ড ণর কয়ক্ষ প্রয়বয়র্র আয়ে অনুমলত লনয়য় প্রয়বর্ করুন। দভতয়র লেয়য় স্বাভালবক র্য়ে সালাম লেন, অনুমলত
দেওয়ার পর বসুন অর্থবা লকছুক্ষর্ োঁলেয়য় র্থাকার পরও বসয়ত না বলয়ল বসার জন্য অনুমলত চাইয়বন এবং বসার পর িন্যবাে
জানান।
২ পুয়রা প্রে দর্ানার পর উির দেওয়া শুরু করুন। বাংলায় প্রে করা হয়ল বাংলায়ই উির লেন। আর ইংয়রলজয়ত লজয়জ্ঞস করয়ল
ইংয়রলজয়তই জবাব দেওয়ার দচষ্টা করুন। প্রেকতণার লেয়ক দচাি দরয়ি উির লেয়ত হয়ব।
৩ উির দেওয়ার সময় দকৌর্লী দহান। কারর্ আপনার দেওয়া উিয়রর লভলিয়ত পরবতী প্রে করা হয়ত পায়র। আন্দায়জ উির
দেওয়া দর্থয়ক লবরত র্থাকুন।
৫. বিয়ব্য লস্থর ও অটল র্থাকয়ত হয়ব, নাভণাস হওয়া ায়ব না। সংলক্ষপ্ত, লচিাকষ ণক ও সঠিক র্েচয়ন করুন।
৬. দকায়না প্রয়ের উিয়র তটুকু জানা আয়ে ততটুকুই বলুন। দকায়না প্রয়ের উির জানা না র্থাকয়ল আেয়বর সয়ঙ্গ বলুন, ‘স্যলর
স্যার, এ ব্যাপারটা আমার জানা দনই।’ তয়কণ জোয়না ায়ব না।
৭.দকান লবলর্ষ্ট ব্যলির নাম জানয়ত চাইয়ল উি নায়মর পূয়ব ণ জনাব বা মাননীয় (দ দ দক্ষয়ি া প্রয় াজু) এসব উয়ল্লিপূব ণক
পূর্ ণ/অলিলর্য়াল নাম উয়ল্লি করুন।
৮.ভাইভা দর্য়ষ কােজ গুলেয়য় সবাইয়ক িন্যবাে জালনয়য় সালাম লেয়য় কক্ষ তুাে করুন।
ভাইভায়ত বাে পোর কারর্/বজণনীয় লবষয়
১। অয়হতুক ভীলত, আত্মলবশ্বায়সর অভাব, মুদ্রা দোষ ,আঞ্চললক ভাষার ব্যবহার ইতুালে।
২। দ য়কান লবষয়য় অজুহাত িাো করা, সুস্পষ্ট উির না দেয়া বা উির না দজয়ন জানার ভান করা।
৩। তয়কণ জোয়না এবং লবনয়য়র অভাব।
৪। সরকার লবয়রািী বিব্য

উপলরলল্ললিত লবষয়গুয়লা সািারর্ত দ য়কান ভাইভার জন্যই প্রস্তুলতয়ত সহায়ক ভূলমকা পালন করয়ব। তয়ব লনয়জর
র্লিমিায়ক আত্মলবশ্বায়সর সায়র্থ উপলস্থত বুলি িাটিয়য় ভাইভা দবায়ড ণ উপস্থাপন করয়ত লনজস্ব পলরকল্পনা করয়ত হয়ব।
সৃলষ্টকতণার ওপর লবশ্বাস রািয়ত হয়ব।

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Business Digest 6 Introduction

The economy of Bangladesh (Pre-Covid)


According to World Bank, Bangladesh is among the five fastest growing economies in the world and
Bangladesh is likely to be the biggest mover in the global gross domestic product rankings in 2030,
becoming the 26th largest. However, the statistics says that Bangladesh’s economy will grow at 8.13
percent this fiscal year, the highest in its history. Once dubbed “basket case” because of extreme
poverty following the Liberation War in 1971, Bangladesh has achieved global recognition for
making exceptional progress in human development (Economist, 2012). Over the last 27 years, the
HDI value of Bangladesh increased by 57.1%and GNI per capita increased by 178.6%. Meanwhile,
Bangladesh has extraordinary achievements in Millennium Development Goals (MDG) which
include reduction of extreme poverty, child mortality rate, gender inequality etc. Yet inequality, in
Gini coefficient or Gini index, rose to .482 in 2018, up from 0.458 in 2010, in a worrying
development. The Gini coefficient is measured on a scale of 0 to 1; the closer it is to 1 the higher
the inequality is in the society. However, The BB has set aside about 200 crores for the financial
inclusion scheme.
Economic Review-2019
Population Density (P/Sq) 1103
Literacy rate 72. 3%
Expected life span 72 years
Per Capita GDP USD 1827
Per Capita GNI USD 1909
GDP growth rate (Fixed price) 8.13%
Sectorial Contribution:
Agriculture 13.6%
Industry 35.14%
Service 51.26%
NBFI 34
Average Inflation 5.44%
GDP (According to Budget) BDT 28, 85872,000
GDP (According to Economic Review) BDT 2536177,000

Public investment and private investment were important contributors to the high GDP
growth rate in 2018.Real investments have increased compared to FY 2017.Public investment
to GDP ratio increased while private investment to GDP ratio decreased.However, Foreign
Direct Investment(FDI) declined to USD 1.58 billion in FY 2018 from 1.65 billion in FY
2017.Bangladesh leaped up 7 places in the Global Competitiveness Index from 2017, but it
ranked the lowest amongst its East and South Asian neighbours in Ease of Doing Business
Ranking 2018.“Encouraging foreign investment” in Bangladesh has had significant success –
particularly in the power generation, gas production, pharmaceutical, textile and cellular
telephony sectors.The country has made excellent progress in expanding electricity supply, but
further steps need to be taken to satisfy the demand for electricity which is rapidly increasing
with the growing economy.

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Business Digest 7 Introduction

What is fuelling Bangladesh’s economy? The garment industry is massive –mostly exported to
the United States and Europe.Other exports in the country include leather, ceramics,
pharmaceuticals and shrimp.This growth, despite of insufficient private sector investment, has
been attributed to manufacturing, construction and a bumper crop harvest, coupled with private
consumption, remittance and rural income growth although private sector investment remains
weak in Bangladesh.
Manufacturing and construction sectors were the main propellers of economic growth in FY
2018. Ready-made garment (RMG) exports, is accounted for 83.4% of total exports.
Bangladesh is on track to graduate from Least Development Country (LDC)status in 2024.After 2027,
the duty free,quota free market access and the relaxed rules of origin (RoO)benefits for LDCs are likely
to end, adding to the global trade challenges Bangladesh might face soon.Therefore, Bangladesh must
devote resources to the development and production of non-RMG products, such as leather, which may
have a promising future in the global market.Bangladesh’s current account deficit records an all-time high
of $7.08 billion in the first nine months of the current fiscal year (2018-29) as the country's capacity to
export is failing to keep up with the appetite for imports.The government has also made efforts to create an
'investor-friendly' environment so as to attract foreign trade.
The volume of non-performing loans (NPLs) rose to BDT 893.4 billion in the middle of FY 2018
and the value of local currency in terms of dollar (exchange rate) decreased due to continuous
inflation.
The arrival of Rohingya refugees will test the resilience of the country’s economy and its ability
to maintain the social development momentum while providing humanitarian
support.Employment opportunities for the young population should be taken into
consideration while making investment decisions.These measures will ensure fairer distribution
of the benefits of robust growth.Sadly, natural disasters have had a negative impact on
Bangladesh’s economy.Despite this Bangladesh’s economic situation looks set to continue
improving.

Total investment (as % of GDP) sluggishly improved mostly due to public investment
Private investment (as % of GDP) remains the “Achilles Heel”
The revenue-GDP ratio has stagnated(around 10%)over the last 10 years without any major
improvement.Development expenditure(22.0%)is programmed to grow faster than operating
expenditure (16.3%).Already more than 12 mega projects are on the way to be
completed.These include Padma Bridge, Metro-rail, Rooppur Nuclear Power Plant, Rampal
Coal Power Plant etc.

The shackles for the business community are coming from land unavailability, poor logistics,
plodding bureaucracy, and skills shortage and quality energy scarcity. To alleviate the land
problem, the government has, in the past, announced creation of 100 economic zones, and
started providing one stop service(electricity, telephone, communication etc utility services).
Bangladesh needs to reduce its gap of balance of payment with India and China.Bangladesh
government is trying to use its demographic dividend (labor force aged 15-)60 properly.
Government is arranging different types of training and focusing technical knowledge for the
young generation to turn this huge population into asset.

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Business Digest 8 Introduction

Post Covid Economy of Bangladesh

Like in most other nations, the outbreak of COVID-19 pandemic is an unprecedented shock to the
Bangladesh economy.
Global and local demand for manufactured goods, particularly in the garments sector, has affected
private sector growth and government’s focus in managing the COVID-19 pandemic has expectedly
halt public sector projects. Hence, based on the economic disruptions following the pandemic, GDP
growth forecast of Bangladesh by IMF, WB and ADB has been revised downward from 7.8%-8.2% to
a range of 2.0% to 3.8% for FY’20. Expert project export to fall by 15.4%, import to slow down by
11.8% and remittance to grow at 6.0% in FY 20.
The banking sector was already struggling prior to the COVID-19 situation from skyrocketing Non-
Performing loans, declining margins in a capped interest rate regime, etc. Now, the pandemic has put
the sector into further stress. The funds from the stimulus package will be distributed through the
banking channel; while both credit and collection risk will lie with the banks. The sector being
overburdened with nonperforming assets need to mitigate credit risk before disbursing any fresh aids. It
is high time for the country’s banking sector to develop and implement a truly digitized financial
system, which would include a secured, contactless, and converged financial platform for transactions.
The post pandemic banking scenario would be unquestionably different than the present and
technology would play the dominant factor in creating competitiveness.
High cost to income ratio (78%) in the banking sector with a sudden pandemic shock made the banks
ripe for cost efficiency developments. Cost rationalizations and layoffs in banking sector may come up
with an endeavour to increase efficiency but if done in biased/ weak governance framework, it may
leave the sector demoralized.
The revenue stream of insurance industry is suffering badly due to COVID-19 pandemic. Due to
COVID-19 fire and marine insurance are expected to take the biggest hit. The Covid-19 pandemic has
completely derailed the textile industry from its growth trajectory. From Mar 2020 to May 2020, RMG
exports fell by 54.8% to USD 3.7bn from USD 8.2bn over the same period of 2019. During this time,
1,150 factories reported order cancellation/suspension of USD 3.18bn which impacted around 2.28mn
workers in the industry. The previous structural weaknesses coupled with pandemic shock has driven
the textile industry into a corner and has created a “do or die” situation.
Bangladesh has excess power generation capacity that results in growing capacity payments every
year. Overall power capacity utilization in Bangladesh for 2018-19 was just 43%. Now, the pandemic
driven slowdown in economic activities is likely to further lower energy demand and worsen the excess
capacity situation. Many of the power generation and distribution companies are likely to witness
significant fall in their topline even with capacity payments, some will face business continuity risk
from non-renewal of rental power agreements. Cement and Steel producers in Bangladesh made
aggressive expansion over the past few years with the aim of supplying to the government for its
megaprojects, meeting the rising consumer demand and exporting to neighboring countries. Now, with
the advent of the Covid-19 pandemic all activities in the construction industry has come to a grinding
halt. With the prospect a prolonged demand slump, broken cash cycle from high credit sales and high
debt burden industry players are likely to find it impossible to survive without government assistance.
The pharmaceutical industry is among the least effected by the pandemic disruption but the industry’s
supply chain has been stretched dangerously thin. The industry imports over 97% of its raw materials;
however, trade with importing countries has been severely restricted since the start of the pandemic. If
this persists, drug producers may have to shift to expensive import destinations which will eat into their
profit margins.

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Business Digest 9 Introduction

The government stimulus gives the industry access to cheap financing which is not enough to
address the demand and supply chain disruptions over the long run. Fiscal stimulus worth BDT
1,029.6bn and various non fiscal stimulus has been announced to tackle the economic fallout of
the coronavirus pandemic. However, efficient implementation of the fiscal stimulus will be a key
challenge.
Fortunately, The GDP growth rate of Bangladesh has reached 5.24 per cent in the last fiscal year
(FY20) despite the impact of coronavirus pandemic while the per capita income increased to
$2,064, according to the provisional estimation of Bangladesh Bureau of Statistics (BBS), reports
BSS. The per capita income stood at $2,064 in the last fiscal from US$1,909 in FY19. The per
capita income was US$1,751 in FY18. According to the BBS, the GDP growth rate at constant
prices in the Industry sector increased by 6.48 per cent in the last fiscal year which was 12.67 per
cent in FY19.
Till August,2020, Many of Bangladesh’s South Asian peers and other countries around the world
are in negative growth or lower growth than projections. Bangladesh has recorded an impressive
5.24% GDP growth (provisional) in FY2019-20, despite the devastating impact of the Covid-19
pandemic. Bangladesh’s inspiring performance in GDP growth and other economic indicators has
led economists and global projections to forecast that the country's economy will recover from the
pandemic faster than many other economies in the region.
Experts believe that there will be huge opportunities for Bangladesh in the post-Covid-19 scenario
that the country needs to utilize. The pandemic will bring new life and new culture. He said here
is shortage in demand and supply and this will encourage other countries to supply to Bangladesh
and also take goods from the country. “Bangladesh will be in a much stronger position to
negotiate with the importers of garments which is a basic goods. Padma Bridge and three ports are
coming up which will connect the country with the rest of the world. Many African countries do
not have port facilities for which they have to suffer a lot, but Bangladesh has got that
opportunity. Metro rail, underground tunnel projects are being implemented which will create
new opportunities for the country. Bangladesh's large import is the energy and its cost will be half
in post-COVID-19 era. Education sector is now more dependent on internet connectivity.
Already 95 percent people have access to telephony that another huge thing that happens in
infrastructure “With these telephony available, we can extend it to 4G and 5G and we can find it
for ensuring access to medical service for the people. If we can properly provide education
through internet we can move up. China is coming up fast as because their people are educated. if
we can give it through the internet and computers and telephone, it will be much more useful.
Now the government is looking for converting all the upazila health complexes into hospitals that
will be huge upside to provided social infrastructures. COVID-19 is certainly bad for all but these
opportunities are the stars in the darkness. There could be sunshine and there could be sunshine in
the cloud for which Bangladesh must pursue.
Bangladesh’s exports rose by 0.6% to $3.91 billion in July, after suffering an 83% decline to $520
million in April. Imports are also showing signs of improvement, with a 36% rise from May to
June. In addition, remittance hit record highs of $18.20 billion in FY20 and Foreign Exchange
reserves hit an all-time high of $37.1 billion in July. Agricultural production, a crucial engine of
growth, performed better in the pandemic, even though crops suffered due to supply chain
disruptions. However, the Covid-19 pandemic continues to pose great risk as it could weaken the
outlook in the US and European Union, major exports destinations for Bangladeshi goods, said
the global research team of Standard Chartered Bank.
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Business Digest 10 Introduction

Furthermore, falling oil prices and Covid-19 in the Middle East, a major source of inbound
remittances, is another concern for the Bangladesh economy. Fiscal and monetary support is likely
to be simultaneously used to cushion the growth slowdown. Bangladesh's debt to GDP ratio is
likely to increase to 40% of GDP in FY 2021, but it is still in a comfortable zone compared to
peers, according to the multinational bank. The Bangladeshi Taka is likely to remain stable on the
back of Balance of Payment surpluses, it added. The country’s external debt to GDP ratio remains
low and this is a unique advantage, allowing for a V shaped economic recovery if properly
utilized. While fiscal and monetary policy measures for stimulus packages are expected to
increase local currency liquidity, there will also be opportunities to tap into the foreign currency
liquidity pool for medium to long term funding for various investment and infrastructure projects,
they added. Expert suggested looking at capital market instruments such as commercial paper,
zero coupon bonds, sukuks NS green bonds for long-term financing, and moving away from
traditional bank-led financing models. This will not only help to attract local investors but also
bring in foreign investment to the capital market, making Bangladesh’s financial sector more
vibrant.
The post-COVID-19 world will not be the same again. The new normal may come up with
changed lifestyle, purchasing behavior and way of doing business through new interfaces. The
post-pandemic solutions of unique problems that we are facing through this pandemic may lay the
foundation for many business ideas and can shape the future of our e-commerce industry in the
coming years.

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Business Digest 11 Introduction

Review of budget 2020-21


Recently, Bangladesh has unveiled a Tk. 5.23 trillion spending plan for fiscal year 2019-20,
which is an 18 percent increase from the revised budget of the outgoing fiscal year. The new
budget is growth-friendly and has set ambitious goals but shied away from addressing the key
challenges confronting the economy. The budget has largely focused on infrastructure, along
with a major push to scale up social safety net and other nationally important projects. In the
proposed budget, the GDP growth is projected at 8.2 percent for FY20 and FM hopes to keep the
inflation target below 5.5 percent in the new fiscal year. Composition of individual and corporate
income tax will remain the same (40:60). Of the Tk 5.23 trillion, the proposed budget sets out a
revenue target of over Tk 3.77 trillion. More than Tk 3.25 trillion is expected to come through
the National Board of Revenue. The budget deficit will be kept at 5 percent of the gross domestic
product.
National Budget 2019-20 (in BDT)
Position 49th of Bangladesh, 19th of Awami League Govt. and
1st of Finance Minister A. H. M. Mustofa Kamal
Name "সমৃ গির বসোপোযন বোংলোযির্, সমে এিন আমোযির"
Budget Size (cost) 5, 23, 190 Crore
Aggregate Revenue 3, 81, 978 Crore (including foreign aid)
Aggregate Deficit 1, 41, 212 Crore (considering foreign aid)
Education and Technology (Max) 79, 486 Crore
Annual Development Programme (ADP) 2, 02, 721 Crore
Income Level exempted from Tax 2, 50, 000 for men
3, 00, 000 for men aged over 65 and all women
4, 00, 000 for the disabled
4, 25, 000 for gazetted freedom fighters
GDP (expected) 28, 85, 872 Crore.
GDP Growth (expected) 8.2%
Inflation (expected) 5.5%

The government has already approved the Tk 2.03 trillion Annual Development Programme.
The government is placing the maximum emphasis on developing rural infrastructure to ensure
that people living in these areas have access to all urban amenities in keeping with the party’s
electoral promises. “Therefore, the upcoming budget is focusing on the motto ‘my village, my
city. The Government plans to expand the national budget to Tk 7 trillion and scale double -digit
GDP growth by 2021, the golden jubilee of the country’s independence. Tk. 43,919 crore is
allocated for 14 projects which is 21.7% of total ADP of FY 19-20.
To promote FDI, the government has provided relief to the foreign companies from multiple layer
of taxation on dividend income. Moreover, the proposal to continue with reduced tax rates between
10 percent and 15 percent for readymade garment and textile sectors, would also augment foreign
investment, boost exports and generate employment opportunities. The budget FY20 has proposed
new fiscal incentives for the export sector. Cash incentive of 1% for the RMG exports which are not
receiving the prevailing 4%incentive –An additional Tk. 2,825 crore will be provided in FY20.

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Business Digest 12 Introduction

Education budget decreased as a share of total budget from 12% in FY09 to 11.7% in FY2019 but
VAT on English Medium Schools is to be reduced to 5% from 7.5%- reducing the cost of
education. Allocation for social safety net (SSN) has been increased by 15.5%. TDS on interest from
savings certificate has been increased from 5% (final settlement) to 10% (final settlement) –the final
settlement part of the new clause will put tax burden in case of low-income people depending on the
interests from savings (measures should be taken to protect their welfare).
VAT exemption on, inputs required for government's priority and fast track projects, such as the
Bangladesh Economic Zone (BEZA) and the Public-Private Partnership (PPP) projects, might attract
investment but will probably create discrimination. Total allocation for the power division has been
increased from BDT 22, 936 crore in budget FY19 to BDT 26, 064 crore in budget FY20 -a 13.64%
increase.
Certain products and services are exempt from VAT (foodstuffs, agricultural supply, public transport,
pharmaceutical products, educational services), and some have a reduced rate:6% for restaurants
without air conditioning, 5% on electricity supply, information technology services, online business
services (as of 2019), 4.5% on photography and garages, 2% on goldsmiths, 1.5% on construction,
etc. Bangladesh is expected to introduce a new VAT regime by 2021, with two standard reduced VAT
rates of 7.5% and 5%.
Excise duties have been abolished on all products except on bank deposits and airline tickets
(exemptions are provided for disabled soldiers). An additional duty of 20%, 35%, 65%, 100%
or more is levied on certain products, the highest being on beer (250%), alcohol and cigarettes
(350%).
During the last three fiscal years, it has never been possible to fully spend the agriculture subsidy
(Tk. 2,570 crore, Tk. 5,390 crore and Tk. 3,800 crore remained unutilized in FY16, FY17 and
FY18). The proposed budget has announced to introduce ‘crop insurance’ in order to save
farmers from the financial loss caused by natural calamities -very much needed.
Most appreciated part of the budget includes proposed changes in tax holiday facilities,Tax
exemption or rebate on institutions for educating, training or employing the physically
challenged, Providing new fiscal incentives to exporters and remitters, instead of gradually
depreciating BDT.
Govt. has also proposed institutional measures to expand tax net includes setting up tax offices in
every upazilla, Increasing the number of tax zones to 63 from current 31, Setting up specialized
units, submitting return of income for the non-resident taxpayers who are doing business in
Bangladesh through permanent establishments, making TIN compulsory for receiving different
utility services as well as asset transfer, increasing the number of income taxpayers to more than
1 crore by the next few years -any time bound action plan is missing in this regard.
Tax on retained earning had been very much controversial issue in this budget. However,
according to finance act-2019, any listed company can transfer maximum 70 percent of its net
profit after tax to retained earnings and reserves in any financial year. That means at least 30
percent dividend will have to be offered. If any company fails to do so, 10 percent tax will be
levied on retained earnings and reserves. In addition, if the company's stock dividend is more
than the cash dividend, 10 percent tax will be slapped on stock dividend.
Successful implementation of these initiatives, revenue on average will grow by 25 percent in the
coming years, and the Tax-GDP ratio will increase to 15 percent by 2021, ” FM said in his
speech. Several economists predicted that it would be difficult to implement this budget. Now we
will have to see whether the government will be able to face the forthcoming challenges.

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Business Digest 13 Introduction

National Budget 2020-2021: A contemporary of post COVID-19


The national budget of Tk 5,68,000 crore for 2020-21 fiscal containing the outline of salvaging the
economy from the grasp of COVID-19 has been placed. The budget has focused 8.2 percent GDP
growth and 5.4 percent inflation. Deficit budget is Tk 190,000 crore which is 6 percent of GDP. To
tackle the economic challenges, the deficit budget should be utilized to meet the basic needs of the
people, As can be readily understood, the budget is aimed at striking a balance between life and
livelihoods triggered by the miserable consequences of the spread of Covid infections and loss of life
in recent days
The National Economic Council (NEC) approved the Annual Development Programme (ADP) of Tk
205,145 crore for 2020-21. On the expenditure side, health, agriculture and employment creation have
been given priority while allocating resources for the annual development program (ADP) in the next
fiscal year.
The government had to continue allocating on mega infrastructure and energy projects because
otherwise costs would be heavily escalated. These projects would also be required to achieve double-
digit growth when the Covid-19 would be over.
The estimated revenue collection for the coming fiscal year is TK 378,000 crore but the total outlay
stands at Tk 568,000 crore leaving a budget deficit of TK 190,000 crore. This fiscal deficit will now
add to the already accumulated public debt (government debt) which is now equivalent 34 per cent of
GDP (of which 38 per cent are external debt).The Debt-GDP ratio is likely to rise to 38.3 per cent by
2022-23.This figure is relatively low in comparison with the US at 84 per cent, the Eurozone 69 per
cent and Japan at 154 per cent. If output falls sharply and the deficit grows, the debt-GDP ratio for
Bangladesh will climb up.
Government is working with various tax reforms. The Electronic Fiscal Device (EFD) machines are
likely to be launched formally on August 25 which is expected to increase the VAT collection.
Statistics shows that some 4 crore people are now in the middle income bracket, but only 22 lakh
people submit tax returns in the country. government will have to identify the new taxpayers, motivate
them and bring them under the tax net.
The budget contains clear directives regarding saving the overall economy, agriculture, industries,
SME and trade and business. The budget will give special focus on post-COVID-19 employment,
investment, food security, social safety net (SSN) and medical services. It expanded social safety net
schemes (SSNS) for bringing some 9.8 million beneficiaries under its net from existing 8.1 million
while the allocation in this sector would be Tk 95,574 crore.
The budget announced the economic recovery packages worth TK103,117 crore equivalent to 3.7 per
cent of GDP. The government provided a number of strategic policy initiatives to deal with the
negative economic fallouts caused by the pandemic. They include discouraging luxury expenditures
(not very clear what constitutes luxury or not) and prioritizing public expenditure to create jobs. Also,
interest rate subsidy for businesses, expansion of the social security net and increased money supply
are also parts of those strategic policy initiatives.
Corporate tax has been slashed to 2.5 percent for non-listed companies in the private sector. Corporate
tax should have been cut a bit so that entrepreneurs may sustain in the post-Covid-19 situation. There
is an increase in the income tax free ceiling for the individual taxpayers and it rises to Tk 3,00,000 for
male and Tk 3,50,000 for female.
Though the government is giving stimulus to the industries, it is essential to give waiver of advance
income tax and advance tax on RMG, leather, jute and jute goods and agro-processing sector. Due to
lower export orders, source tax on RMG exports from 0.25 percent to 0.5 percent will put the sector in
a challenging situation. So, the government should reduce source tax on RMG exports. Economists
welcomed the decision of 1 percent cash incentive to RMG exports.

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It is very commendable that the government has given a Tk 20,000 crore stimulus to the micro, small and
medium enterprises (MSMEs). The MSMEs should get easy access to loan under the stimulus package.
The government could have imposed 1 percent source tax instead of 2 percent on local Letters of Credits (L/
C) used for importing essential commodities.
There is no imposition of new taxes on taxpayers in the new budget, but the government will expand the tax
net to bring more eligible people under it.

National Budget (2020-2021)


Budget 49th (50th including the interim budget)
Slogan ÒA_©‰bwZK DËiY I fwel¨r c_ cwiµgvÓ
Presenter A. H. M. Mustofa Kamal (2nd of his and 20th of Awami League Govt.)
Presented on 11 June, 2020; passed on 30 June, 2020 and implemented on
Date
1 July, 2020.
Budget Size Tk 5,68,000 Crore [17.9% of GDP]
Aggregate Revenue Tk 3,78,003 crore [13.1% of GDP]
Aggregate Deficit Tk 1,90,000 crore [6% of GDP]
Highest allocation Transport and communication sector 25.2%
(Development Budget) Education and Technology sector 19.4%
Annual Development Tk 2,05,145 crore
Programme (ADP)
GDP size (Expected) Tk 31,71,800 crore
GDP growth (Expected) 8.2% [Growth in the last year was 8.13%]
Inflation rate 5.4%
Allocation to tackle Tk 10,000 crore
COVID-19
Social Safety Net (SSN) Tk 95,574 crore

Subsidy on Agriculture Tk 9,500 crore


Allocation for Padma Bridge: Tk 5,000 crore
Others
VAT on daily necessary products decreases to 2%
For male: Tk 3,00,000
Tax Free Ceiling For female: Tk 3,50,000
[5% tax for both male and femaleon next first Tk 1,00,000]
Imported onion, furniture, car, mobile phone SIM/RIM cards
including internet charge, chartered airplanes and helicopters,
Products which price Cosmetics, AC launch travel, tobacco products including cigarette,
level will increase Industrial salt, furnace oil, television, online shopping, aluminium
products, imported poultry goods, painting charge, cement, printer
etc.
Products which price ICU instruments, PPE, hand gloves, sugar, agricultural
level will decrease machinery, shoe, textile fabrics etc.

Successful implementation of the huge gigantic budget depends on the efficiency in using the available
resources. Since at first, the govt. need to topple the covid-19 situation, it is to expand and monitor the
health sectors very carefully right now. Now we need to depend on time to have answer whether this piece
of budget is an effective one or not!

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Business Digest 15 Introduction

Banks- the heart of the economy of Bangladesh (Pre-Covid)


The financial sector of Bangladesh is mainly bank-based - so the contribution of banking
sector to the overall economy of Bangladesh is immense. Over the last three decades, the
banking sector has done a phenomenal job to promote financial inclusion of the poor and
achieve sustainable economic growth.
According to Bangladesh Bank’s definition, scheduled banks are those banks which have the
license to operate under Bank Company Act 1991. Scheduled banks are under full control of
Bangladesh Bank and these banks must have at least BDT 400 crore paid-up capital. These
banks get the privileges of clearing facility and rediscounting of bill to the Bangladesh bank.
There are 59 scheduled banks in Bangladesh.

commercial banks (SCBs):Bangladesh


Bank’s Guidelines on Risk-Based Capital Adequacy (2014) state that banks

Conservation Buffer of 12.5%) by 2019, in line with BASEL III. State-owned


commercial banks (SCBs) have failed to maintain minimum capital adequacy requirements
since 2013.
Non-performing loan (NPL) as a share of total loans is exceptionally high in SCBs and
Development finance institutions (DFIs). Private commercial banks maintained very low
level of NPLs compared to state-owned commercial banks. This indicates their high quality
of lending and recovery efficiency. On the other hand, state-owned banks show higher level
of NPLs which is a sign of lower efficiency and effectiveness with respect to credit decision
and recovery of loans.NPL now estimated to be in excess of BDT 1 lakh crore (USD 12bn)
and half of it is owed to six state-owned banks. Recently, the govt. disclosed in parliament
the names of the country's top 300 loan defaulters, worth Tk 50,942 crore in unpaid loans.
These loan defaulters took loans from various banks and financial institutions in the public
and private sector. It is argued that the lack of collateral against loans, showing the same
asset as collateral at more than one bank for loans, and showing the value of collateral
higher than its true market value places any loan at risk. The government has given a special
loan facility for rescheduling long unpaid loans, and a one-time exit on May 16, 2019,
aiming to maintain the normal flow of loans to production and other sectors, in an effort to
bring down loan defaults and ensure economic development of the country. In addition, to
encourage the defaulters to repay loans the state-owned commercial and specialized banks
waived interest to the tune of Tk 1198. 24 crore last year against 6163 loans. NBFI’s are also
in weak situation. Out of 34, only 3 NBFI’s are green zone and the rest are either in yellow
or red zone.

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Business Digest 16 Introduction

Secondly, inefficient liquidity management:During the last few years, the banking industry
faced more than two
management of some banks. We can
attribute the current liquidity crisis of banking sector to four major factors - 1) the rise in
default loans, 2) the erosion of public confidence in the banking sector, c) increased demand
of dollar in foreign currency market, and d) high demand of government savings certificate
as they offering high-interest rate.

Fourth-generation banks such as The Farmers Bank, NRB Global Bank, and NRB
Commercial Bank faced liquidity crisis during 2016-2017. The problem was particularly
acute in the case of The Farmers Bank, which had to be bailed

agreements with The Farmers Bank to inject BDT 765 crore into the bank (The Daily Star,
2018).
The government will inject another Tk1, 500 crore in FY 2019-20 into state-run banks to
meet their capital shortfall, despite their persistent financial irregularities and irresponsible
lending practices. In the last 10 years, the government has supplied a total of Tk17,521 crore
in capitalization to ailing state banks with budgetary allocation since fiscal year 2009-10.
Economists have raised concerns about the practice of recapitalizing state-owned banks with
budgetary allocations, saying that the trend will not help improve these banks ’ health.
Rather, it will encourage loan defaults.
Finally, Poor corporate governance: A single corporation gained control over 7 private
commercial banks in Bangladesh (The Daily Star, 2017). In 2013, the government-approved
licenses of 9 new private commercial banks. All of these banks were backed by politically
powerful owners. The fourth-generation banks (9 newly approved commercial banks) are
beset with large amounts of NPLs and are making losses.
It has been estimated that the Government of Bangladesh has spent BDT 15,705 crore in
recapitalizing the banks during the period FY 2009 - FY 2017 (Monthly Fiscal Frameworks,
Budget Briefs, Finance Division).
From the perspective of current scenario, single digit interest rate has become talk of the
town in banking industry. Earlier in 2018, the private banks' lending rates hovered
between 10 percent and 16 percent while the deposit rates were below 6 percent. But the
rates on fixed deposit schemes for three months to three years ranged between 5 percent
and 10 percent; the rates were above 10 percent in a few banks. after August 9, 2018, the
BB recommended single digit interest rate policy which is, to bring down interest rates
on lending to 9% and the rate on deposits to 6% from existing levels. However, many of
the banks failed to keep their promise. Currently, private banks are lending at between
14% and 15%, while the average interest rate for deposits is between 9% and 10%.
The average advance-deposit ratio (ADR), came down to 84.38 percent in September from 86.23
percent in April, according to Bangladesh Bank data. Currently, banks are required to maintain an
ADR of 85 percent, meaning they can lend Tk 85 against a deposit of Tk 100. In January last year,
the BB slashed the ADR by 1. 5 percentage points to 83.5 percent in a bid to tighten banks'
capacity to lend. The ratio for Shariah-based banks was cut to 89 percent from 90 percent. The
number of the non-compliant banks dropped after the central bank cut down the cash reserve
requirement (CRR) by 1 percentage point to 5.5 percent - a move that has freed up about Tk 20,000
crore for banks to lend.
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Business Digest 17 Introduction

Post Covid-19 Banking Industry


Covid-19 has hit the Banking sector of Bangladesh very hard. Prior to COVID-19, the Banking sector
was already struggling with high levels of Non-Performing Loans and liquidity issues. Bangladesh
Bank has considerably relaxed the repo rate and slashed CRR and SLR rates that have markedly
improved the liquidity position of most banks. However, the banks are cagey in lending to borrowers
given their past experience and the uncertainty surrounding the future prospects of repayment post-
Covid. Covid-19 brought some new dimensions in the banking industry.
Deposit growth in the country’s banking sector declined consistently from March to June this year as
the COVID-19 pandemic almost brought economic activities to a halt for around three months. The
growth rate was 12.82% in February this year, but the rate declined to 11.06% in March from the
previous month, but then it increased to 11.90% in April, as the BB data show. After April, deposit
growth consistently declined in May and June, by 11.28% and 10.94%, respectively.
South Bangla Agriculture and Commerce Bank’s deposit declined by 7.38% to Tk.6,626 crore till
June 30 this year, as per the bank’s half yearly financial statement.
AB Bank’s deposit declined by 6.77% to Tk..26,047 crore as of June 30 this year.
Mercantile Bank deposit declined by 2.08% to Tk.24,243 crore till June 30 this year.
Mutual Trust Bank’s deposit declined by Tk.74 crore in the first six months of this year.
The deposit of Modhumoti Bank declined by 5.90% in the first six months of this year.

At the end of June, the ratio of bad loans in the country’s banking sector increased to 9.16% against
outstanding loans worth Tk.10,49,725 crore. Banks’ non-performing loans (NPLs) increased by
Tk.3,606 crore in the second quarter of this year, despite the Bangladesh Bank’s directive not to
classify loans till September due to consequences arising from the new virus. At the end of June this
year, the amount of NPLs in the banking sector stood at Tk.96,116 crore, which was 9.16% of the total
disbursed loans, according to the latest Bangladesh Bank (BB) data. The defaulted loans in the banking
sector were Tk.92,510 crore as of March this year. On June 15 this year, the BB asked banks not to
downgrade any loan over a failure to pay installments in the January-September period in order to help
business people combat the economic fallout of Covid-19. In March, the NPL ratio in the country’s
banking sector was 9.03% against Tk.10,24,498 crore in outstanding loans.

Compared to the pre-pandemic days, the customer's transaction pattern and behavior has been a lot
different in the last few months. Small depositors, who generally were used to withdrawing their
money on a piecemeal basis, tended to take out a chunk of their money keeping the pandemic in mind.
On the other hand, due to the countrywide shutdown, many business houses had to shut down and
consequently the recovery from the loans and advances were close to zero.

Some banks have taken some steps to face covid-19 crisis such as:
On July 09, One Bank management issued letters to their officials, announcing that basic salary would be
reduced by 5 to 10% .
In June, for the first time, City Bank slashed its staffers’ salaries by 10% to offset the losses caused by the novel
coronavirus outbreak.
Earlier, On June 14, Bangladesh Association of Banks (BAB) issued a 13- point recommendation to private
banks that include as high as 15% salary cut.
Private commercial AB bank is not just cutting the salaries of their staff; it terminated at least 80 bank staff.
Earlier, Al Arafah Islami Bank, Exim Bank, Citi Bank and AB Bank have cut salaries of their staff.

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Business Digest 18 Introduction

The banking sector will face liquidity pressure as deposit growth and loan recovery also declines..
Cutting the cash reserve requirement (CRR) by 1 per cent would add approximately inject Tk. 130
billion into banking sector liquidity. Other than this BB has taken some healthy initiatives such as:
reduction in repo interest rate, buy-back of government securities, promotion of payment services,
refinance scheme BDT 50bn for agriculture sector at a concessional rate, quarterly repayment for
imports under supplier's/buyer's credit, refinance scheme of BDT 30bn for low income professionals,
farmers, micro businessmen, postponement of charging interest on loans, restriction on dividend
payment by banks, prohibition of workers lay-off, maximum margin limit for import of child food,
relaxations for holding meetings and regulatory reporting. In addition, Bangladesh Bank also relaxed
the bar of Advance-Deposit Ratio (ADR) from 83.50 to 87 per cent. Although the financial market
especially the banking sector is battered heavily due to regulated cap of rate of interest of deposit and
advance very before of this pandemic. Many willful borrowers may resort to take undue advantage of
this regulation and the industry may face this in bigger scale amid the pandemic. A threshold may be
initiated to identify the genuine sufferers and pass a resolution for safeguarding them only.

Digitisation is the major tool that can help banks cope with the challenging situation by improving
operational efficiency and minimising expenditures. Covid-19 has brought blessings for digitalisation
as the pandemic has pushed banks to go for expanding their digital banking services. Digital banking
also has penetrated the customers' mind as people have become used to with online shopping and
transactions during the pandemic situation. According to Bangladesh Bank, the average daily mobile
financial services (MFS) transactions increased by 7% in the third quarter of FY 2019-20 from its
previous quarter. Moving towards a cashless society, digital transactions are gradually being woven
into the fabric of life. According to Bangladesh Bank data, the volume of transactions EFT
substantially increased from March 2020 to June 2020. Banks have witnessed significant growth in
online transactions during the pandemic indicating the up and coming demands for digital banking
services.

The customers who made regular payments before the pandemic and affected by COVID-19, Banks are
allowing a grace period. This will help them to revive the business and make the payments. Besides,
some encouragement programs are being introduced for the good customers like a discount/waiver on
interest is offered to them on regular payment or upon successful closure of the loan.

Some special financial packages have been declared by the banks as well as government. Another
strategy to manage the liquidity is restructuring of the bank debt with grace period. As collection is the
main lifeline of this sector, Banks are more focused to improve their collection strategies and
disbursing new loans based on the collection in order to maintain liquidity.

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Business Digest 19 Introduction

Capital Market of Banglades (Pre-Covid)


Capital market can be termed as the engine of raising capital, which accelerates industrialization and
the process of privatization. It is easy to raise funds from the capital market. No interest, no collateral
and less risk will be attached with the fund. Investor will enjoy some tax benefits too. Bangladesh
capital market is small but in South-Asia, it is the third largest one. Major regulating body of the
market includes Bangladesh Securities and Exchange Commission (BSEC), Dhaka Stock Exchange,
Chittagong Stock Exchange, Bangladesh bank and Central Depository Bangladesh Ltd (CDBL). Major
players include Stock Dealer/Sock Broker, Merchant Banker, Portfolio Manager, Asset Management
Companies (AMCs) and small investors. In capital market, the firms which regularly hold the Annual
General Meetings (AGM) and have declared dividend at the rate of 10 percent or more in a calendar
year are generalized as “A” Category Companies. “B” Category companies regularly hold AGM
but have failed to declare dividend at least at the rate of 10 percent in a calendar year. “G’ Category
Companies refer to Greenfield companies. “N’’stands for newly listed companies other than
Greenfield companies. “Z’ Category includes the companies which have failed to hold the AGM or
failed to declare any dividend or not in operation continuously for more than six months.

Bangladesh Securities and Ex- Regulator of capital market of Bangladesh.


change Commission (BSEC) Established in 1993
Current Chairman:Dr. M. Khairul Hossain
Have two exchanges :DSE and CSE

Name of the Capital Market Dhaka Stock Exchange Chittagong Stock Exchange
(DSE) (CSE)
Establishment 1954 1995
OTC introduction 2009 2004
Market Capitalization (BDT million) 3, 847, 423 3, 144, 671
Number of listed companies 585 288

(till July, 2019)


Mutual Fund listed 37 37

Corporate Bond listed 1 -


Indices DSE-X= Parent index CSE-50, CSE-30, CSCX, CAS-
DSE-30= Top 30 Blue-chips PI, CSI
DSE-S= Sharia index

Chairman/Head Prof. Abul Hashem Dr. A. K. Abdul Momen

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Business Digest 20 Introduction

Investors are taught in fundamental finance course that the recipe to avoiding financial disaster is
to diversify their money. “Don't put all your eggs in one basket”— the golden rule of investing.
In our country, however, investors do the exact opposite. They put all (or most) of their money in
the hands of an ailing banking sector in mundane deposit schemes generating returns that cannot
even outrun inflation. In fact, rise and fall of stock prices in Bangladesh market, in most cases,
have been without any plausible reason.

In Bangladesh, companies raise money from the primary market through IPO (initial
public offering) and rights offer. In the last nine years, on an average 15 new companies
got listed through IPO each year. Till date, bank financing has been the major source for
companies despite the long-term benefits of fund raising from the capital market.

Lack of listing of large corporations in the market is the primary reason behind our
falling Mcap/GDP ratio. The government may focus on reducing the time it takes for a
corporate to raise money through IPO to increase the attractiveness of IPO as a financing
option.

There have been several challenges in the primary market and in the process of IPO. One of
the challenges is an absence of regulatory measures or incentives to bring new companies in
the market with strong fundamentals. Discovery of price also becomes very difficult due to a
lack of analysts.

Discovery of price also becomes very difficult due to a lack of analysts. Public
confidence in mutual funds is very low due to asset managers' involvement in the gross
violations of securities rules and misappropriation of funds money. Quality of
disclosure is not up to the peer standards. Investors find it difficult to assess the
portfolio holdings or quality of stated net asset value. Most of the mutual funds are
generic rather than style based. Fund managers have selection errors and prefer passive
management. While in peer markets open-end funds dominate, there are only nine open-
end funds in Bangladesh.

Although there were eight debentures and 221 treasury bonds listed in the market, these
issues do not trade in the market. There is only one corporate bond listed in the
market, which is hardly traded. We are not aware of any regulatory vision or seldom
see any guideline in introducing derivative products/new products. We have noticed fear
in the derivative products but no initiative to gain knowledge on these products.

Despite having favourable economic factors and a positive market outlook, foreign
participation in equity market is very low. Foreign Direct Investment (FDI) is highly
focused on large-cap stock. Weak corporate governance, less transparent market
structure, low level of financial disclosure and a lack of research remain as
bottlenecks.

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Business Digest 21 Introduction

Bangladeshi corporate houses are yet to grow a culture of investor meetings. Even, they
do not have any formal investor relationship department. While allowing foreigners,
local institutions should also build capacity for better investment management. The
domestic banks had too much of their money invested in the stock market (18% of
market cap, till date), for quick and easy profit taking and as a result caused the stock
market to rise even higher.
In last three decades, capital market of Bangladesh faced two calamitous market
crashes:one in 1996 and the other in 2010. Both crashes had one thing in common. Stock
prices were manipulated to exorbitant levels luring in naive investors who were hoping to
make easy money. Speculation became the mantra of stock investing. The supposedly high -
quality companies dragged down the market.
It is a shame that the daily turnover of the prime bourse of the world's 42nd largest economy,
in nominal terms, is less than Tk 3.0 billion. The figure should be many times more.
In 2018, financial sector was adversely affected by rising interest rate and growing NPL
problems. Financial composite including Bank, NBFI, and Insurance declined by 18.6%
against overall market decline of 13.8%. In recent days, macro factors were positive for
Textile Sector, which rallied almost 16% (till date). Textile business returned to a growth
momentum after a long time, benefitting from US-China trade war and cheaper BDT.
Fuel & Power sector also surged, backed by earnings growth coming from the government ’s
power plant binge. High import growth arising primarily from one– time surge in food grain
import due to flood and sharp increase in petroleum products import exerted significant
pressure on current account (Dec, 2018).
As a result of the recent entrance of a Chinese consortium, comprising the Shanghai
Stock Exchange and Shenzhen Stock Exchange, as strategic partner of DSE , DSE
should become a more profitable organisation and receive foreign knowledge and expertise
which can only change things for the better.
In Bangladesh, we cannot compel multinational companies to come to the stock market due
to lack of rules. But in India, it is mandatory for every multinational to be listed with stock
market if it wants to do business in that country. The existing rule of giving 10 percent tax
benefit to every listed company has failed to attract the global firms.
It must be acknowledged that regulators have taken some steps in recent years which have
promised to bring some semblance of market stability. Largest of these steps was
demutualization of the Dhaka and Chittagong stock exchanges. It is fair to say that
separating ownership, management, and trading rights of members and transforming the two
stock exchanges into more professionally run organizations free of vested interests from
brokers and dealers will go a long way towards ensuring long-term development. The overall
volume of our capital market needs to be increased with a greater number of good IPOs each
year. The overall accounting practice of private companies is a major issue, which needs to
be addressed as soon as possible. Importance should be given to the authenticity of financial
statements, and all stakeholders must promote financial literacy among retail investors.

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Business Digest 22 Introduction

Post Covid Capital Market


Bangladesh’s capital market has greatly lost the confidence of its investors due to negative
performance in the previous two years and the COVID-19 pandemic crisis. Yet, the country’s
capital market needs these investors now more than ever in order to revitalize the nation’s
economic recovery. Historically, Bangladesh’s capital market has failed to keep up with the
country’s economic growth. Among its regional peers, the market capitalization-to-GDP ratio is
the lowest. The ratio has been decreasing over the years suggesting a lack of listing of large
corporations in the market. Consequently, investors are losing confidence to invest in the
country’s capital market as large corporations are more likely to provide regular dividends and
coupon payments.
The first announcement of COVID-19 caused a huge drop in investors’ confidence as they became
uncertain about the country’s economy. To avoid the free-fall, Bangladesh Securities and
Exchange Commission (BSEC) issued a floor pricing-setting circular that the opening price of the
listed security will be set on the average closing price of preceding five trading days and the
average price will be considered as the floor price and lower limit of the circuit breaker.
The Dhaka and Chattogram stock exchanges resumed operations on May 31, 2020 after a
prolonged nationwide shutdown since the last week of March, 2020. After resuming the market,
investors appeared shaky and worried about the overall economic and financial uncertainty,
reflected by a sharp decline in trading activities. The trading value of the leading bourse was at a
13-year low at Tk430 million on June 5, 2020.. From Feb 27, 2020 to June 10, 2020, the market
value of equities tumbled by 11.5 percent along with a daily market volatility (standard deviation)
of 2.2 percent (in annualized term it becomes as large as 98.3 percent
A research by the Research and Innovation Lab (RIL, 2020) shows that 13 out of 18 equity sector
categories in the Dhaka Stock Exchange could embrace growth and performance downturns; while
four of the sectors have potential for generating growth and performance gains from the ongoing
pandemic.
The DSE listed sectors such as pharmaceuticals, food & allied, fuel & power and IT are expected
to see significant benefits. One such example is Beximco Pharma and Beacon Pharma being the
front runners in producing Remdesivir- a potential treatment for Covid-19.Telecommunications
and IT sectors could see an increase in customer demand and business performance, as a demand
for online shopping, meetings, webinars, podcasts, and video games etc. spikes up manifold.
The credit shortage could turn out as blessing for the stock market.As the companies find it hard to
get loans from banks and other non-bank financial institutions, some of them may consider going
for IPOs in a desperate move to raise large funds.
The floor price-setting scheme was meant to prevent investors from facing further losses due to the
stock markets going negative. But the scheme has discouraged investment in the first place: 301
companies listed in the Dhaka Stock Exchange could not find buyers as their floor price was
higher than the average price.

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Business Digest 23 Introduction

The price-setting scheme goes against the basic economic principles of supply-demand
equilibrium. Fortunately, BSEC has lifted the floor price restrictions for transactions in the block
market on June 15. This is a good sign although the move will not impact small investors as they
do not participate in the block market where the minimum allowed transaction is BDT 5 lakhs.
BSEC should also remove the restriction on the main market so that small investors can benefit as
well.
The Dhaka Stock Exchange (DSE) uses Flextrade- a real-time trading platform that allows remote
trading from any suitable device. But only 5% of trades of the bourse are executed online. BSEC
should, therefore, provide incentives for traders and brokers to adopt electronic trading. Electronic
trading will also support the need for physical distancing as market participants do not need to be
physically present in the market. This measure will support small retail investors who might need
emergency liquidity if the economy faces a further downturn.
A vibrant bond market can provide investors with a less risky asset. This can increase participation
in the country’s capital market. Moreover, the fixed coupon payment of bonds can increase
investors’ confidence in the market. On the other hand, corporations will have a low-cost
alternative to banks for funding.
The capital market of Bangladesh has gone through a lot of downturns in the past two years. As a
result, investor confidence went down as well. The situation went further south with the COVID-
19 pandemic. Now as the country’s two stock exchanges have reopened, it is time for
policymakers to diversify the market so that investors, businesses, and even the government can
benefit and help in the path to economic recovery.

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Business Digest

Chapter Contents Page No.

Finance, financial Management, objectives of the finance, Corporate (Business) Finance, Public 1-3
Basics of Finance, Functions of finance, Major Financial Decisions, Principles of Finance, Financial
Finance instruments, Debt Instruments , Equity Securities, Bonds, Derivative instruments, Collateralized
mortgage obligation, Term structure of interest rate, Market Segmentation Theory, Expectations
Theory , Liquidity Preference Theory
Financial Financial instruments, Debt Instruments and types, Equity Securities and types, Bonds and its 4-9
Instrument properties/Bonds related issues, Major Types of bond, Differences between common stock and
preferred stock, Difference between preferred stocks, common stocks, and bonds, Why preferred
stock is called hybrid security, What are the structural finance instruments, Stripped security,
Derivative instruments, Theories that describe the shape of yield curve, Term structure of interest
rate, Treasury bond, Treasury bill vs Treasury bond

Financing Types of Financing, short-term financing , mid and long-term financing, lines of credit and 10-11
overdrafts , long-term financing (internal)

Capital market/financial market, Characteristic of good market, Major functions of Capital/share 12-18
Market, Problems of Share Market in Bangladesh, Types of Financial Market, Money Market:
(Regulated by Central Bank,Capital Market (Regulated by BSEC),Core differences between
Money market and capital market, Primary vs Secondary market, Bearish vs Bullish market,Cash/
Spot Market, Financial Intermediaries, participants of Financial market,Difference between Dealer
Market and Broker, Strong, Semi-strong and weak form, Internal and external efficiency of market, Types of
order in market, Possible abuses by stockbroker, market breadth and Depth, Buy side vs sell side,
market capitalization, Net asset Value(NAV)of mutual fund, market premium, bubble in capital
market, Short Sale, Stock split, Growth vs value stock, Blue Chip Stocks, Defensive Stock VS
Cyclical Stocks, Marketed claims of the firm, Margin/Margin requirement:Margin Call, Open
interest, Proxy, Different valuation terms used in market, Capital Market regulators.

Time Value of Why value of money changes, Determining factors of time value of money, Future value, Present 19
Money Value, Annuity and its classification, amortization schedule, Effective Interest Rate (EIR)

Gross working capital and net working capital, Methods/approaches of working capital 20-23
Working management, Cash conversion cycle and cash turnover, Economic Order Quantity (EOQ), cash
Capital management, Operating cash flow (OCF),Free cash flow, Most liquid assets, Motives for Holding
Management Cash and marketable securities, Float, lockbox, Zero balance account, Relevant model in cash
management, cash budget, cash concentration, Liquidity vs Marketability

Risk and Return Return,Risk,Variance, standard deviation, Coefficient of variation (CV), Types of Investor based 24-26
on risk preference, beta, Adjusted bet, Types of Risks, Systematic Risk/Market Risk/Non-
Diversifiable Risk/Uncontrollable Risk, Unsystematic Risk/non-market/Stand-alone Risk/
Diversifiable Risk/controllable Risk.

Cost of Capital Importance of cost of capital, Computation of cost of capital, Steps in computation of Weighted 27-28
average cost of capital (WACC),Capital Asset Pricing model (CAPM),Arbitrage pricing theory
(APT),Fama-French Three-factor Model

Capital Capital structure, Factors Affecting Capital Structure, Miller and Modigliani’s two propositions , 29-30
Structure and Static trade-off theory.Pecking order theory, consideration in selecting of debt-equity ratio/Capital
Leverage structureLeverage/operating leverage/financial leverage, Degree of operating leverage
(DOL),Degree of financial leverage (DFL),Degree of total leverage (DTL)

Capital Types of Projects, Conventional vs nonconventional cash flows, Three major types of investment 31-35
Budgeting decision, Problems Associated with Capital Budgeting, Hurdle rate, Methods (Techniques/Tools)
of capital budgeting, Discounted Payback Period, Time value of Money adjusted or Discounted
Cash Flows Methods,NPV profile, Multiple IRR (MIRR),Modified internal rate of return
(MIRR)

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Chapter Contents Page


No.
Security Valuation: Valuation, Approaches to the Valuation Process, Valuation of Ordinary Shares, The 36-40
Discounted Cash Flow Valuation Techniques, Steps in stock valuation based on forecasted
future cash flow, Gordon Dividend discount model (DDM, Free Cash Flows to Firm
(FCFF)model, Free Cash Flows to Equity model (FCFE), Residual Earnings Model
(RE),The Relative Valuation Techniques/Steps in relative valuation, Problems with
relative valuation, Asset based valuation, Valuation of Bonds, tax shield and interest tax
shield, Terminal value vs continuing value, Cum-dividend vs ex-dividend earnings, P/E vs
Trailing P/E vs Forward P/E ratio, Dirty surplus vs clean surplus accounting/Dirty
surplus items, Cherry Pick, Fundamental vs Technical analysis
Dividend: Dividend, Dividend policy, cash dividend and stock dividend, Relevant dates in dividend, 41-43
Distribution of Cumulative dividend, dividend yield, Alternatives to pay dividends with excess cash, share
Wealth repurchase, Dividend pay-out policy types, clientele effect, dividend Signalling, residual
dividend Policy, Homemade-dividend, pay-out ratio and retention (plowback)ratio, Miller
and Modigliani proposition of dividend (relevancy of dividend),Gordon’s Model
(relevancy of dividend), Bird-In-Hand theory

Investment Banking New issue, Market trades, Major Four activities of Investment Banker, financial engineering, 44-47
Securitization, fiduciary obligation, due diligence, Underwriting and different types, prospectus,
shelf registration, red herring, origination, IPO vs Private placement vs seasoned offering,
flotation cost, The steps in going public/new issue of shares/how to be public limited company,
Method of determining new issue price in Bangladesh, Determination of offering price (under
fixed price method), Book Building Method, Types of trading strategies:(Arbitrage,
speculation and hedging)

Portfolio Market portfolio, portfolio Management, Portfolio management process, Modern Portfolio 48-51
Management Theory (MPT), Assumptions in MPT, opportunity, Set, efficient frontier, optimal portfolio,
Capital preservation vs capital appreciation, How to measure portfolio return and risk, beta,
Concave vs convex curve, global Minimum variance portfolio, Separation theorem, CAL Vs,
CMLVS SML, How to find optimal portfolio (when risk free borrowing/lending allowed),
characteristic line, Sharp ratio vs Treynor ratio, Jensen’s Alpha Ratio, Alpha/Alpha hunter,
Active vs passive portfolio management, Returns to the investor:Main three forms/How
investors get return.

Corporate Finance Agency problem/agency cost/principle-agent/types of agency cost, merger, acquisition, 52-55
strategic alliance, joint venture, venture capital, conglomerate, Types of acquisition, Purchase
method of acquisition, tender offer, synergy, Sources of synergies, Steps in determining NPV of
merger, Strategy to discourage takeover followed by target firm, Greenmail, Golden parachute,
Poison pill, knight, financial distress, Options in financial distress, Absolute priority rule,
coinsurance effect, Dilution, leveraged buy-out (LBO),Altman Z Score model.

Derivatives Call and put option, writer, exercise price (strike price), expiration date, elapsed option, 56-61
American vs European option, Options Premium (call premium or put premium),In the money,
out of the money and at the money, naked option, Factors affecting the price of an option,
warrants, employee stock option (ESOP),put-call parity, Futures contract, Forward contract,
Forward vs Futures, Options vs Futures, Long short position, Options and futures are zero sum
game, LIBOR vs LIBID (London interbank offered rate, London interbank bid rate), Forward
rate, basis and basis point, backwardation and contango, SWAP, Plain vanilla interest rate swap,
Forward Rate Agreement (FRA),Trading strategies using options, Delta, theta, Gamma, Rho,
hedge ratio, Swaptions.

Financial Statement Limitations of Financial Statement, Techniques or Tools of Financial Analysis, Limitations of 62-63
Analysis Ratio Analysis, Decision tree, Sensitivity vs scenario analysis, Monte Carlo simulation, Du Pont
Analysis

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Business Digest 1 Finance (Basics of Finance )

Finance/what is Finance/how do you define Finance?


► Finance can be defined as the art and science of managing money.
► Finance is an integrated process of planning, identifying, evaluating and selecting the sources
of funds; evaluating and selecting best investment opportunities using various techniques in
order to maximize the wealth of the owners.
► Finance is the branch of economics concentrating on financing, investing and periodically
distributing the wealth among the owners.
► In total, Finance can be defined as the art and science of managing money to achieve the goal
of wealth maximization. The activities of finance include:identifying and evaluating the
available sources of funds, choosing appropriate source of financing, appraising and selecting
the best investment alternative, and ensure the proper utilization of fund. The ultimate objective
is to maximize the wealth of the owners.
What is Financial Management?
★ Financial management refers to that part of the management activity, which is concerned with
the planning, & controlling of firm’s financial resources. It deals with procurement of funds
and their effective utilization in the business.
Who is father of Finance?
★ The father of Modern Finance is Dr.Eugene Fama.Efficient Market Hypothesis & Fama-
French Model are his most important contributions to the field of Finance.
What are the objectives of the finance?
★ The main objective of finance is to maximize the owner’s economic welfare in the form of
increasing the stock price in the stock market. Objectives of Financial Management can be
broadly divided into two parts such as:
1. Profit maximization 2. Wealth maximization

 Profit Maximization
★ A business being an economic institution must earn profit to cover its costs and provide funds
for growth.Profit maximization is the traditional and narrow approach, which aims at,
maximizes the profit of the concern. Profit of a business entity is measured by the EPS.
 Drawbacks of Profit Maximization
√ The term ‘Profit’ is vague and it cannot be precisely defined. Maximizing means different things for
different people. For example, short term profit or long-term profit? Gross profit or net profit?
√ Profit maximization does not consider the time value of money or the net present value of the cash
inflow.
√ Profit maximization does not consider the risk of the prospective earnings stream.
√ The effect of the dividend policy on the market value of the shares is also not considered in the profit
maximization objective.

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Business Digest 2 Finance (Basics of Finance )

 Wealth Maximization
★ Financial theory asserts that the wealth maximization is the single substitute for a stake holder’s
utility.Wealth maximization is also known as value maximization or net present worth
maximization.The wealth of the shareholders is measured by the current market price per
share.Thus, a firm should aim at maximizing its current stock price, which helps in increasing
the value of shares in the market.
 Favourable arguments for Wealth Maximization
The concept of wealth maximization is universally accepted, it takes care of interest of financial
institution, owners, employees and society at large.
 Wealth maximization considers the time value of money or the net present value of the cash inflow.
 Wealth maximization considers risk of the business concern.
Wealth maximization guides the management in framing the consistent strong dividend policy to
reach maximum returns to the equity holders.
Types of finance:

Based on ownership Based on sources Based on maturity Based on equity/debt


 Public finance Internal finance • Capital market finance Debt finance (Bond)
 Private finance External finance • Money market finance Equity finance (share)
 Personal finance
 Corporate/business
finance

★ Corporate finance can be broadly defined as the activity of planning, raising, controlling and
administrating the funds used in a corporation. It is concerned with the procurement and
utilization of capital funds in meeting financial needs of a corporation.
What is Public Finance? /Sources of income and expenditure of Government:

★ Public finance is that branch of economics which deals with, the income and expenditure of a
government. Major ingredients of public finance are:
(1) Public Expenditure (2) Public Revenue, (3) Public Debt and (4) Budgeting etc.

Public Revenue Public Expenditure


 Income tax ( personal, corporate )  Health care
 Property tax  Employment insurance
 Sales tax  Pensions
 Education
 Value added tax ( VAT )
 Defence ( military )
 Import duties
 Estate tax  Infrastructure

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Business Digest 3 Finance (Business Finance)

Major Financial Decisions/Main 3 decisions finance managers take:


► Investment Decisions:Investment Decision relates to the determination of total amount of
assets to be held in the firm, the composition of these assets and the business risk complexions
of the firm.
► Financing Decisions:Financing decision includes the sources, method, time and price of
financing.
► Dividend Decision:It includes decision regarding the portion, time and method of paying
dividend .
Functions of finance manager/what finance mangers do:
 Estimating the amount of capital required  Utilisation of funds
 Determining capital structure  Disposal of profits or surplus
 Choice of Sources of funds  Management of cash
 Procurement of funds

Principles of Finance/what are the principles of finance?


★ The principle of Risk & Return:Positive relationship exists between risk and return.“Risk
drives return” -is the cardinal principle of finance.The Higher the risk, the higher the rates of
expected return is and the lower the risk, the lower the rates of expected return is.
★ Time Value of Money:This principle states that value of money falls over time and thus
require wise decision on financing mood.
★ Cash Flow Principle:This principle mainly argues about the cash inflow and outflow, more
cash inflow in the earlier period is preferable than later cash flow by the investors.
★ Profitability & Liquidity Principle:Profitability and liquidity is negatively related and thus this
principle requires sound balance between profitability and liquidity based on investors
requirement.
★ Principles of diversity:Never put all your eggs in the same basket because if it falls then all of
your eggs will break, so put eggs by separating in a different basket so that your risk can be
minimized. Diversification of investment ensures minimization of risk.
★ Hedging Principle:Hedging principle indicates us that we have to take a loan from
appropriate sources, for short-term fund requirement we have to finance from short-term
sources and for long-term fund requirement we have to manage fund from long-term sources.
How financing decisions can add value/the need of finance people?
► By deciding on time and form, finance people can play and accommodate with the strategy of
the investors.
► By selecting the right inputs and paying least, finance people can reduce costs or increases
subsidies.
► To suit with the investor’s need they can create new security or financial instrument.

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Business Digest 4 Finance (Financial Instruments)

What is financial instrument?


★ Financial instruments are monetary contracts between parties. It is a contract that gives rise to a
financial asset of one entity and a financial liability of another entity. It is a contract through
which the surplus unit finances deficit unit.
★ It is the evidence of an ownership interest in an entity (share), or a contractual right to receive
or deliver cash (bond).
Debt Instruments and types:
 A debt instrument is a paper or electronic obligation that enables the issuing party to raise
funds by promising to repay a lender in accordance with terms of a contract. Most frequently
used debt instruments are discussed below:
► Treasury Bill (T-Bill):Treasury Bill (T-Bill) is a short-term debt obligation issued by the
government (normally by the central bank) with a maturity of less than one year and sold at
a discount from par.
► Commercial Paper:Commercial paper is an unsecured, short-term debt instrument issued
by firms with high credit standing, typically to finance short-term liabilities. CP usually has
maturities less than 270 days and often issued at a discount from face value.
► Certificate of Deposit – CD:A certificate of deposit (CD) is a savings certificate (generally
issued by commercial banks, thrift institutions, and credit unions) with a fixed maturity
date and specified fixed interest rate that can be issued in any denomination aside from
minimum investment requirements.
► Negotiable Certificate of Deposit:A negotiable certificate of deposit or NCD is a short
term (2 to 52 weeks) large certificate of deposit that is typically purchased by institutional
investors and issued by large banks. NCDs are freely traded in secondary markets. NCDs
are guaranteed by the bank but they cannot be cashed in before maturity.
► Repurchase Agreement:A repurchase agreement, also known as a repo, is the sale of a
security combined with an agreement to repurchase the same security at a future date at a
slightly higher price. That future date can be the next day, or maybe the next week.
► Banker's Acceptance:A banker's acceptance (BA) is a short-term debt instrument issued
by a company (exporter) that is guaranteed by a commercial bank (client of the importer)
traded at a discount from face value on the secondary market.

★ Simply when exporter discounts his letter of credit (L/C) in his domestic bank for
short term financing, this L/C is called Banker’s Acceptance (BA).

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Business Digest 5 Finance (Financial Instruments)

Equity Securities and types:


★ Equity instruments are those instruments that signify an ownership position (called equity) in a
corporation, and represents a claim on its proportional share in the corporation's assets and
profits. Equity holders act as owners of a company with a claim on the company’s net assets
and an expectation that management will act in the shareholders’ best interests.
★ Equities can be split into two main categories: common securities and preference
securities.
Þ Common Shares:Common shareholders are true owners and residual claimer as they
receive that is left after all other claims on the firm’s income and assets are satisfied.
However, common shareholders share in the operating performance of the company and
also participate in the governance process through voting rights.
Þ Preference Shares:Preference shares have priority to common shares with respect to the
payment of dividends and claim on net assets upon liquidation but do not share in the
company’s operating performance and do not typically have voting rights.
Bonds and its properties/Bonds related issues:
★ A Bond is a secured fixed income debt instrument in which an investor agrees to lend money to
a company or government in exchange for a predetermined interest rate.
√ Par Value/Premium/discount:Par value is the amount of money a holder will get back once
a bond matures; a bond can be sold at par, at premium, or discount. When a bond trades at a
price above the face value, it is said to be selling at a premium. When a bond sells below face
value, it is said to be selling at a discount.
√ Coupon Interest Rate:The coupon rate is the amount of interest that the bondholder will
receive per payment, expressed as a percentage of the par value.
√ Current Yield:Current yield is a bond's annual return based on its annual coupon payments
and current price. The formula for current yield is a bond's annual coupons divided by its
current price.
√ Yield to Maturity (YTM):Yield to maturity (YTM) is the total return anticipated on a bond
if the bond is held until it matures. It is the internal rate of return (IRR) of an investment in a
bond if the investor holds the bond until maturity, with all payments made as scheduled and
reinvested at the same rate.
√ Bond Indenture:An indenture agreement is the formal contract between a bond issuer and
the bondholders. It sets forth the details of all the terms and conditions of the bonds, such as
the obligations of the bond issuer and benefits owed to the bondholder, the exact day of their
maturity, the timing of the interest and principal payments, and the details of any special
features.
√ Bond Covenant:A bond covenant is a legally binding term of agreement between a bond
issuer and a bondholder. Bond covenants are designed to protect the interests of both parties.
Negative or restrictive covenants forbid the issuer from undertaking certain activities;
positive or affirmative covenants require the issuer to meet specific requirements.

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Business Digest 6 Finance (Financial Instruments)

√ Sinking Fund Provision:Sinking fund provision of the corporate bond indenture requires a
certain portion of the issue to be retired periodically. A sinking fund reduces credit risk but
presents reinvestment risk to bondholders.
√ Call Provision, Call price:The right of the issuer to buy back the bond at a predetermined
price at a certain time in future. This is likely to happen when interest rates go down. The
price at which bonds are called is named as call price.
√ Put Provision:The right for the holder of the bond to force the issuer to repay the bond before
the maturity date on the put dates. This is likely to happen when interest rates go up.
√ Trustee:A trustee is a third party to a bond indenture. The trustee is paid to act as “watchdog”
on behalf of the bondholders and can take specified action if the terms of the indenture are
violated. The trustee can be an individual, a corporation or (most often) commercial bank trust
department.
** In Bangladesh corporate bond market is almost non-existing. But the regulators are
working on it.
Major Types of bond:
► Corporate Bonds:Bonds issued by different types of companies. They are riskier than
government bonds so they offer a higher rate of return.
► Government Bonds:Bond issued by a national government, generally with a promise to pay
periodic interest payments and to repay the face value on the maturity date.
► Convertible Bonds:A convertible bond may be redeemed for a predetermined amount of the
company's equity at certain times during its life, usually at the discretion of the bondholder.
► Perpetual Bond:A perpetual bond is a fixed income security with no fixed maturity date. A
perpetual bond is also known as a "console" or a "perp. "
► Zero-coupon Bond:Doesn’t pay interest (a coupon) like other bonds. Instead investor will
receive a discount when he purchase the bond and hopes to make profit when the bond is
redeemed at maturity.
► Callable Bond:A callable bond (also called “redeemable bond”) is a type of bond that allows
the issuer of the bond the right, but not the obligation, to buy back the bonds from the bond
holders at a defined call price. Usually a premium is paid to the bond owner when the bond is
called.
► Put-able/put Bond:Puttable bond (put bond, put-able, or retractable bond) is a type of bond
that allows the holder of the bond the right, but not the obligation, to demand early repayment
of the principal.
► Eurobond:An international bond issued in Euros, or in a currency not native to the country
where it is issued. An example is a bond issued by a group of banks in Singapore, denominated
in US dollars, sold to international investors.
► Junk Bonds:Junk bonds are similar to regular bonds, except that the issuer has a low credit
rating. Because of this, they have the potential to pay higher yields than regular bonds to
investors, but they also come with higher risks.

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Business Digest 7 Finance (Financial Instruments)

► Angel Bonds:Angel bonds are investment-grade bonds that pay a lower interest rate because of
the issuing company's high credit rating. Angel bonds are the opposite of fallen angels, which
are bonds that have been given a "junk" rating and are therefore much riskier
► Senior Bond:Ranked higher in an issuer’s repayment list if they face financial difficulty.
► Subordinated Bond:Ranked low in an issuer’s repayment list if they face financial difficulty.
► Debenture:A debenture is similar to a bond except the securitization conditions are different. A
debenture is generally unsecured in the sense that there are no liens or pledges on specific assets.
 Debentures vs. Bonds:
★ Debentures and bonds are similar except for bonds are secured and backed by company’s
physical assets whereas debentures are unsecured and backed by issuer’s creditworthiness .

Differences between common stock and preferred stock:


Common stock Preferred stock
√Common stock represents ownership in √Preferred stock, represent preferential right in
the dividend and liquidation proceeds but not owner-
company ship
√Can vote in the company's meeting. √Doesn’t have voting right.
√Dividends are not guaranteed and no fixed √Sometimes dividends are guaranteed some-
rate of dividend times not, but at a fixed rate.

Difference between preferred stocks, common stocks, and bonds:


Types of security Preferred Common Bond
Ownership of Company Yes Yes No
Voting Rights No Yes No
Dividends Fixed Varies Fixed
Order Paid if Company Defaults Second Third First

Why preferred stock is called hybrid security?


★ Preferred shares combine elements of both bonds and common stocks. They get priority in
dividend and in case of liquidation preferred stock holder gets priority in the distribution of
proceeds. But the company has the right not to pay dividend on preferred stock unlike bonds if
adequate profit has not been made. Unlike bond interest, preferred dividends can be omitted or
suspended without triggering default provisions.
What are the structural finance instruments?
★ Structural finance is the creation of complex debt instruments by securitization or the addition of
derivatives to existing instruments that aim to target stable and predictable cash flows often
provided to large institutions and companies that have complex and structured needs. Examples:
CMO, ABS, Tranchee, MBO etc.

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Business Digest 8 Finance (Financial Instruments)

 Asset-backed securities (ABS)


★ABSs are backed by a pool of assets. This pool of assets will generate the necessary cash
flow to service the related payments to investors and serve as collateral. The underlying
assets are pooled to make the securitisation economical and diversify the quality of the
underlying assets.
 Mortgage Backed Securities (MBS)
★A mortgage-backed security, or MBS, is a debt security backed by home mortgages—
usually a bundle of several mortgages that have similar interest rates or other similar
characteristics. Investors usually receive monthly payments that include interest and
principal.
 Collateralized mortgage obligation (CMO)
★Collateralized mortgage obligation (CMO) is a type of mortgage-backed security that
contains a pool of mortgages bundled and sold as an investment. CMOs receive cash flows
as borrowers repay and distribute principal and interest payments to their investors based on
predetermined rules and agreements in different tranches.
Stripped security:
★ A financial instrument such as a treasury bond that is broken down into multiple financial
instruments each representing one of the original instrument’s expected payments.
Derivative instruments:
★ Derivative instruments are that type of financial instrument whose price depends on the value
of another underlying security. The price, riskiness and the function of the derivative depend
on the underlying assets. Thus, whatever affects the underlying asset must affect the
derivative. Derivatives can be exchange-traded derivatives and over-the-counter (OTC)
derivatives. Some examples of derivatives are:
Theories that describe the shape of yield curve:
Term structure of interest rate:
★ Yield curve shows the relationship among interest rates on bonds with different terms of
maturity. There are three theories explaining the shape of yield curve (which shows the
relationship between yield of bond and maturity of the bond). The theories are:
Market Segmentation Theory
(MST)posits that the yield curve is determined by supply and demand for debt instruments of
different maturities. There need be no relationship between short, medium- and long-term interest
rate. The difference in the supply and demand in each market segment (short, intermediate and long)
causes the difference in bond prices, and therefore, yields.
Pure Expectations Theory
Expectation theory suggests that only market participant expectations for future rates will consistently
impact the yield curve shape.It suggests long term interest rate should reflect expected future short -
term interest rates.More precisely, it argues that a forward rate corresponding to a certain future
period is equal to the expected future zero coupon interest rate for the period .

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Business Digest 9 Finance (Financial Instruments)

Liquidity Preference Theory


Liquidity Preference Theory assumes that investors prefer short term bonds to long term bonds
because of the increased uncertainty associated with a longer time horizon. Therefore, investors
demand a liquidity premium for longer dated bonds.
Treasury bond:
√ Treasury Bond refers to a certificate issued by the government acknowledging that money has
been lent to it and will be paid back with interest. Bond is a debt investment in which an
investor loans money to an entity (typically governmental) which borrows the funds for a
defined period of time (more than a year) at a variable or fixed interest rate.
Treasury bill vs Treasury bond:
√ Treasury Bill is government promissory letters. The government receives short-term loan (short
-term liabilities) through it. Treasury bill is the written document by which the government is
pledged to pay the due loan back with interest after the maturity. Theoretically, the government
of Bangladesh issued three types of T-bills through auctions, namely 91 days, 182days and 364
days.
√ Auctions of treasury bills by Bangladesh Bank:Currently, three treasury bills (T-bills) are being
transacted through auctions to adjust the government's borrowing from the banking system..

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Business Digest 10 Finance (Financing)

Types of financing:
► Short term financing:Short term finance refers to financing needs for a small period normally less
than a year.
► Mid-term financing:Medium term finance are sources of finance available for the mid-term of
between 2 – 5 years typically used to finance an expansion of a business or to purchase large fixed
assets.
► Long-term financing: Long-term finance can be defined as financing with any financial instrument
with maturity exceeding 4-5 year (such as equity financing, bonds, leasing and other forms of
debt finance).
Which financing mood is best?

• The finance manager should choose the alternative that best suit the risk-return preferences of the firm
following the balance between liquidity and profitability.
Different types of mid and long-term financing and their sources:

Mid-term sources Long-term sources


 Preference Capital or Preference Shares. Internal sources:
 Lease Finance.  Promoter’s initial capital
 Hire Purchase Finance.  Retained Earnings
 Debenture /Bonds (less than 5 but more  General Reserve
than 1 years)  Dividend Equalization Fund
 Sinking Fund
 Workers’ Compensation and Welfare Fund
External sources:
 Common Stock
 Preferred Stock
 Bond or Debenture
 Lease Financing
 Loans from Commercial Bank, Investment
Bank, Insurance Company, Specialized Fi-
nancial Institutions

What are the differences between lines of credit and overdrafts?


★ A line of credit is a personal loan that gives the client access to a specified credit limit. It allows
him to withdraw sums up to that limit.
★ An overdraft is also a line of credit, but it’s attached to a customer’s existing transaction
account.
★ In overdraft, Customer has access to a certain amount of credit that becomes available when he
exhausts all the funds in his account.

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Business Digest 11 Finance (Financing)

Different types of short-term financing and their sources:

Spontaneous Financing Money market credit


 Trade Credit  Commercial paper
 Notes payable  Bankers’ acceptance
 Advances from Customers & Deferred In-
come
 Accrued Expense
Bank loan Other methods
 Line of credit  Factoring accounts receivables
 Revolving credit  Loan using Inventory as collateral
 Single payment credit transactions

What are sources the long-term financing (internal)?


► Retained Earnings:Retained earnings are the cumulative net earnings or profits of a corporation
that is retained after dividend payments.
► General Reserve:General reserves are the retained earnings of a company which are kept aside out
of company's profits to meet future (known or unknown) obligations or unexpected situations.
► Dividend Equalization Fund:A fund maintained by a firm to meet and continue its dividend policy
in uncertain years.
► Sinking Fund:A sinking fund is a means of repaying funds borrowed through a bond issue through
periodic payments to a trustee who subsequently retires part of the issue by purchasing the bonds in
the open market.
Sources of long-term financing (external):
★ Common Shares- (discussed above)
★ Preferred stock-(discussed above)
★ Right Share: When an existing firm requires additional funds, it raises new capital by issuing
shares. In such issue the existing shareholder gets privilege to buy those new issues. Such shares are
called right shares.
★ Bond or Debenture: (discussed above)
★ Lease Financing:Lease financing is one of the important sources of medium and long
term financing where the owner of an asset gives the right to use that asset to another person against
periodical payments. The owner of the asset is known as lessor and the user is called lessee.
★ Loans from Commercial Bank, Investment Bank, Insurance Company, Specialized Financial
Institutions.
What is Mezzanine financing:
★ Mezzanine Financing is a hybrid of debt and equity financing that is typically used to finance the
expansion of existing companies. It is basically debt capital that gives the lender the rights to
convert to an ownership or equity interest in the company if the loan is not paid back in time and in
full.

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Business Digest 12 Finance (Market/Capital Market)

Definition of market in terms of different disciplines/What is market?


► From the general perspective, market is a place where buyers and sellers get together to buy and sell
goods and services.
► From the point of Finance, market is the means (not necessarily place) through which surplus units
(who have excess funds or resources) and deficit unit (who need funds) are brought together to
participate in financial/security commodity trade.
► From the perspective of Marketing, market is the sum of potential and actual customer.
► From the perspective of Economics, market is a mechanism (not necessarily a place) whereby
buyers and sellers come in close contact with each other directly or indirectly to sell and buy goods.
Characteristics of good market:
√ Timely and accurate information
√ Liquidity:Asset can be bought and sold quickly
√ Low transaction cost
√ Prices rapidly adjusts to the information.
Major functions of capital/stock market:
★ Mobilization of savings to finance long term investments.
★ Facilitates trading of securities
★ Provides liquidity to investors/firms/governments

Problems of Stock Market in Bangladesh:


• Political instability
• Lack of awareness of people about share market
• Lack of Investment bank and merchant bank Products traded in financial market :
• Inefficient management of stock exchanges
• Manipulation in trading In Exchange In OTC market
• Misuse of circuit breaker Shares, corporate Forwards, Swaps, in-
• Rumors from curb market bonds, options, dex options
• Inefficiency of BSEC futures, deben-
tures, treasury
bonds, ETF
Types of Financial Market:

 Money Market:(regulated by Central Bank)


★ Money market is the financial market for short term financing. It is the market where money and
several types of liquid assets are lent and borrowed for short period of time, i;e: less than one year.
Money market is comparatively liquid, safe and provides competitive return.
 Capital Market (regulated by BSEC)
★ A capital market is one in which individuals and institutions trade financial securities like stocks and
bonds for long-term financing. This is the market where funds are borrowed and lent for long
periods (more than one year). This type of market is composed of both the primary and secondary
markets.
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Business Digest 13 Finance (Market/Capital Market)

 Capital Market (regulated by BSEC)


★ A capital market is one in which individuals and institutions trade financial securities like stocks
and bonds for long-term financing. This is the market where funds are borrowed and lent for long
periods (more than one year). This type of market is composed of both the primary and secondary
markets.
Core differences between money market and capital market:

Money Market Capital market


 Market for short financing  Market for middle and long-term financ-
ing
 Liquidity is high, risk low and thereby financing  Liquidity is comparatively low, risks high
cost is low and thereby uncertainty and cost of financ-
ing is high.

Capital Market Instrument: Money Market Instruments:

√ Common stock, √ Commercial paper,


√ Preferred stock, √ Promissory notes
√ Treasury bonds, √ Repurchase agreements (repos)
√ Corporate bonds, √ Zero-coupon bond
√ Municipal bonds √ Negotiable certificates of deposit (CDs),
√ Banker's acceptances,
√ Treasury bills

Primary vs Secondary market:


► Primary Market: It is the market for the trading of new securities, for the first time.
► Secondary Market: Secondary Market can be described as the market for old securities, in the
sense that securities which are previously issued in the primary market are traded here.
Bearish vs Bullish market:
★ Bearish and Bullish are simply terms, used to characterize trends of price of various instruments
such as in the currency, commodity or stock markets. If prices tend to be moving upward, it is a
bull market. If prices are moving downward, it is a bear market.
★ A bear market is typically considered to exist when there has been a price decline of 20% or more
from the peak (security prices are falling significantly), and a bull market is considered to be a 20%
recovery from the bottom (security prices are increasing significantly).
Cash/Spot Market:
★ In the cash market, goods are sold for cash and are delivered immediately. Prices are settled in cash
"on the spot" at current market prices.
Who are the Financial Intermediaries?
★ A financial intermediary is an institution or individual who serves as a middleman among diverse
parties to facilitate financial transactions. Common types include commercial banks, investment
banks, stockbrokers, pooled investment funds, and stock exchanges.

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Business Digest 14 Finance (Market/Capital Market)

Who are the participants of Financial market?


► Banks:Bank is the major depository financial institution which works as intermediary and turns
savings into investment.
► Broker:Broker is an employee of a brokerage firm who acts as intermediary between buyer and
seller in a financial security trade in exchange of commission. Broker doesn’t take long or short
position in securities. He is just a facilitator.
► Stock Exchanges:An exchange is an institution, organization, or association which hosts a market
to trade securities within investors. Secondary securities are traded here and sometimes exchange
are called secondary market for securities.
► Dealer:Dealers are group of investors who buys or sells securities to gain profits. Dealer plays key
role in market making. Dealer can take different forms such as speculators, arbitragers or hedgers.
► Investment Bankers (Merchant Bankers):They advise the issuing company on book building,
pricing of issue, arranging registrars, bankers to the issue and other support services. They can
under-write the issue and also function as issue manager. Examples of top investment
banks:Goldman Sachs, JP Morgan, Credit Suisse, HSBC, Morgan Stanley.
► Mutual funds:Mutual funds are the funds pooled and managed by sophisticated and expert
managers who raises fund from the investors and invest those funds in different stocks and other
financial securities traded in the market to increase the net asset value of the fund.
√ In open end mutual fund, the supply of shares in the fund is not fixed but can increase or
decrease daily with purchase and redemptions of shares. The sales/purchase take place with fund
managers.
√ In close end mutual fund, the supply of shares in the fund is fixed and thereby shares are traded
among the traders.
Difference between Dealer and Broker:

Broker Dealer
Broker executes the trade on behalf of others Trader trades securities on their own behalf.
Brokers do not take long or short position Dealers take long or short position
Brokers have comparatively lower level of Dealers have sound knowledge on markets,
depth regarding market and trends economy and trends.

Types of market efficiency: Strong, Semi-strong and weak form

★ In strong form/perfect market, all relevant information of the–private, public, historical and
current – about the company are reflected in the current stock prices. Price will change only if new
information is emerged. Active management is fruitless in this market.
★ In semi-strong form the stock's current price reflect only relevant public and historical
information about the stock. Active management can be somewhat meaningful in this form.
★ The weak form suggests that stock prices reflect only historical price information of the share. It
implies that security prices follow a random walk. Active management is highly effective in this
market.

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Business Digest 15 Finance (Market/Capital Market)

Internal and external efficiency of market:


★ Market is said to be internally efficient if the security transaction cost is at minimal and market is
externally efficient if prices reflects all available information.
Types of order in market:
► Market order:In market order, orders will be executed by the broker at current market price.
► Limit order:A limit order is an order to buy a security at no more than a specific price, or to sell a
security at no less than a specific price
► Day order:This order is in force from the time the order is submitted to the end of the day's trading
session
► Stop Loss order: A stop-loss order is a tool used by traders and investors to limit losses and reduce
risk exposure. With a stop-loss order, an investor enters an order to exit a trading position that he
holds if the price of his investment moves to certain level that represents a specified amount of loss
in the trade.
► Conditional order:A conditional order is any order other than a limit order which is executed only
when a specific condition is satisfied. For example, the owner places to sell the stock when price
reaches at 50Tk.
► Discretionary order:A discretionary order is an order that allows the broker to delay the execution
at its discretion to try to get a better price.
Possible abuses by stockbroker:
★ Churning:Excessive trading of securities by a broker for the purpose of generating commission in a
discretionary account.
★ Front running:A stock broker buys or sells securities for their own account before executing orders
previously submitted by their customers.
★ Bucket shop:A small securities firm that doesn’t execute client’s orders immediately rather wait for
the price change and execute at the changed price but client is told that trade was executed at
ordered price.
★ Boiler room:Securities firm capitalizes high-pressure sales tactics to sell.
Net Asset Value (NAV) of mutual fund:
★ NAV at market price is the value at which the share in the mutual funds is traded.It equals the total
market value of the assets of the fund (Market value of shares/bonds/securities in which the fund
has investment)divided by number of outstanding shares.(See Formula: F-63).
What is market premium?
★ Market premium is the difference between the market price of equity and the book value of equity.
What is bubble in capital market?
★ Bubble is an economic cycle characterized by rapid expansion, followed by a contraction. In
simplier terms, it’s an overheated market (whether it be stocks, bonds, real estate, commodities,
technology, etc.)where too many investors become overly eager to buy.If bubble is created
artificially, it will eventually crash ,leading to collapse in stock market and thereby the whole
economy.

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Business Digest 16 Finance (Market/Capital Market)

commodities, technology, etc.)where too many investors become overly eager to buy.If bubble is
created artificially, it will eventually crash ,leading to collapse in stock market and thereby the whole
economy.
What do you mean by market breadth and Depth?
Market breadth: Market breadth is a technique used in technical analysis that attempts to gauge
the direction of the overall market by analyzing the number of companies advancing relative to the
number declining. The capital market of Bangladesh suffers from lack of breadth. In another way,
market breadth is a ratio that compares the total number of rising stocks to the total number of
falling stocks.
Market depth: Market depth is the market's ability to sustain relatively large market orders without
impacting the price of the security. Market depth is closely related to liquidity and volume within a
security.
For example, if the market for a stock is "deep", there will be a sufficient volume of pending orders on
both the bid and ask side, preventing a large order from significantly moving the price.
What is the market capitalization?
★ Market capitalization is the current market value of a company which is equal to the share price
multiplied by the number of shares outstanding. Total market cap is the sum of market cap of all
listed companies in the exchange.
Share premium and share discount:
★ Share premium is the amount received by a company over and above the face value of
its shares.A discount on stock occurs when the stock’s par value is higher than the
issuing price.Premium is reported under equity in financial statements and share
discounts are reported as fictitious asset in the statement.
Short sale:
★ A short sale is the sale of an asset or stock the seller does not own. It is generally a transaction in
which an investor sells borrowed securities in anticipation of a price decline.
What is stock split? Why it is done?
★ A stock split is a corporate action in which a company divides its existing shares into multiple
shares to boost the liquidity of the shares.The primary motive is to make shares seem more
affordable to small investors even though the underlying value of the company has not
changed.This has the practical effect of increasing liquidity in the stock.
Growth vs value stock:
★ Growth stocks are associated with high-quality, successful companies whose earnings are expected
to continue growing at an above-average rate relative to the market.Growth stocks generally have
high price-to-earnings (P/E) ratios and high price-to-book ratios along with low dividend yield
★ Value stocks are those that tend to trade at a lower price relative to their fundamentals (including
dividends, earnings, and sales).Value stocks generally have good fundamentals, but they may have
fallen out of favour.Investors buy these stocks in the hope that they will increase in value when the
broader market recognizes their full potential, which should result in rising share prices. Value
stocks generally have low current price-to-earnings ratios and low price-to-book ratios along with
high dividend yield.

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Business Digest 17 Finance (Market/Capital Market)

★ Growth and value are styles of investing in stocks.Neither approach is guaranteed to provide
appreciation in stock market value; both carry investment risk.
Blue Chip Stocks:

► Blue chip stocks are shares of very large and well-recognized companies with a long history of
sound financial performance and stable dividend policy.
► These stocks are known to have capabilities to endure tough market conditions and give high
returns in good market conditions.
► Blue chip stocks generally cost high, as they have good reputation and are often market leaders in
their respective industries. Such as Square Pharma share.
Defensive stocks VS Cyclical stocks:
★ A Defensive (or non-cyclical) stock is a stock whose profit growth and therefore its price has a
very low correlation to the economic activity. Health care, household and Personal Care (HPC)
stocks are known as Defensive
★ A Cyclical stock is a stock highly correlated to the economic activity. These types of stocks grow
rapidly during the boom cycle but the growth is slowed down in the slow economy. Automobile
stocks fall in this category.
Marketed claims of the firm:
★ Firms liability to shareholders and bondholders to pay periodical cash or dividends is called
marketed claims
Margin/Margin requirement:
★ Margin(some sort of collateral)is a good-faith deposit, or down payment, on the assumed liability
of a newly opened position to ensure that contract will be honoured in due time and to avoid
potential credit risk.
Margin Call:

★ Margin Call is a notification from the broker to top up cash into client’s margin account so that it
is once again at initial margin level. Failure to meet a margin call immediately may result in some
or all of the trader’s positions being liquidated by the firm without prior notification.
Open interest:

★ Open interest indicates the number of options or futures contracts that are held by market
participants. It tells you how many futures(or Options)contracts are currently outstanding
(open) in the market.
Proxy:

★ A proxy is an agent legally authorized to act on behalf of another party or a format that allows an
investor to vote without being physically present at the meeting.

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Business Digest 18 Finance (Market/Capital Market)

Buy side vs Sell side:


★ The buy side refers to those firms who buy the reports of research on different securities whereas
the sell side sells such reports.
Different valuation terms used in market:
★ Going-concern value and liquidation value are two distinct methods of valuing companies.Going
-concern value represents the monetary value that can reasonably be expected to be received from
continuing business operations, and liquidation value represents the total sales value of all company
-owned assets. Going-concern value is usually accepted.
★ Book Value vs Market value:Book Value literally means the value of the business according to its
financial statements.In this case, book value is calculated from the balance sheet, and it is the
difference between a company's total assets and total liabilities.Market Value is the value of a
company according to the stock market.Market value is calculated by multiplying a company's
shares outstanding by its current market price
★ Market value vs intrinsic value:Market value is the price at which stock/asset is traded, the price
gasped by the market whereas intrinsic value is the security’s “ought to be’’ price based on past and
future factors determined by valuation by the experts. Intrinsic value is the worth of the asset
based on forecasted payoffs from the investment. Forecasted payoffs are justified by the
information.
Capital market regulators:

Regulators Established Chairman/Head


Bangladesh Securities and Exchange Commission 1993 Dr. M. Khairul Hossain
(BSEC)
Dhaka Stock Exchange: 1954 Prof. Abul Hashem
Chittagong Stock Exchange: 1995 Dr. A. K. Abdul Momen

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Business Digest 19 Finance (Time value of Money)

Time Value of Money: (See Formula: F-67-71)


► Time value of money (TVM) is the idea that money that is available at the present time is worth
more than the same amount in the future, due to its potential earning capacity.
► The rate of exchange (difference) between current consumption and future consumption is called
pure interest rate.
► The willingness of both party (surplus and deficit unit) to receive or pay such difference increases
the pure rate which is known as pure time value of money.
Why value of money changes?
Investment opportunity:money can be invested to earn profit.
Present consumption:by nature, people prefer current consumption
Uncertainty:present cash flow is certain but future is not
Inflation:currency value falls due to inflation
★ For the above reasons, the value of 100 Tk. in current time is worthier than that of 100 Taka at a
future point of time. This change is known is time value of money.
Determining factors of time value of money:
★ 1. Time 2. Risk level 3. Type of interest (compounding or simple) 4. Inflation rate 5. Interest rate 6.
Discount rate. 7 interest interval.
Future value:
★ Future value (FV)refers to a method of calculating how much the present value (PV) of an
asset or cash will be worth at a specific time in the future based on an assumed rate of growth
(interest rate).
Present value:
★ Present value (PV) is the current value of a future sum of money or stream of cash flows given a
specified rate of return. Future cash flows are discounted at the discount rate, and the higher the
discount rate, the lower the present value of the future cash flows.
What is amortization schedule?
★ Amortization schedule is a complete table of periodic loan payments, showing the amount of
principal repayment and the amount of interest that comprise each instalment, until the loan is fully
paid off at the end of its term.
Effective Interest Rate (EIR):
★ Effective interest rate is the interest rate that is actually earned (or paid) on an investment (or loan)
or other financial product due to the result of compounding over a given time period. (See
Formula: F-71 and 76)
What is Annuity and its classification?
► An annuity is a series of equal-payments made or receipt at certain intervals. Examples
of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly
insurance payments and pension payments.
► When cash payment or receipt is made at the beginning of each period it is known as annuity due
and when it is made at the end of every period it is called ordinary annuity. In annuity due, the
first payment occurs right after the contract taking place.

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Business Digest 20 Finance (Working capital Management )

What is Working Capital Management ?


★ Working capital management is the process of managing short-term assets and liabilities to ensure
that the company has adequate liquidity to operate smoothly without any obstacles. It requires
adequate investments in current assets to meet current liabilities at appropriate time balancing
profitability and liquidity.
Gross working capital and net working capital:
★ Working capital refers to a company's available capital for daily operations at any given point of
time.The amount of working capital a company has is a good measure of its liquidity, efficiency and
financial health.
★ Gross working capital is the firm’s investment in current assets such as cash, inventory, marketable
securities whereas net working capital is the difference between current assets and current
liabilities.It measures firm’s excess investment in current assets beyond required to meet current
liabilities.Positive working capital generally indicates that a company is able to pay off its short-
term liabilities almost immediately.Negative working capital generally indicates a company is
unable to do so
★ Relevant ratios to measure firm’s working capital management efficiency:(See Formula:F-121-125)
Current ratio

Acid-test (quick)ratio

Working capital ratio

Net working capital.

Methods/approaches of working capital management:

★ Businesses follow mainly three working capital financing strategies or approaches to maximise the
wealth of the firm.These strategies are different because of their different trade-off between
liquidity risk and profitability.Long term finance provides higher liquidity but also requires higher
interest payment.Short-term finance sources require low interest payment but firms might face
liquidity risk.
In conservative strategy, apart from the fixed assets and permanent working capital, a part of
temporary working capital is financed by long-term financing sources. Thus, long-term
sources are mostly used. It has the lowest liquidity risk at the cost of higher interest outlay.
In aggressive strategy, Long term funds are utilized only to finance fixed assets and a part of
the permanent working capital.Complete temporary working capital and a part of permanent
working capital also are financed by the short-term funds.Thus, short-term sources are mostly
used. The complete focus of the strategy is in profitability.It is a high-risk high profitability
strategy with the cost high liquidity risk.
Matching strategy works on the cardinal principle of financing.It suggests utilizing long-term
sources for financing long-term assets and a part of permanent working capital and temporary
working capital are financed by short-term sources of finance.It matches the maturity of
financing source and maturity of assets.This is a meticulous strategy with moderate risk and
profitability.It matches liquidity and profitability.

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Business Digest 21 Finance (Working capital Management )

What is Cash Conversion Cycle and Cash Turnover?

★ Cash conversion cycle is the time it takes a company to convert its investment in inventory and
other resource inputs into cash. It is measured through: Cash Conversion Cycle =
Days Inventory Outstanding +Days Sales Outstanding -Days Payable Outstanding
★ Days Inventory Outstanding (DIO) is average number of days that a company holds its
inventory before selling it.Days Sales Outstanding (DSO) is the average number of days for a
company to collect payment after a sale.Days Payable Outstanding (DPO) is the number of
days, on average, it takes a company to pay back its payables.(See Formula: F-136,137,140)
★ Cash Turnover is a ratio measuring the amount of times that the company’s cash has been
spent through over certain period of time.It measures the number of times cash conversion
cycle took place in a year.
★ A higher cash turnover ratio and lower cash conversion cycle is always expected.
What is Economic Order Quantity (EOQ)?

★The Economic Order Quantity(EOQ)is the number of units that a company should order to
minimize the total costs of inventory—such as holding costs, order costs, and shortage costs.It
is the efficient order management approach to minimise inventory management cost.(See
Formula: F-87*)
What is cash management?
► Cash management refers to management of cash from the time it starts its transit to the firm
until it leaves the firm in payments. It also includes planning, designating monitoring and
executing firm’s cash collection and disbursement system while temporary investment of idle
cash to generate value.
► Decisions regarding the level of cash balance to maintain, when and how to make cash
transactions and where to put any excess cash are critical value-adding activities.

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Business Digest 22 Finance (Working capital Management )

Major types of cash flows that matters in project valuation:


 Initial project investment
 Investment in regular working capital
 Terminal cash flows.
What is Operating Cash Flow (OCF)?

★ Operating cash flow (OCF), also known as cash flow from operations, is the total amount of cash
generated by a firm during a given period from its core business activities. OCF begins with net
income, adds back any non-cash items, and adjusts for changes (investment)in net working capital
to arrive at the total cash generated or consumed in the period.
What is Free Cash Flow (FCF)?
★ Free cash flow is the cash available to the firm to be distributed between stockholders and
bondholder after meeting investment and working capital needs.
Most liquid assets:
Cash in vaults and cash with other banks

Cash with central banks

Commercial paper (a short-term debt instrument)

Money market funds,

Savings and checking account money

Treasury bills

Investment in capital markets (easily marketable)

Motives for holding Cash and marketable securities:

Transaction Motive: to meet the day to day needs of its business operations
Precautionary Motive: to meet the contingencies or unforeseen circumstances if arises
Speculative Motive: to exploit the possible opportunities out of regular business.
What is float?
► Float is the time it takes in issuance, distribution and clearance of checks.
► In other words, Float can be defined as the delay between a payment being made and the funds
being received by the payee. Three main categories of float are mail float, processing float and
availability float
► Cash float is the total value of checks that have been written or received, but have not yet come out
or been credited to your bank account.
★ The goal of efficient cash management is minimising this float.(See Formula: F-83)
What is lockbox?
► It’s a cash management system to reduce float.Lockbox is a bank-operated mailing address to
which a company directs its customers to send their payments.
► Customers are required to mail all their checks to the bank, which receives the checks and starts
their clearance right away.

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Business Digest 23 Finance (Working capital Management )

► By using lockbox, float can be reduced because company staff is no longer required to receive
checks and then send them to bank for deposit.
What is Zero Balance Account?
★ It is a controlled cash disbursement mechanism.An account is opened with a bank where firm
doesn’t hold permanent cash.Cash is wired transferred into the account just before the checks are
presented to the bank for cash.
Relevant model in cash management :
Baumol’s model  Cash flows are certain
 Cash inflows are periodic(terminal)

Beranek model  Cash flows are certain


 Cash inflows occur at a constant rate

Miller-Orr  Firms maintain minimum required cash


 Cash flows are normally distributed as the number of observations increase

Stone model  Firms maintain minimum required cash


 Firm has some knowledge about future cash flow although this knowledge

What is cash budget?


★ A cash budget is a statement showing the estimated cash receipts and disbursements over the firm’s
planning horizon.
★ In simple words, its basic idea is to predict when and what quantity, the receipts of cash would come
into firm and when and in which quantity, payments in cash would be made.
What is cash concentration?
★ Cash concentration is the aggregation of the cash in multiple bank accounts into a single master
account. This is done so that the funds can be more efficiently invested or used for payments from
a centralized account.
Liquidity vs Marketability:
★ Liquidity is an asset's property of being able to be sold without affecting its fair value.liquidity
refers to the speed and certainty with which an asset can be converted into cash.
★ "Marketability is the ability to trade an asset at a given price in given volumes.It essentially relates
to the ease of trading
★ Marketability describes an attribute of an investment that means it can be sold at any time.Liquidity
describes an attribute of an investment that means it can be sold at any time close to the value of the
original investment.

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Business Digest 24 Finance (Risk And Return)

Return: (See Formula: F-1,2,5,15)


★ Return is the income or compensation received from an investment as a reward for deferring
consumption, bearing risk and taking inflation risk. Return is expressed as a percentage of total
initial investment.
★ In case of stock, return is the change in the price plus any dividend received from the stock as a
percentage of purchasing price of the stock.
★ Expected return is the weighted average of possible returns.The weights or probabilities for each
return is assigned based on forecasted scenarios.
★ In some fixed income assets such as bonds, return is the coupon interest payment received from the
bond.
Risk: (See Formula: F-6,7,8)
★ From general point of view, risk is the uncertainty of happening or not happening any event that
might negatively affect the expected outcome or event. From Finance perspective, risk can
affect both positively and negatively. Positive risk is called opportunity and negative risk is called
threat.
★ From the perspective of finance, risk is the variability of expected return associated with a given
asset. It implies future uncertainty about deviation from expected earnings or expected outcome.
It measures the uncertainty that an investor is willing to take to realize a gain from an investment.
How to measure risk? Variance, Standard Deviation, Coefficient of Variation (CV):

► In finance, standard deviation is the statistical measure used as proxy of risk. It is the variabilities
of return distribution around expected return. Standard deviation is the measure of dispersion.
The greater the standard deviation, the greater the risk.
► In other words, standard deviation is squared root of weighted average sum of the squared
deviations of returns from expected returns.
► Variance is also another measure of risk, which is calculated by squaring the standard deviation.
But variance is rarely used as measure because of its being large in quantity.
► Variance is the weighted average sum of squared deviations of returns from expected return.
► But standard deviation is an absolute measure, thus cannot be compared with another stock’s risk.
Coefficient of Variation(CV)is the relative measure which solves this problem.
► Coefficient of variation is the ratio of the standard deviation and expected return of a particular
stock.
► When making risk decision among the projects/stocks, CV should be appropriate risk measure.
(See Formula: F-5-17)
Types of Investor based on risk preference:
► An investor is said to be risk averse if he requires additional return for increase in the risk.
► An investor is said to be risk neutral if he doesn’t require any return premium for increase in risk
and
► Finally, an investor is risk seeker if he requires reduced return for increase in the degree of risk.
► In most of the finance and portfolio theory, investors are assumed as risk averse.

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Business Digest 25 Finance (Risk And Return)

What is beta, Adjusted beta? (See formula: F-56)


★ Beta is a measure of systematic risk.It measures the sensitivity of a particular stock return in
response to the changes in market return.
 If beta is more than 1, the stock will be affected more than market as a whole due to change in
systematic risk factors.
 If beta is less than 1, the stock will be less responsive compared to market in systematic risk
change.
 If beta is 1, the stock will be as much as responsive as the whole market does in response to
change in systematic risk factors.
★ Analysts suggest that in the long run the security beta will move towards market beta, which is
1.Thus, adjusted beta(Blume’s adjustment) is sometimes used in long-run security
valuation.The formula for adjusted beta is:
Adjusted beta =(2/3) x (unadjusted historical beta) + (1/3)(1. 0)
Types of Risks:
★ Every organization must properly group the types of risk under two main broad categories viz .,
Systematic risk (undiversifiable) and Unsystematic risk (diversifiable).
A. Systematic Risk/Market Risk/ Non-Diversifiable Risk/ Uncontrollable Risk:

★ Systematic risk is the influence of external factors on an organization.Such factors are normally
uncontrollable from an organization's point of view.It is macro in nature as it affects a large
number of organizations operating under a similar stream or same domain.However, an
organization can reduce its impact, to a certain extent, by properly planning the risk attached to the
project.The types of systematic risk are explained below:
 Interest rate risk: Interest-rate risk arises due to the variability in the interest rates from time
to time. It particularly affects debt securities as they carry the fixed rate of interest.
 Price risk: Price risk arises due to the possibility that the price of the shares, commodity,
investment, etc. may decline or fall in the future.

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 Reinvestment rate risk: Reinvestment rate risk results from the fact that the interest or dividend
earned from an investment can't be reinvested with the same rate of return as it was acquiring
earlier.
 Purchasing power or inflation risk: Purchasing power risk is also known as inflation risk. It
affects the purchasing power adversely; the same amount of money will buy fewer goods and
services.
 Currency Risk:It applies when investors owns foreign investments. It is the risk of losing
money because of a movement in the exchange rate.
 Political Risk: Political risk occurs due to changes in the political events. Such changes
may have an unfavourable impact on an investor.

B. Unsystematic Risk /Non-market/ Stand-alone Risk/ Diversifiable Risk/ Controllable Risk:

★ Unsystematic risk is due to the influence of internal factors prevailing within an organization.
Such factors are normally controllable from an organization's point of view. Such risk is
micro in nature. It can be planned, so that necessary actions can be taken by the organization
to mitigate(reduce the effect of)the risk. The types of unsystematic risk are depicted below.
 Business risk: Business risk is the
possibility that a company will have
lower than anticipated operating
profits, or experience loss rather than
making profit. It is the risk that the
business may not be able to cover its
operating costs. It is influenced by
numerous factors, including sales
volume, per-unit price, input costs,
competition etc.
 Financial risk:The risk that the cash flow of an issuer will not be adequate to meet its
financial obligations is called financial risk. It is the inability of the firm of not being able to
pay off the debt it has taken from the bank or the financial institution. Financial risk arises
when a company uses debt financing.
 Credit risk:A credit risk is the risk of default which may arise from a borrower failing to
make required payments.Credit risk is the risk of probable loss resulting from a borrower's
failure to repay a loan or interest timely.
 Operational risk:This type of risk arises from operational failures such as mismanagement or
technical failures.Operational risk can be classified into Fraud Risk and Model Risk. Fraud
risk arises due to lack of controls and Model risk arises due to incorrect model application.
 Liquidity risk: Liquidity risk is the risk that a company may be unable to meet short term
financial demands. This usually occurs due to the inability to convert a security or hard asset
to cash without a loss of capital and/or income.

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Business Digest 27 Finance (Cost of Capital)

★ The cost of capital of a firm is the minimum rate of return expected by its investors. It is the rate
of return that a firm must earn on its project investments to maintain its market value and attract
funds. It is the weighted average cost of various sources of finance used by the firm.
Importance of cost of capital:
Acts as criterion in capital budgeting.
Helps in determining the present value of cash flows
Required in the valuation of firm/stock
Acts as basis for evaluating the financial performance.
Computation of cost of capital:
★ Cost of Debt:Cost of debt is the after-tax cost of long-term funds through borrowing. Debt may
be issued at par, at premium or at discount and also it may be perpetual or redeemable.
★ Cost of Preference Share Capital:Cost of preference share capital is the annual preference share
divided by the net proceeds from the sale of preference share.
★ Cost of Retained Earnings:Cost of retained earnings is the same as the cost of an equivalent fully
subscripted issue of additional shares, which is measured by the cost of equity capital.
★ Cost of Equity:Cost of equity capital is the minimum rate of return that a firm must earn on the
equity financed portion of an investment project in order to leave unchanged the market price of
the shares. Cost of equity can be calculated from the following approach:

► Capital Asset Pricing Model


► Fama-French three factor model
► Packaged/sum-up model
► Yield plus Model

What is Weighted Average Cost of Capital (WACC)? (See Formula: F-14*)

★ Weighted average cost of capital is the weighted average cost of various sources of financing. It
is the expected average future cost of funds over the long run which is found by weighting the cost
of each specific type of capital by its proportion in the firm’s capital structure.
★ It is the appropriate rate used in valuation of a levered firm.
Steps in computation of Weighted Average Cost of Capital (WACC):

 Finding cost of specific sources of fund.


 Assigning weights to specific sources of fund.
 Multiplying the cost of each of the sources by the appropriate weights and sum up.

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Business Digest 28 Finance (Cost of Capital)

Capital Asset Pricing Model (CAPM): (See Formula: F-18)

★ CAPM is a market determined model to determine the price of an asset or required return the firm
must earn on its equity capital.The model assumes the cost of the equity is a function of risk-free
return and risk premium for the responsiveness of the risky asset in response to systematic risk
measured by beta. It also assumes there is linear relationship between the required return and risk
-premium for systematic risk. In CAPM, only market risk is considered relevant and premium is
required only for market risk.

Fama-French Three-factor model:


★ The Fama-French Three-factor Model is an extension of the Capital Asset Pricing Model
(CAPM). The Fama-French model aims to describe stock returns through three factors:
1.Market risk,
2.Size factor-the outperformance of small-cap companies relative to large-cap companies, and
3.Value factor-the outperformance of high book-to-market companies versus low book-to-market
companies.
► The rationale behind the model is that high value and small-cap companies tend to regularly
outperform the markets.
Arbitrage Pricing Theory (APT):

★ The Arbitrage Pricing Theory (APT)is a theory of asset pricing that holds that an asset’s returns
can be forecasted using the linear relationship between the asset’s expected return and a number of
macroeconomic factors that affect the asset’s risk such as inflation rate, GDP growth, change in
interest rate, major political upheavals etc. The theory also suggests that the returns on assets
follow a linear pattern. An investor can leverage deviations in returns from the linear pattern
using the arbitrage strategy.

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Business Digest 29 Finance (Capital Structure and Leverage )

Capital structure:
★ Capital structure refers to the proportions or combinations of common equity capital, preferred
capital, bonds, debentures, long-term loans, retained earnings and other long-term sources of funds
in the total amount of capital.
★ In other words, capital Structure refers to the amount of debt and/or equity employed by a firm to
fund its operations and finance its assets.
Optimum capital structure:

★ Optimum capital structure is the capital structure at which the weighted average cost of capital is
minimum and thereby the value of the firm is maximum.The structure is typically expressed as a
debt-to-equity or debt-to-capital ratio.
Factors which affect capital structure:
㊣ Financial leverage ㊣ Cost of capital &costs of floatation
㊣ Cash flow ability to service debt ㊣ Control &flexibility
㊣ Nature and size of a firm
㊣ Growth and stability of sales ㊣ Risk
㊣ Capital market conditions ㊣ Corporate tax Rate &legal requirements
㊣ Purpose of financing

Miller and Modigliani’s two propositions (no tax):

★ Proposition I states that market value of any firm is independent of amount of debt or equity in its
capital structure. The firm cannot change its value by changing its capital structure. The value of
the levered firm is the same the value of the unlevered firm.
★ Proposition II states that the company’s cost of equity is directly proportional to the company’s
leverage level. The increase in leverage level induces higher default probability to a company.
Therefore, investors tend to demand a higher cost of equity (return) to be compensated for the
additional risk.
Static Trade-Off theory:
★ Tax shield from debt increases the value of the firm whereas financial distress costs associated with
debt decreases the value of the levered firm. The two offsetting factors produce an optimal
amount of debt.
★ The static trade off theory attempts to explain the optimal capital structure in terms of the
balancing act between the benefits and loss of debt. According to this theory, optimal debt level is
the point at which marginal financial distress cost equals marginal tax benefit from the debt.

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Pecking Order theory:


★ The pecking order theory suggests the sequence and choice of instruments to raise capital based
on empirical evidence. Accordingly, sequence of financing type to raise capital is, firms first
tap retained earnings(internal equity)finance, second source is debt (external source) and the
last source is issuing new common stock shares (external equity).
What to consider in selecting of debt-equity ratio/capital structure?

► Tax rate(High tax rate leads to high debt-equity ratio and vice versa)
► Types of assets(if assets are mostly physical, firm can go for high debt-equity ratio)
► Certainty of operating income(if high level certainty)exists, go for high debt-equity ratio and
vice-versa)
Leverage/operating leverage/financial leverage:

► Leverage is defined as the ability of a firm to use fixed cost liability or fund to magnify the
returns of the shareholder.
► Leverage is created when a firm has fixed cost associated with sales/operation or with its
financing characteristic.
► Operating leverage is the firm’s ability to use fixed operating costs to magnify the effects of
changes in sale on its operating profit.
► Financial leverage is the firm’s ability to use fixed financing costs to magnify the effect of
changes in operating profit on firms earning per share (EPS).

Degree of operating leverage (DOL):

★ The degree of operating leverage(DOL)is a financial ratio that measures the sensitivity of a
company’s operating income to its sales.It is the multiple by which operating income of a
business changes in response to a given percentage change in sales.The DOL ratio shows the
percentage change in operating income in response to a 1% change in Sales. (See Formula:F
-77).

Degree of financial leverage (DFL):

★ The degree of financial leverage(DFL)measures the sensitivity of earnings per share (EPS)to
the fluctuation in the operating income. The DFL ratio shows the percentage change in EPS in
response to a 1%change in EBIT. (See Formula:F-78)

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Business Digest 31 Finance (Capital Structure and Leverage )

★ Capital Budgeting is the process of identifying, evaluating, and selecting investment projects whose
returns are expected to extend beyond one year to maximise shareholders’ wealth. It is the process
of deciding whether or not to commit resources to particular long-term projects whose benefits are
to be realized over a period of time.
Problems associated with capital budgeting:
1.Forecasting cash flows in long term is very difficult due to uncertainty
2.Figuring out proper discount rate is also challenging
Steps of Capital Budgeting Process:

㊣ Identify and evaluate potential opportunities


㊣ Estimate operating and implementation costs
㊣ Estimate cash flow or benefit of the project
㊣ Assess risk of the project
㊣ Implement the proposed project.

Types of Projects:

► Mutually Exclusive Projects:Mutually exclusive projects are a set of projects from which
at most one will be accepted.
► Independent Projects:An independent project is a project whose cash flows are not
affected by the accept/reject decision for other projects. Thus, all Independent Projects
which meet the Capital Budgeting criterion should be accepted.
► Dependent Project:Dependent projects are those project whose acceptance/rejection
depends on the acceptance/rejection of another project.
Hurdle rate:

★ Hurdle rate is the minimum required rate of return on an investment/project in a discounted cash
flow analysis. The minimum rate at which project is acceptable.
Three major types of investment decision:

1. Whether project should be accepted or rejected based on analysis


2. Among the mutually exclusive projects which one is to be selected and
3. Capital rationing; if some projects are accepted, how much investments are to be made for those
projects.In rationing process, projects with maximum benefits are provided with largest
investments.

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Business Digest 32 Finance (Capital Structure and Leverage )

Conventional vs nonconventional cash flows:


★ A conventional cash flow for a project or investment is typically structured as single initial
outflow, followed by a number of inflows over a period of time.
★ An unconventional cash flow is a series of (more than one)inward and outward cash flows over
time in which there is more than one change in the cash flow direction.

Methods (Techniques/Tools) of capital budgeting:

CAPITAL BUDGETING
TECHNIQUES

Modern methods/ Discount methods


Traditional methods/Non-discount methods √ Net Present Value method(NPV)
√ Pay-back Period method (PBP) √ Internal Rate of Return method(IRR)
√ Accounting/Average rate method (ARR) √ Profitability Index method(PI)
√ Discounted Pay Back Period method

How to adjust risk and uncertainly in capital budgeting?

★ The future cash-flows are always uncertain. Estimation of demand, production, selling price, cost
etc. cannot be exact. The firm can incorporate such uncertainty in cash flows by:
 Risk-adjusted discount rate:Discount rate to derive NPV is added with some uncertainty
premium leading to increased cost of funds and reduced NPV.
 Certainty equivalent method:It reduces expected cash inflows by certain amounts.
Expected cash flows are multiplied by certainty equivalent factor (less than 1)to derive
most certain cash flows.

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Business Digest 33 Finance (Capital Structure and Leverage )

Traditional methods/Non-discount methods

Pay Back Period Method (PBP) (See Formula:F-142)


★ Pay-back period is the time required to recover the initial investment of a project. It represents
the period in which the total investments in permanent assets pay backs itself.
★ Accept /Reject criteria:If the actual pay-back period is less than the predetermined pay-back
period, the project would be accepted. If not, it would be rejected.

Time value of money adjusted or discounted cash flows methods


Discounted Payback Period:
★ One of the major limitations of PBP method is that it does not consider time value of money.
This problem can be solved if we discount the cash flows and then calculate the PBP.
★ Thus, discounted payback period is the number of years required to recover the investment outlay
on present value basis. However, it still fails to consider the cash flows beyond the payback .

Accounting/Average Rate of Return (ARR) (See Formula:F-145)


★ Accounting/Average Rate of Return (ARR)is the average net income an asset is
expected to generate divided by its average capital cost, expressed as an annual percentage.
Average capital is the average of initial investment and liquidation value
★ Accept/Reject criteria:If the actual accounting rate of return is more than the predetermined
required rate of return, the project would be accepted. If not, it would be rejected.

Net Present Value Method (See Formula:F-143)


★ Net present value is the difference between the total present value of future cash inflows
and the total present value of current/future cash outflows. In this method cash flows are
considered with the time value of the money.
★ Accept/Reject criteria:If the present value of cash inflows is more than the present value
of cash outflows(positive NPV, it would be accepted. If not, it would be rejected.

Merits Demerits
√ It recognizes the time value of mon- √ It involves some guesswork regarding cost of
ey. capital.
√ It considers the total benefits arising √ It assumes the same level of risk for the whole
out of the proposal. period.
√ It is the best method for the selec- √ It is not suitable for the projects having different
tion of mutually exclusive projects. effective lives.

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Business Digest 34 Finance (Capital Structure and Leverage )

Internal Rate of Return Method (See Formula:F-144)


★ IRR is the discount rate that makes a project break even.It can be defined as the rate of
discount at which the present value of cash inflows is equal to the present value of cash
outflows.IRR is calculated based on interpolation method following the mentioned
formula.
★ Accept/Reject criteria: If the IRR is greater than the cost of capital the project is
accepted. If not, it will be rejected.

Merits Demerits
 It considers the time value of money.  It produces multiple rates which may be
 It takes into account the total cash confusing for taking decisions.
inflow and outflow.  It assumes that all intermediate cash flows
 It does not use the concept of the are reinvested at the internal rate of return.
required rate of return.  It uses same rate for the whole period.

Profitability Index (PI) (See Formula:F-146)


★ Profitability index is the ratio of the present value of a project’s future net cash flows
to the project’s initial outlay.
★ This is also known as benefit cost ratio.This is similar to NPV method.The
major drawback of NPV method is that it does not give satisfactory results
while evaluating the projects requiring different initial investments. PI
method provides solution to this.
★ Accept/Reject criteria:If PI>1, project will be accepted, if PI<1, then project is
rejected and if PI=1, then decision is based on non-financial consideration.

When managers accept negative NPV project?


 If the project has significant positive environment impact
 If the project ensures reasonable social benefits and customer attraction
 Most of the government owned social projects
 To create future opportunities and market
 In a competitive marketing purpose,
 To develop brand value, goodwill initiatives etc.
What is NPV profile?
★ NPV profile shows the relationship between the NPV of a project and the discount rate employed
for that project.

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Business Digest 35 Finance (Capital Structure and Leverage )

What is Multiple IRR (MIRR) ?

★ Multiple IRRs occur when a project has more than one internal rate of return.It is a limitation of
IRR, where IRR provides more than one rate that makes the NPV equal to zero.The problem arises
where a project has non-conventional interim cash flow pattern.
What is Modified Internal Rate of Return (MIRR)?

★ MIRR assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial
outlays are financed at the firm's financing cost.In contrast, the traditional internal rate of return
(IRR)assumes the cash flows from a project are reinvested at the IRR.The MIRR more accurately
reflects the cost and profitability of a project.
NPV or IRR which one is better?

★ IRR and NPV both are superior capital budgeting techniques.But for almost any project simple IRR
isn't superior to NPV.In many cases, projects’ NPV is much better compared to IRR.Some reasons
for the superiority of NPV include:
IRR assumes the single discount rate which will not be case in reality
Multiple IRR will not only make confusion but also make analysis difficult.
IRR can be negative too which is difficult to interpret, whereas in case of negative NPV, it surely
means deficit and positive value implies profitability in the project.
Positive NPV indicates value addition to shareholder’s wealth, and negative NPV implies vice-
versa. However, this thumb rule will not applicable in case of IRR.

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Business Digest 36 Finance (Security Valuation )

What is valuation? the basic model of valuation/what do you mean by valuation?

★ Valuation is the process of determining how much a security/project/firm is worth.It is the


process that links risk and return to determine the worth of an asset.The expected benefits from
real/physical and financial asset/project/firm are measured and discounted in monetary value to
determine their worth at a given point of time.
★ The value of a security/project/asset/firm is the present value of all future cash flows associated
with it over the specified period.The expected returns are discounted using the appropriate required
return. Symbolically,

Where,
V = Value of security at time zero (t = 0)
At= cash flow expected at the end of year t
K = appropriate discount rate

Approaches to the Valuation Process:


★ Top-Down, Three-Step Approach:Investors consider the aggregate economy and market, then
examine alternative industries, and finally analyse individual firms and their stocks.
★ Bottom-Up, Stock picking Approach:Investors focus on a specific company rather than on the
industry in which that company operates, or on the economy as a whole.

Valuation of common stock:


★ Value of a share is equal to the present value of all future cash flows it is expected to provide over
an infinite time horizon. Because of the complexity and importance of valuing common stock,
various valuation techniques have been devised over time.These techniques fall into one of two
general approaches:discounted cash flow valuation techniques and relative valuation techniques.
Fundamental vs Technical analysis:

Topic Fundamental Analysis Technical Analysis


Definition Calculates intrinsic value using Uses historical and current price movement
fundamental factors of stock. of security to predict future price
movements
Methodology Financial data & industry trends Price movement and market psychology
Time horizon Long-term approach Short-term approach
Objective Investing Trade
Vision looks backward as well as forward looks backward

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Approaches to equity Valuation

Discounted Cash Flow Non-discounted Valuation


Techniques Techniques

√ Based on Gordon’s Dividend discount model (DDM)


√ Based on expected free cash flow to the firm (FCFF)
Relative valuations/
√ Based on expected free cash flow to equity (FCFE) comparable
√ Based on residual earning (RE)
√ Price/Earnings Ratio (P/E)
√ Price/Cash Flow Ratio (P/CF)
√ Price/Book Value Ratio (P/B)
√ Price/Sales Ratio (P/S)
√ Asset Based valuation

The Discounted Cash Flow Valuation Techniques:

★ Under the discounted cash flow valuation techniques, the value of the stock is estimated based
upon the present value of some measure of cash flow. Cash flows include dividends, operating
cash flow, and free cash flow.
Steps in stock valuation based on forecasted future cash flow:
1) Determine the methods of valuation
2) Define forecast time horizon.
3) Calculate appropriate WACC or Cost of equity funds as discount rate
4) Define the types of cash flow such as Dividend/FCF/RE
5) Calculate the growth rate of cash-flow beyond time horizon
6) Determine the continuing value
7) Calculate the present value of forecasted cash flow within horizon and beyond horizon
(continuing value)
8) The sum of present value of cash in hands, forecasted cash flow and continuing value is the
stock’s intrinsic value.
Asset based valuation:
★ Asset- based valuation values equities by adding up the estimated fair market values of the assets
of a firm minus the values of liabilities. The model is criticized due to inadequate and inefficient
access to the fair market value of intangible assets and sometimes market values are not readily
available.

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Business Digest 38 Finance (Security Valuation )

Dividend Discount Model (DDM): (See Formula: F-50)


★ In this model, the value of equity is determined by discounting the future dividends coming from
the share. In other words, the value of share is the present value of all expected dividends from the
share.
1. It is appropriate method when firm follows a fixed dividend pay-out ratio
2. One criticism is that, it ignores capital gain and some theorist believe that dividend is irrelevant
and dividend pay-out is not related to value. Dividend doesn’t create value rather it is the
distribution of value.
3. However, from investors’ point of view, dividend is relevant as dividend is the cash flow that
investors eventually receive. (See Formula:F-50)
Free Cash Flows to Firm (FCFF) model: (See Formula:F-58):
★ In this model, the total firm value is determined by discounting the free cash flows to the firm. In other
words’ the value of the firm is the present value of all the future expected free cash flows to the firm
plus cash in hand.
►In this method the firm’s weighted average cost of capital (WACC)is appropriate discount
rate.
►This method is applicable when firms’ have sustainable positive constant free cash flow
and have constant growth rate.
►It is straightforward, real and not affected by accounting accruals rules.
►Some value generated in short term in non-cash form highly distorts the forecast and
valuation process.
Free Cash Flows to Equity model (FCFE):(See Formula:F-53)
★ In this method, the value of the equity share is the present value of all the future expected free cash
flows to the owners of the firm. Notably, because these are cash flows available to equity owners,
the discount rate used is the firm’s cost of equity(k)rather than the firm’s WACC.
★ Free cash flow to equity (FCFE)is a measure of how much cash is available to the equity
shareholders of a company after all expenses, reinvestment, and debt are paid.
FCFE =
Net Income -Net Capital Expenditure-Change in Net Working Capital +New Debt -Debt Repayment.
Residual Earnings model (RE):
★ In this model, the value of the equity firm is present value of expected residual earnings from the
stock plus the current book value of the firm.The book value is the liquidation value of the firm.If
forecasted earnings are equal to the required earnings, the firm value would be equal to its book
value.Appropriate discount rate is cost of equity.
★ Residual earning is the excess earnings on a particular year over the required earnings on the
beginning book value.
★ This model is supported by accrual accountings and accounting principles.
★ It focuses on value drivers and incorporates financial statements.
★ It concentrates on earnings rather than cash flow.

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Business Digest 39 Finance (Security Valuation )

The Relative valuation techniques/steps in relative valuation:

In relative valuation:
1. Find the comparable firms in terms of sale size, capital size, same industry/product, equivalent
environment
2. Identify measures for the comparable such as P/E, P/S, P/B, P/CF ratio from the financial
statements of comparable firms.
3. Determine the average of every -ratio for all comparable firms.
4. Multiply the average of any particular ratio with target firm’s value. For example, if average P/
E ratios of comparable firms equals 10 and earnings of target firm is 10, then value of that
target firm is 10*10*10= 100 Tk.
5. Similarly, if average P/S ratios of comparable firms equals 9 and Sales of target firm is 8, then
value of that target firm is 9*8=72 Tk.
6. After calculating the values based on different ratios of comparable firms, the average of all
values is considered as the final determined value of the firm.
Problems with relative valuation:

★ There is circular effect.The values of firms are circulated within themselves. One
firm’s value is based on comparable but those comparable are also based on another
comparable and this goes on making no sense.
★ Market is inefficient in reality.Comparable’ prices may not be well justified.
★ No firm is alike and comparable in reality
★ This method would be meaningless of denominator of any ratio becomes negative.
Valuation of Bonds:

★ A Bond is a long-term fixed income instrument. The value of bond is the present value of the
contractual payments its issuer obliged to make from the beginning till maturity. The appropriate
discount rate would be the required return matching with risk and the prevailing interest rate. This
is the amount that an investor should be willing to pay for this bond, if the market price is above
this value, the investor should not buy it.
What is tax shield and interest tax shield?
★ Tax Shield is the saving in taxable income for corporations by deducting allowable expenses such
as interests, depreciation. A levered firm pays interest, and thus pays less tax than an unlevered
firm does. This benefit made out of using debt is called interest tax shield.
(Tax Shield =Interest expense x Tax Rate).

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Terminal value vs Continuing value:


★ Continuing value is the value calculated at forecast horizon. It captures the value beyond the
forecast horizon (after the horizon).Continuing value is appropriate when the operation is
assumed to continue for indefinite period of time (common stock).
★ Terminal value is what an investment is expected to be worth in the future when it terminates or
when it may be liquidated.It is non-discontinuing value and applicable to any particular project or
bond valuation.
Cum-dividend vs Ex-dividend earnings:
★ The total earnings from an investment is referred to as cum-dividend earnings that is earnings with
the dividend reinvested.Earnings without reinvesting dividend is called ex-dividend earnings.In
residual earning valuation, cum-dividend earnings are applicable.
P/E vs Trailing P/E vs Forward P/E ratio:
► P/E ratio suggests how much investors are willing to pay for each taka of a company’s earnings.
If P/E is 10, it means investors are willing to pay 10 Tk. for 1 taka of earnings for a particular
stock.
► Trailing P/E ratio is calculated by dividing the current stock price of a company by the last 12
months’ earnings per share(EPS)whereas forward P/E ratio is the price-to-earnings ratio variant
which is calculated by dividing the current stock price by the earnings per share expected in the
next 12 months.
► Some analyst suggests, in trailing ratio the price should be added by dividend in order to reflect the
value that has been distributed to avoid misleading P/E ratio.
Dirty surplus vs Clean surplus accounting/Dirty surplus items:
★ Reporting an income in equity statement rather than reporting in income statements is called dirty
surplus accounting whereas an equity statement without any income item other than net income is
known as clean surplus accounting. Most Notable dirty surplus items are:
㊣Unrealized gains and losses from securities available for sale
㊣Foreign currency translation gains
㊣Unrealised gains and losses from derivate.
Cherry Pick:
★ A strategy in which firms sell the stocks with unrealized gains and report in income statement but
stock with unrealised losses are held and reported in equity statement in order to boost earnings per
share .
Economic Value Added (EVA)
★ Economic Value Added (EVA), also referred to as economic profit, is the difference between how
much profit a company makes from invested capital and how much it had to pay out to obtain that
capital.
★ Economic value added (EVA) is an internal management performance measure that compares net
operating profit to total cost of capital. The positive number tells us that the firm/project generates
more than required cost of capital. A negative number indicates that the firm/project did not make
enough profit to cover the cost of doing business.
EVA = NOPAT - (Total Assets - Current Liabilities)* WACC

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Business Digest 41 Finance (Dividend)

Dividend, Dividend policy, Cash dividend and Stock dividend:


► Dividends represent a distribution of corporate earnings to company shareholders and usually take
place in one of two forms --cash or stock.
► In cash dividend, cash is distributed whereas in stock dividend, in lieu of cash payments, new
shares are given to the existing shareholders proportionately, as a result total number of outstanding
share increases.
► Dividend Policy is a financial decision that refers to the proportion of the firm’s earnings to be paid
out to the shareholders. It involves two things: the level of dividends and stability of dividends
paid.
► If a company declares a 15% stock dividend, this means every shareholder receives an additional
15 stocks for every 100 stocks he already owns.
Relevant dates in dividend:
 Dividend Declaration Date is the date on which a company's board of directors declares the
amount of dividend to be paid.
 Record Date is the date on which a company reviews its books to determine its "shareholders of
record" who hold a particular stock and will receive the firm's dividend payment.
 The ex-dividend date for stocks is typically two business days prior to the record date. If an
investor buys a stock before the ex-dividend date, then they will receive the dividend payment. If
they purchase the stock on or after the ex-dividend date, then they are not entitled to receive the
dividend.
If a company gives stock/cash dividend or split the stock, what will happen to the total equity/
market price?

 In case of cash dividend, the total equity value will fall by the amount dividend paid.
When there
is news of dividend in the market, price might increase due to signalling effect but after the
payment of dividend price will fall.
 Stock dividend or stock split increases the number of outstanding shares. Since no cash-flow is
involved with stock dividend, there will be no change in total equity but stock price will change as
number of shares changes. It will have dilution effect on EPS, NOCF, NAV per share.
Why stock price falls on or after ex-dividend date?
★ It is to be noted that this fall is the sign of market efficiency, not inefficiency because market
rationally attaches or adjusts the value to be distributed among shareholders. Since some value
will be distributed, price falls.
Cumulative dividend:
★ Cumulative dividend is a sum that companies must remit, usually on preferred shares, before any
other dividends on any of the issuer's of other securities. Maximum 6 years of accumulation is
possible.

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Business Digest 42 Finance (Dividend)

What is dividend yield?


★ Dividend yield refers to a stock's annual dividend payments to shareholders, expressed as a
percentage of the stock's current price.It measures the quantum of earnings by the way of total
dividends which investors make by investing in that company. (See Formula: F-21)
Alternatives to pay dividends with excess cash:
► Select positive NPV project
► Acquire other companies
► Purchase financial asset
► Repurchase share from market

Gordon’s Model (relevancy of dividend):


★ Gordon’s model assumes that investors are risk averse i.e.not willing to take risks without
proportional return/reward and prefers certain returns to uncertain returns. Therefore, dividends
are relevant as certain cash flow.
What is share repurchase?
★ It is an alternative to dividend for some firms. Share repurchase is simply when a company
chooses to buy back some of its own stock from the investor at market price, typically on the open
market, with the help of a financial institution as an intermediary.
Why investors prefer high-dividend stock?
 Source of regular income
 Dividends are regarded as less risky than potential future capital gains .
 From behavioural perspective, investors lack self-control
Types of dividend policy:

► Fixed dividend-pay-out ratio


► Fixed amount of dividend
► Residual dividend (irregular dividend policy)
► No dividend (need fund for growth)

What is clientele effect?


 This theory is based on the notion that certain investors are attracted to a company's stock
because of their policies.
 It suggests company's stock price increases or decreases according to changes in the
company's policies.
 It states that the price of a security is affected by certain shareholders if a company
changes its policies
 Thus, once a firm establishes its pay-out pattern and attacks a given clientele, a shift in
dividend policy would be ill-advised.

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What do you mean by dividend signalling?


★ Dividend signalling theory asserts that the announcement of increased dividend payments by a
company gives strong signals about the bright future prospects of the company.

What is residual dividend policy?


★ If companies use residual dividend policy, firstly, they use the cash flow to fulfil necessary
capital expenditures and the remaining amount available(the residual)is paid out to
shareholders as dividend.

What is Homemade-dividend?

★ Homemade-dividend is a concept that an investor can undo a company's dividend policy to


match his own cash flow objectives.If an investor receives a dividend when he does not want
any cash inflow, he can simply reinvest the amount in the company's stock.On the other hand,
if he needs some cash inflow but the company is not paying anything, he can sell off some of
the stock to generate the needed cash inflow.

What is pay-out ratio and retention (plowback) ratio? See Formula: (F-48, 132)

★ Dividend pay-out ratio, if measured in percentage form, is the percentage of earnings


distributed to the shareholders whereas retention ratio measures percentage of earnings kept
within the firm for growth and financing the capital investment Calculated by RR= {{1-
Dividend pay-out ratio}}.

Miller and Modigliani’s propositions of dividend (relevancy of dividend):

 MM Approach suggests that dividend policy has no effect on the price of the shares of the firm
and believes that it is the investment policy that increases the firm’s share value.
 Major assumptions are: perfect capital market, dividend and capital gain tax rate are same
and investment policy are set ahead of time.

Bird-In-Hand theory:
★ Investors think dividends are less risky than potential future capital gains, hence they like
dividends.
★ The theory states that having a cash pay-out appears to be better than the company retaining
the earnings for growing the business.The latter is full of uncertainty as the company may
eventually collapse with the investors ending up with nothing. Hence, it seems to be better to
get the money out first!

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Business Digest 44 Finance (Investment Banking and new issue)

Investment banking:
★ Investment banking is a special segment of banking operation although it is different from banking
activities that help individuals or organisations raise capital and provide financial consultancy
services. It is one sort of intermediation in resource allocation.
Major Four activities of Investment Banker :
1. Issue management
2. Corporate advisory
3. Underwriting
4. Portfolio management
What is financial engineering?
★ It can be defined as the development and creative application of financial technology to solve
financial problems, exploit, financial opportunities and to otherwise add value.For example, the
creation of swaption. For example:
► Quantitative research and analysis
► Model validation
► Building valuation models
► Derivative trading
► Portfolio analysis
► Development of quantitative software
What is securitization?
★ Securitization is the practice of packaging and pooling together various types of debt instruments
(assets)such as mortgages and other consumer loans, and finally, selling the interest in the pool as
financial instrument in the liquid market.
What is fiduciary obligation?
★ Fiduciary obligation is the obligation or trust imposed by law on officials of an organization
making them liable for the proper use of the client’s money, funds and property to ensure client’s
best interest served.
What is due diligence?
★ Due diligence is the process of systematically independent researching and verifying the accuracy
of a statement and future prospects to identify or re-evaluate risk in the anticipation of a major
investment.
Lock provision:
★ Lock provision specifies the predetermined amount of time after an initial public offering where
large stakeholders are restricted from selling their shares. The length of time for a lock-up
provision can vary, but is typically for the duration of the investment.

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Underwriting and different types?


★ In investment banking, underwriting is the process of raising capital for a client (corporation,
institution, or government)from investors in the form of equity or debt securities by an
investment banker. It undertakes the responsibility to raise capital in exchange of commission.
★ There are mainly three types of underwriting mechanism:
1. In firm commitment, the underwriter agrees to buy the entire issue at a certain price. If the
underwriter fails to sell the entire issue, the underwriter must take full financial responsibility
for any unsold shares.
2. In best effort mechanism, although the underwriter commits in good faith to sell as much of
the issue at the agreed price, there is no financial or legal responsibility imposed to the
underwriter for any unsold shares or deal performance and thereby unsold shares are return
back to issuer.
3. Finally, in an all-or-none commitment, unless the entire issue is sold at the offering price, the
deal is voided, and the underwriter will not receive any compensation.
What is prospectus?
★ A prospectus is a legal document issued by a company that is offering securities for sale inviting
the investors to invest in the firm. The document includes a description of the firm’s strategies,
financials statements, past history, future prospects, entrepreneurs, use of proceeds, potential risks,
underwriters, issue manager etc.
What is shelf registration?
★ Shelf registration allows firms to register advance with BSEC without specifying the date of issue.
Using shelf-registration a company can use a single prospectus to issue seasoned securities to the
public multiple times over a period of many years. The company does not have to have a separate
prospectus for each offering.
What is red herring?
★ Red Herring Prospectus is a prospectus, which does not have details of either price or number of
shares being offered, or the amount of issue. It is a preliminary prospectus.It includes a legend in
red on the front page stating that the registration has not become effective yet.
What is origination?
★ Origination involves the development and registration of the securities offering. It mainly
involves the preparation of new offering and assisting in issuing securities usually by investment
bankers.
IPO vs Private placement vs seasoned offering:
★ An IPO, or initial public offering, is the process by which a privately held company decides to
raise capital by offering shares or debt securities to the public for the first time, thus becoming a
public company. On the other hand, in case of private placement, the issue is placed directly with a
few selected small numbers of institutional investors such as large banks, mutual funds, insurance
companies and pension funds. On the other hand, seasoned offering involves the issuance of
additional shares of a publicly traded company to the listed at the current market price.

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Business Digest 46 Finance (Investment Banking and new issue)

► IPO requires permission of SEC whereas private placement doesn’t


► IPO issuance takes longer time than private placement does.
► IPO is generally employed to raise large capital whereas private placement is used to raise
small capital.
What is flotation cost?
★ Flotation costs are costs associated with issuance of stocks or bonds or other financial instruments
to the public and such costs include the costs of printing the certificates, paying the underwriters,
government fees, and other associated costs.
The steps in “going public”/ new issue of shares/ how to be public limited company:

1. Select an investment bank (issue manager)


2. Decide method of IPO with assistance from issue manager
3. Get accounts audited by BSEC approved panel of auditors
4. Initiate process for credit rating
5. Prepare draft prospectus
6. Select underwriter, bankers to issue with assistance of issue manager
7. Determine pricing mechanism (fixed price or book building)
8. Apply to BSEC for public offer
9. Print final prospectus
10. Apply to exchanges for holding bidding with BSEC approved indicative price (Book
Building)
11. Determine date of subscription and allotment.
12. Distribute allotment letter and refund warrants
13. Refund funds to the un-allotted subscriptions (if over subscription happens)
14. Commencement of trading in stock exchange.
Method of determining price of new issue in Bangladesh:
★ Fixed price method(when offered at par value)[in Bangladesh, fixed price is Taka 10]
★ Book-building method(when offered above par value)
Determination of offering price (under fixed price method):

√Based on Net Asset value of per shares.


√Based on historical earnings based value per share
√Based on projected earnings per share
√Average market price per share of similar stock sfor the last 1 year prior to the issuance of
ordinary shares.

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Business Digest 47 Finance (Investment Banking and new issue)

Types of trading strategies: (Arbitrage, Speculation and Hedging):


★ Hedgers take position in financial instruments to hedge or protect themselves against the risk of
losses from price fluctuation. Hedgers want protection from risk
★ Speculators speculate on the direction of the futures prices movements with the intention of
making money.The speculators assume risk in the hope of realizing profits by predicting price
movements.
★ Arbitragers are the traders who buy and sell simultaneously of the same instrument in different
markets to make money on price differentials. Arbitrage is almost risk free considering no
transaction cost.
Book Building method:

★ Book building is a process of price discovery for security that is intended to be issued through
public offering It is one of the two mechanisms to determine the offer price of a new public
issue.The stages in book building are as follows sequentially:
1. Receipt of permission from BSEC and DSE
2. Issuer will prepare prospectus and quote an indicative price (at least three different
categories of EII) in the prospectus & SEC
3. Prospectus will have to be posted on the Websites of the Commission, stock exchanges,
issue manager and issuer at least two weeks prior to the start of the bidding
4. A road-show will be arranged where issuer invites for bid price offer from the EII
(Eligible Institutional Investor)
5. Eligible institutional investors shall bid for the share at a price within (+/-)20% of the
indicative price.
6. No institutional investor shall be allowed to quote for more than 10%of shares.
7. If institutional quota is not cleared at 20%(twenty percent)below indicative price, the
issue will be considered cancelled unless the floor price is further lowered
8. The bidding will be handled through a uniform and integrated automated system of the
stock exchanges.
9. The institutional bidders will be allotted security on pro-rata basis at the weighted average
price of the bids that would clear the total number of securities being issued to them;
10. The lowest bid price at which all the institutional investor’s share will be exhausted is
called cut-off price.
11. General investors, which include mutual funds and NRBs, shall buy at the cut-off price;
12. There shall be a time gap of 25(twenty-five)working days between bid and public issue.
13. General investors shall place their application through banker to the issue.
Who is scalper?
★ Scalper is a trader who buy and sell an underlying asset multiple times in the same day for a small
profit. It is a form of day trading that involves taking position in stock only for a few minutes.

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Business Digest 48 Finance (Portfolio Management)

What is portfolio?
★ A portfolio is the collection of assets of different kinds. Financial portfolio includes investments
asset such as share, bond, derivatives, Government securities and so on. Typically, an investor
would want to hold a number of different financial securities to spread his risk, and would seek a
mixture of them. Harry Markowitz is the father of portfolio theory.
What is market portfolio?
★ The market portfolio is a portfolio consisting of all securities available in the market where the
proportion invested in each security corresponds to its relative market proprtion.
★ It is a portfolio consisting of all assets/securities available to investors.
What is portfolio management?
★ Portfolio Management is the art of tactfully managing an investment portfolio by selecting the best
investment mix in the right proportion in the right time and continuously shifting proportion and
class of assets in the portfolio, to increase the return on investment and maximize the wealth of the
investor.
Portfolio management process:
Investment policy statement (goals, expectations, risk/return preference)-IPS
Examine market environment (Capital market, economy, political condition, social status)
Implement the plan and construct the portfolio considering objectives and constraints.
Monitor and update regularly.
Modern Portfolio Theory (MPT):
★ According to Markowitz portfolio theory, an investor can mathematically trade off risk tolerance
and reward expectations, resulting in the ideal portfolio. This theory was based on two main
concepts:
► Every investor’s goal is to maximize return for any level of risk
► Risk can be reduced by diversifying a portfolio through individual, unrelated securities.
Assumptions in MPT:
√ Investment alternatives provide expected returns which follows normal distribution
√ Risks are estimated based on the variability of expected return
√ For a given risk they want to maximise return and for a given return they want to minimise risk.
√ Investors are generally rational and risk adverse
√ To buy and sell securities there is no transaction costs.
√ Analysis is based on a single period model of investment.
√ Investors base decision solely on expected return and risk and thereby their utility curve is a
function of expected return and risk (variance/standard deviation of expected return)
√ Investors want to maximise their utility for a given period, and their utility curve shows
diminishing marginal utility of wealth.
What is opportunity set?
★ Opportunity set is the set of all combinations of assets/investment that can be created/constructed
from a given asset pool with different risk and return expectations.

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Business Digest 49 Finance (Portfolio Management)

What is efficient frontier?


★ The efficient frontier is a concave curve(within opportunity set)that shows the set of optimal
portfolios which have the maximum rate of return for every given level of risk or the minimum
risk for every given level of return.
What is optimal portfolio?
★ Optimal portfolio is one of the efficient portfolios which provides the highest utility for the
investor and lies at the point of tangency between the efficient frontier and highest utility curve.
What is Global Minimum Variance Portfolio?
★ A minimum variance portfolio indicates a well-diversified portfolio that consists of individually
risky assets.This portfolio lies at the left-most portion of opportunity set and it is the lowest
variance portfolio in the efficient frontier.
Covariance and Correlation: (See Formula:F-15-17)

★ These are two statistical measures that describe how two variables are related.

►Covariance indicates the direction of how two variables are related. A positive
covariance means the returns of the stocks are positively related, while a negative
covariance means the returns are inversely related.
►Correlation coefficient is the statistical technique to measure the degree to which returns
from stocks are related. It specifies the degree of relationship.
 If correlation coefficient is +1, the returns have a perfect positive correlation,
 If correlation coefficient is 0, no relationship exists between the returns (returns)
 If correlation coefficient is –1, the returns are perfectly negatively correlated (or inversely
correlated)
★ Diversifiable risk of the portfolio is critically dependent on the correlation co-efficient of the
portfolio.
How to measure portfolio return and risk, beta? (See Formula:F-15-17)

★ Portfolio return is the simple weighted average return of the individual assets in the portfolio.
★ The beta of a portfolio is the weighted sum of the individual asset betas, according to the
proportions of the investments in the portfolio
★ Variance of the portfolio is the expected value of the squared deviations of the return on the
portfolio from the mean return on the portfolio.Standard deviation, a measure of risk of the
portfolio, is the squared root of variance.
Concave vs Convex curve:
★ If any two points of a curve are joint by a straight line and the line lies entirely below the curve, it
is said to be concave curve, whereas if the line lies above the curve it is said to be convex curve.

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Separation theorem:
★ The ability to determine the optimal portfolio of risky assets without knowing anything about the
investor’s risk/return preference is known as separation theorem.
CAL VS CML VS SML:
 When portfolio manager combines a risky asset portfolio with a risk-free asset, he forms a capital
allocation line (CAL).
 CAL demonstrates the relationship between risk and return of the portfolio where assets are
combination of risk-free asset and the risky asset based on a particular investor’s risk preferences.
 The capital market line (CML) is a special case of the CAL where the portfolio of risky assets is
replaced by the market portfolio (market index).
 On the other hand, security market line(SML)is the line that demonstrates the linear relationship
between expected return and systematic risk measured by beta of a particular stock.
What is characteristic line?
★ It is straight line on a graph that shows the relationship between returns on a stock and returns on the
market portfolio over time.
How to find optimal portfolio (when risk free borrowing/lending allowed):

★ The optimal risky portfolio is found at the point where the CAL(capital allocation line) is tangent
to the efficient frontier of risky assets. This portfolio is optimal because the slope of CAL is the
highest, which means the highest returns per additional unit of risk can be achieved.
Sharpe ratio vs Treynor ratio: (See Formula:F-64-65)

★ Sharpe Ratio is the most popular tool to measure the risk-adjusted performance of portfolio or
mutual fund managers among other available measuring formulas. It is calculated by dividing
excess return(portfolio return over risk free return)by standard deviation of the return of the
portfolio.
★ Treynor ratio evaluates the additional returns generated by a fund manager over and above the risk
-free returns.In case of Treynor ratio, the excess return is divided by beta-coefficient of the
portfolio. It is another popular tool to measure the risk-adjusted performance of portfolio or mutual
fund managers.
What is Jensen’s Alpha?

► The ratio is the performance ratio which evaluates the returns of the fund over its index.
This helps
investors examine the risk adjusted performance of the portfolio and determine risk reward profile
of mutual fund.
► Jensen’s Alpha=[(Fund Return-Risk free return)-(funds beta)x(Index return-risk free
return)].

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► Jensen’s Alpha=[(Fund Return-Risk free return)-(funds beta)x(Index return-risk free


return)]
► A positive alpha represents the outperformance of the fund where a negative alpha represents the
underperformance.
What is Alpha/Alpha hunter?

★ In finance, the word “Alpha” signifies above-average market return. Usually the stocks which
lies above or below the market determined return or similarly far away from the SML line are
either undervalued or overvalued. The stocks that provide above average market return are
called alpha. An aggressive and highly expert benchmark beaters who find and invest in
those stocks in expect of above average return (abnormal return)are called alpha hunter.
Active vs Passive portfolio management: (See Formula:F-61)

► Active portfolio management means making investment decision with an eye to beat the
market and earn abnormal return. It is against efficient market hypothesis. It believes
there are inefficiencies in the market which skilled portfolio managers can use to their
advantage. In doing so the managers employ various trading strategies.
► On the other hand, passive portfolio management is based on Efficient Market Hypothesis
(EMH). This theory postulates that financial markets are efficiently priced and therefore
passive portfolio managers track market index in making investment decision. Passive
investment managers seek to match the return and risk of an appropriate benchmark.
Benchmarks include broad market indices that cover an entire asset class, index for a
specific industry
► While active management believes that market returns can be exceeded, passive
management believes it is futile to try to do so. Active managers take position for short
term whereas passive managers take position for long term.
► Semi-active managers want to outperform their benchmark while carefully managing their
portfolios' risk exposures. An enhanced index portfolio is designed to perform better than
its benchmark index without incurring much additional risk.
Capital preservation vs Capital appreciation:
★ In preservation, investor wants to minimise risk and maintain the equivalent purchasing power
over time.
★ In appreciation, investor wants to increase the value of portfolio in real term to meet some
future need.

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Business Digest 52 Finance (Corporate Finance )

Agency problem/agency cost/principle-agent/types of agency cost:

► Principal-Agent relationship is built when one person (the agent-the management of the firm)is
allowed to make decisions on behalf of another person (the principal—the owners of the firm/
bondholder).
► Agency problem is a situation in which agents of an organization(e.g.the management)use their
authority for their own benefit or wealth maximisation rather than pursuing the interest or wealth
maximisation of the principal.
► Agency cost is the cost of the firm associated with resolving the conflicts of interest between
managers and shareholders or the value firm lost as a result of such conflict (directly traceable).
► Major two type of agency costs are:
 Monitoring costs of the shareholder
 Costs of implementing monitor and control device and techniques .
What is merger?
★ A merger happens when two firms agree to go forward as a single new company rather than remain
separately owned and operated. In merger, previous two firms cease to exist and new one
emerges. A+B=C
What is acquisition?
★ In an acquisition, one company purchases another through stock or assets. In other words, when
one company takes over (at least 51%)share of the acquired)another and clearly established
itself as the new owner, the purchase is called an acquisition. A+B=A
What is strategic alliance?
★ A strategic alliance is a legal agreement between two or more companies to share access to their
technology, trademarks or other assets. A strategic alliance does not create a new company.
What is joint venture?
★ Joint Venture can be described as a business wherein two or more independent firms come together
and share resources to form a legally independent firm for a stipulated period, to fulfil a specific
purpose such as activity or project. In Joint venture new firm comes into force where the previous
two continue their own business (unlike merger).
What is venture capital?
★ It is a private or institutional capital investment made in the early-stage of new ventures having
uncertain outcome in the expectation of a sizeable gain. Invested firms are usually small; or exist
only as an initiative, but have huge potential to grow.

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What is conglomerate?
★ A conglomerate is a large corporation run as a single business, but made up of several unrelated
firms (acquired through mergers or takeovers)operating in diverse goods and/or services
industry.
Types of acquisition:

★ Horizontal:Acquisition of a company which belongs in the same industry and same production
step
★ Vertical:Acquisition of a company which belongs in the same industry but different step of
production process(supplier/customer group).
★ Conglomerate:Acquisition a company which is active in a partly or entirely different industry.
Purchase method of acquisition:
★ Purchase method of reporting acquisition requires that asset of the acquired firm be reported at fair
market value on the book of acquiring firm. The difference in purchase price and market value of
asset is considered as goodwill.
What is tender offer?
A tender offer is the offer by a company (bidder)to the public investor to purchase a substantial
percentage of the equity share in a particular company(target company)at a price slightly higher than
market price.
What is synergy?
★ Synergy is the extra added value that derives through merger or acquisition.
It is the difference
between the value generated by a merged firm and the sum of value generated by previous two
firms.
★ Synergy=AB - (A+B)
Sources of synergies:
Revenue enhancement through economies of scale and economies of scope
Increased control over market leading monopoly in price setting
Exploitation of unused capacity
Reduced marketing and promotion cost
Reduced fixed cost (shared facility)

Reduced administration and management compensation


Shared technological resources
Use of complementary resources elimination of inefficient management
Reduced financing cost.

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Business Digest 54 Finance (Corporate Finance )

Steps in determining NPV of merger: (See Formula:F-85)

1.Calculate PV incremental cash flow traceable to the merger


2.Calculate PV of cost saving due to merger
3.Calculate PV of reduction addition of tax shield due to merger
4.Deduct initial merging/acquisition cost(premium) from the sum of above three
5.Total PV of synergy minus premium paid.
6.Deduct initial merging/acquisition cost(premium) from the sum of above thr
7.Total PV of synergy minus premium paid.
Strategies to discourage takeover followed by target firm:
★ Divestitures
√ Sale of a crucial assets of the target for cash (here those crucial assets are called
crown jewel)
√ Spin-off- distributing shares of subsidiary to shareholders of target company to
increase their stake in the firm. Thus, subsidiary becomes a completely separate
company.
√ Curve out- sale of shares of subsidiary through IPO
√ Issuing tracking stock- a stock whose value is directly related with the
performance of segment of parent company.
★ Frequent change of corporate charter (Articles of incorporation) to make acquisition
too difficult.
★ Repurchase its own share from bidding firm at premium
★ Exclusionary self-tender:tender offer by the target to repurchase of share excluding target
shareholders.
★ Going private through leveraged buyout to get out of public shareholders.
 Greenmail:
★ Greenmail is the process in which a buyer acquires a large number of a target company's shares and
threatens a hostile takeover but, instead, forces the target company to then buy back their shares at
a higher price.
 Golden Parachute:
Golden parachute is an agreement between a company and the senior executives that provides significant
financial benefits to the executives upon termination.
 Poison Pill:
★ A poison pill is a shield against a takeover bid where target triggers a new, prohibitive cost that
must be paid after the takeover and making takeover highly expensive and make itself less
desirable to potential acquirers.

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 White Knight:
★ A white knight is called a saviour. It is a third corporation invited by target firm to buy out
substantial shares of target firm in order to prevent an undesired takeover.
Options in financial distress:

√ Selling major assets


√ Merging with another firm
√ Reducing capital investments
√ Exchange debt for equity
√ Negotiation with banks and other creditors
√ File for bankruptcy or private liquidation.
Absolute Priority Rule:

★ Absolute priority rule is a rule that stipulates the order of payment in the event of liquidation
among creditors and shareholders. It states senior claims must be fully satisfied before junior
claims receive anything.
What is coinsurance effect?

★ It refers to the fact that merger of two firms reduces the probability of default on either’s debt.

What is dilution?
★ Reduction in the price of every share as a result of increase in the number of total outstanding
shareholdings.
What is leveraged buy-out (LBO)?
★ Leveraged buyout refers to the purchase of a company while using mainly debt to finance the
transaction
★ It is the process of buying another company using money from outside sources as debt.
MBO (Management Buy Out):
★ Management buyout (MBO) is a type of acquisition where a group of people in the current
management of a company buy out majority of the shares from existing shareholders and take
control of the company.
Altman Z Score model: (See Formula:F-86)

★ The Altman Z Score model, defined as a financial model to predict the likelihood of bankruptcy in
a company, The Altman Z Score is used to predict the likelihood that a business will go bankrupt
within the next two years.The formula is based on information found in the income statement and
balance sheet of an organization; as such, it can be readily derived from commonly-available
information.

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Business Digest 56 Finance (Derivatives)

★ Derivative is a kind of financial instrument whose value is derived from another underlying
traded asset such as share, bond, commodities, interest rate, currency etc.Derivative securities
are traded on exchanges or OTC market like other financial instruments, and their value varies
with the value of the underlying assets.Most common form of derivative securities are call
option, put option, futures, forward contract, swap etc.
Call and put option, writer, exercise price (strike price),expiration date, elapsed option:

► Call option is a derivative contract which gives the holder (buyer) of the option the right
(not obligation)to buy the underlying asset at a certain predetermined price on or before the
maturity date.
►A put option gives the holder (buyer) the right(not obligation) to sell the underlying asset
at a predetermined price (exercise price) on or before the maturity date.
► The price at which the option is executed (if right is applied) or the price at which
underlying asset is bought/sold is called exercise or strike price.
► The date at which the option is exercised (written in the contract) is called expiration date.
Sometimes option can be exercised before aforementioned expiration date.
► The party which sells (prepares) the option contract in exchange of premium is called the
writer of the contract.
► Since option is a right (not the obligation), the holder (buyer) will decide whether to
exercise the contract or not. If an option contract is not exercised within maturity, it is
called elapsed option. Largest option exchange in the world is Chicago Board Options
Exchange.
American vs European option:

★ Owners (holder)of American options may exercise the option contract at any time before the
option expires (before or on maturity date)while owners (holder)of European style options
may exercise only at maturity date. Early exercise is possible in American option.
Options Premium (call premium or put premium):

★ Option premium is the price (initial outflow)paid to acquire the option, also known simply
as option price.This is the price paid to the writer (seller)by the holder (buyer).In other
word it is the price of the right gained by the holder.In case of call option, it is told call
premium.In case of put, it is called put premium.

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When options are exercised? How to make profit?


A call option is exercised if market price of the underlying asset (say, for example, share)is higher than
the strike price. The holder will exercise the option (buy the underlying asset)from the seller of the
option contract and then sell the underlying asset in spot market. The difference between underlying asset’s
market price and strike price is the profit of the holder . A put option will be exercised if market price of the
underlying asset is lower than strike price. The holder will buy the asset from spot market and sell to the
writer of the market. The difference in market price and strike price is holder’s profit.
In the money, out of the money and at the money:

★ An option is in the money when exercise of the option is profitable; out of the money when exercise
is not profitable, at the money when holder is neither in profitable nor in unprofitable situation.

★ In case of call option, In the money means spot price(market price)is higher than strike price, out
of the money means spot price is lower than strike price and at the money means spot price equals
strike price.

(market price), out


★ In case of put option, In the money means strike price is higher than spot price
of the money means strike price is lower than spot price and at the money means spot price equals
strike price.

★ Options are exercised when they are in the money.

What is naked option:

★ A naked option is the situation when the writer (seller)of the option does not have own any
underlying asset to honour the right of buyer (buy or sell)at the agreed price.It is also called
uncovered option.Naked options carry a chance of huge profit as well as of great risk, depending on
the market's direction.

What is warrants?

★ Warrants are securities (issued by a specific company) that give the holder the right, but not the
obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain
price before a certain time. While options are contract, warrants are security and options are
standardized derivative contract but warrants are unstandardized security.
What is Employee Stock Option (ESOP)?

★ The Employee Stock Options or ESOPs is the compensation scheme (to motivate employees). It
is the call options on a company's common stock granted to employees giving the right to buy a
certain amount of company shares at a predetermined price.

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What is put-call parity? (See Formula:F-86*)

★ Put-call parity is an important principle in options pricing.It can be defined as an equivalence


relationship between the European put and call options of a common underlying asset carrying the
same strike price and expiry.

★ It argues that the risk/return relationship between puts and calls on the same security should be
identical, thus price of a call can be derived from the price of a put considering other things
identical. Put-call parity will not hold for American options unless they are held to expiration.
Arbitrage opportunities would be available if there is a divergence between the value of calls and
puts.
Futures contract:
★ A 'Future' is a derivative contract in which two parties come to an agreement to buy or sell the
underlying asset for a specific price at a pre-determined time. Futures are traded on an exchange.
Forward contract:
★ Forward contract is a non-standardized derivative contract between two parties to buy or to sell
an underlying asset at a specified future time at a price agreed upon today.They are mostly traded
at OTC market .
Forward vs Futures:

Forward Futures
Private contract between two parties Traded on an exchange
Not standardised Standardised contract
Some credit risk Virtually no credit risk
One specified delivery date Range of delivery dates
Delivery of underlying takes place Usually delivery of underlying asset is closed out pri-
or to maturity

Options vs Futures:

Option Futures/Forward
It gives the right to the holder It is an obligation for the holder
No margin required for buyer, required only for seller Margin is required
Risk/return potential is unlimited for seller but lim- Risk/return potential is unlimited
ited or buyer

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Long and short position:


★ Buyers are referred to as having long position and sellers are referred to as having short position.
Options and futures are zero sum game, explain?

★ In options/futures agreement, one wins at the expense of the other.When someone wins, the other
loses an equal amount.There is no addition to net wealth.Thus, these are usually called zero sum
game.
Factors affecting the price of an option:

1.Current price of underlying asset


2.Strike price
3.Time to expiration
4.Volatility of the price of underlying asset
5.Risk free interest rate
6.Expected Dividends from the underlying asset
LIBOR vs LIBID (London Interbank Offered Rate, London Interbank Bid Rate):

★ LIBOR is the rate at which banks are prepared to make large wholesale deposits with other bank
whereas LIBID is the rate at which banks will accept deposit from other banks.LIBOR rate is
often used as a benchmark of floating rate.
Forward rate, basis and basis point:

Forward rate: A forward rate is an interest rate, implied by current zero rates, applica-
ble to a financial transaction that will take place in the future .
What is basis? The difference between the spot price and the futures price of a com-
modity
What is basis point? Basis point is the one-hundredth of one percent

What is backwardation and contango?


★ Backwardation is the situation when futures price is below the spot price of underlying asset and
contango is the situation when futures price is above the spot price of underlying asset.
Sometimes the term “spot price of underlying” is replaced by “expected futures spot price” to
define backwardation and contango.
What is Swap?
★ Swap can be defined as an OTC derivative contract (mutually agreed)between two parties to
exchange a sequence of cash flows with another series of cash flow at a predetermined rate in the
future. Common forms of swap are interest rate swap, currency swap, equity swap, etc.
Typically, one party agrees to pay at fixed rate whereas the other at floating (varying)rate.

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Swaption:
★ A swaption is a combination of a regular swap and an option. It gives a holder the right to enter a
swap with another party at a given time in the future.
Plain vanilla interest rate swap:
★ Plain vanilla interest rate swap is a contractual agreement between two parties to exchange
interest payments on a certain notional principle where one pays at fixed rate and the other at
floating rate (LIBOR)on the same notional principal amount. Here, the principal is not
eventually exchanged and that’s why it is called “notional principal”.This is the simplest and
straightforward form of swap and thus called “plain vanilla”.
What is Forward Rate Agreement (FRA)?

★ A Forward Rate Agreement, or FRA, is an over the counter agreement between two parties (who
want to protect themselves against future movements in interest rates)to ensure that a certain
interest rate will be applied to borrowing/lending a certain principle amount for a specified period
of time starting at an agreed date in the future.
Assumptions in valuation of options:
 No transaction cost
 Same tax rate for all trading profits
 Borrowing/lending possible at-risk free interest rate.
Trading strategies using options:
• Covered call- buying a stock and selling a call option (or selling a put)
• Protective put—buying a stock and buying a put option (or buying a call)
• Spread-Taking position in two (or more) calls or two put option
• Combination-Taking position in both call and put on same underlying stock.
• Straddle-long call and long put at same strike price and maturity date
• Strangle-long call and long put at different strike price and same maturity date
• Butterfly spread- buy one call at higher strike price, buy another call at lower strike price
and sell two call at intermediate strike price (between the strike price of first two calls.
Futures Option:
★ A futures option is an option contract in which the underlying is a single futures contract. The buyer
of a futures option contract has the right to enter into a particular futures position at a specified
price (the strike price).
What is real option?
★ Real option is a choice available to a company regarding an investment opportunity. The term ‘real’
means that it refers to a tangible asset, and not a financial instrument.
★ Managers are presented with the real option to generate value for the firm by some additional
investment embedded with a significant large investment decision.
★ Thus, when making investment decision, managers should look for any real options embedded with
major investment to be made.

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★ Thus, when making investment decision, managers should look for any real options embedded
with major investment to be made.
Black-Scholes model:

★ Black-Scholes is a pricing model used to determine the fair price or theoretical value for a call
or a put option based on six variables such as volatility, type of option, underlying stock price,
time, strike price, and risk-free rate. It often assumes percentage change in short-term stock
price follows normal distribution.
Binomial model:

★ Binomial model is very simple model used to pricing options based on the assumptions that
there is no arbitrage opportunity by constructing a binomial tree. The model is mainly based
on risk neutral valuation.
Risk neutral valuation (RNV):
 RNV is very important principle in the valuation of derivatives. This principle assumes that
investors are risk neutral and thus they do not increase the expected return they require for an
investment to compensate for increased risk.

Delta, Theta, Gamma, Rho, Hedge ratio:

Delta: ►The number of the stock to be held for each option shorted to make the
portfolio riskless or
►It is a measure of sensitivity to the value of option in response to the change
in underlying share/asset price.

Theta: ►Theta is a measure of the rate of change in the value of an option with
respect to the passage of time

Gamma: ►It expresses how much the delta will change with a change in the price of
underlying asset
►It is the second partial derivative of the option price with respect to the value
of underlying

Rho: ►Rho is the rate of change in in the price of derivative in response to the
change in interest rate
Hedge ratio: ►A ratio of the value of the proportion of a position that is hedged to the value
of the entire position. A hedge ratio shows how exposed an investment is to
risk. For example, if a hedge ratio is .65, then 65% of the investment is
protected from risk

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Business Digest 62 Finance(Financial Statement Analysis)

Limitations of financial statement:

√ Dependence on historical numbers (Inflationary effects are missing )


√ Many intangible assets not recorded (management quality)
√ Not always comparable across companies .
√ Earnings are reported even though cash has not yet received .
Techniques or tools of financial analysis:

√ Comparative financial statement


√ Common size financial
statement How firms can increase firms’ value?
√ Ratio analysis ► Generate a high Net Profit Margin: Increase profit margin
√ Cash flow analysis ► Effectively use its assets to generate more sales, increase
√ Fund flow analysis asset turnover.
► Use high Financial Leverage: Increase leverage
√ Trend analysis
√ Sensitivity analysis.
Limitations of Ratio Analysis:
■ It only evaluates historical performance not future performance
■ The effect of inflation on assets and liabilities are not adjusted in ratio analysis
■ Changes in accounting policies might invalidate ratio analysis
■ Seasonal effects are not reported
■ If financial statements are subject to misstatement, ratio might not give true information .

Decision tree:

★ Decision tree is a graphical representation that sets out


alternative courses of actions and the financial
consequences of each alternative, and assigns subjective
probabilities to the likelihood of future events occurring.
It helps in decision-making in uncertain conditions.
★ It's called a decision tree because it starts with a single box
(or root), which then branches off into a number of
solutions, just like a tree.
Define trend analysis:

★ Trend analysis is a technique used in technical analysis that attempts to predict the future stock
price movements based on recently observed trend data. Trend analysis is based on the idea that
what has happened in the past gives traders an idea of what will happen in the future.

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Sensitivity vs scenario analysis:


★ Sensitivity means the responsiveness of any variable(say, net income)to the change in another
variable (say, for example sales)
★ In sensitivity analysis, firms try to determine the sensitivity of a project's NPV to changes in the
input variables (such as cost of fund), one variable at a time.The purpose is to identify those
variables to which the NPV is the most sensitive
★ In scenario analyse, the firms try to determine the sensitivity of a project's NPV to changes in a set
of variables, which, together, make a consistent scenario.For example, a worst-case scenario
could include interest rates increasing, number of new customers being less than expected, and
unfavourable exchange rates. In scenario analysis, such changes will be altogether reflected to
the NPV of the project.
★ The objective of such sensitive and scenario analysis is to determine the key drivers that mostly
impact the decisions.
Monte Carlo simulation:

★ Monte Carlo simulation is a computerized mathematical technique that furnishes the decision-
maker with a range of possible outcomes, and the probabilities they will occur for any choice of
action.
★ It shows the extreme possibilities—the outcomes of going for broke; and for the most conservative
decision; —along with all possible consequences for middle-of-the-road decisions.
Du Pont Analysis: (See Formula:F-41)

★ DuPont Analysis is an extended examination of Return on Equity (ROE)of a company.


★ DuPont Analysis gives a broader view of the Return on Equity of the company. It highlights the
company’s strengths and pinpoints the area where there is a scope for improvement.
What is leading indicator?

★ A leading indicator is any economic factor that changes before the rest of the economy begins to
go in a particular direction.
Changes in the Gross Domestic Product (GDP)
Income and Wages
Unemployment Rate
Consumer Price Index (Inflation)
Interest Rates, Share market.
What is lagging indicator?
★ A lagging indicator is a measurable economic factor that changes only after the economy has
begun to follow a particular pattern or trend. These are the followings:
•Income and wages
•Inflation rate
•CPI (Consumer Price Index)
•Unemployment rate

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Business Digest 64 Finance (Major Economic Collapse in History)

Surprise devaluation of the Chinese yuan on 11th August and a


2015–16 weakening outlook for Chinese growth are believed to have been the
Chinese
Market Crash
causes for the crash.
The potential reasons behind the crash vary from ‘fat-fingered’
trading (a keyboard error in technical trading) to an illegal
The Flash
cyberattack. However, a joint report by the US Securities and
Crash (2010) Exchange Commission (SEC) and the Commodity Futures Trading
(USA) Commission (CFTC) stated that the extreme price movement could
have been caused by the combination of prevailing market
conditions and the large automated sell order.
The 2008 global financial crisis was fed by deregulation in the
financial industry which allowed banks to engage in hedge fund
trading with derivatives.
Lehman Brothers filed for bankruptcy on 15th September 2008.
The 2008 Merrill Lynch, AIG, HBOS, Royal Bank of Scotland, Bradford &
Financial
Crisis Bingley, Fortis, Hypo Real Estate, and Alliance & Leicester which
were all expected to follow however were saved by bailouts paid by
national governments.

The bursting of the US housing bubble and Lehman Brothers’


collapse nearly crushed the world’s financial system and resulted in a
damaged house market, business failures and a wounded global
economy.

In the second half of the 1990s, the commercialization of the Internet


excited and inspired many business ideas and hopes for the future of
online commerce. More and more internet-based companies
The Dotcom
Bubble Burst (‘dotcoms’) were launched and investors assumed that every
(1990) company that operates online is going to one day become very
profitable. Which unfortunately wasn’t the case – even businesses
that were successful were extremely overvalued. As long as a
company had the ‘.com’ suffix after its name, venture capitalists
would recklessly invest in it, fully failing to consider traditional
fundamentals. The bubble that formed was fuelled by
overconfidence in the market, speculation, cheap money and easy
capital.

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Business Digest 65 Finance (Major Economic Collapse in History)

The Asian crisis of 1998 hit a number of emerging economies in Asia,


but also countries such as Russia and Brazil, having an overall impact
on the global economy. The Asian crisis began in Thailand in 1997
The 1998 when foreign investors lost confidence and were concerned that the
Asian country’s debt was increasing too rapidly.
Crash
The crisis in Thailand gradually spread to other countries in Asia,
with Indonesia, South Korea, Hong Kong, Laos, Malaysia and the
Philippines being affected the most.

On 19th October 1987, stock markets around the world suffered one
of their worst days in history, known today as Black Monday.
Following a long-running rally, the crash began in Asia, intensified in
London and culminated with the Dow Jones Industrial Average down
a 22.6% for the day – the worst day in the Dow’ history, in percentage
terms. Black Monday is remembered as the first crash of the modern
Black financial system because it was exacerbated by new-fangled
Monday computerized trading.
(1987) The theories behind the reasons for the crash vary from a slowdown in
the US economy, a drop in oil prices and escalating tensions between
the US and Iran.
Unlike the 1929 market crash however, Black Monday didn’t result in
an economic recession.

On 29th October 1929, now known as Black Tuesday, share prices on


the New York Stock Exchange collapsed – an event that was not the
sole cause of the Great Depression in the 1930s, but something that
definitely contributed to it, accelerating the global economic collapse
that followed after the historic day.

The Wall During the 1920s, The US stock market saw rapid expansion, which
Street reached its peak in August 1929 after a lot of speculation. By that
Crash of time, production had declined and unemployment had risen, which
1929 had left stocks in great excess of their real value. On top of this,
wages were low, agriculture was struggling and there was
proliferation of debt, as well as an excess of large bank loans that
couldn’t be liquidated.

The crash remains to this day the biggest and most significant crash in
financial market history, signaling the start of the 12-year Great
Depression that affected the Western world.

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Business Digest

Chapter Contents
Page No.
Accounting, Book keeping, Bookkeeping vs accounting, Financial
Accounting, Accounting Information System, conceptual frameworks of 66-74
accounting, objectives of accounting, Users of Accounting Information
System, shadow accounting, Branches of Accounting, Types of accounting
based on profession, Other accounting types, four bases of accounting, Double
entry System, SingleEntry System, disadvantage of double entry system,
accounting Equation, accounting error, account, debit and credit, chart of
accounts, master account/control account, accounting period, economic
Event, Transaction and its Impact on Accounting Equation, classifications of
Account, Assets/Liabilities/Equity/Expense/revenues, Expenses vs
expenditure, Capital expenditure vs Revenue expenditure vs Deferred revenue
expenditure, Capital vs revenue income, Contra Account/Contra asset
Basics of Accounting
account/Contra Entry, Golden Rules of Accounting, Management
Information System (MIS)vs Accounting Information System
(AIS),Accounting Standards, The difference between IAS and IFRS, Basic
Characteristics of a company

Accounting Related Invoice/Voucher and debit/credit notes, Freight, FOB Shipping point vs 75
Documents destination, Debit vs credit memorandum, Consignment/Consignor Vs
Consignee, IOU,
Journal , Special Journals, Ledger, Cash Book, worksheet, Adjusting Entry, 76-80
Closing Entry (temporary vs permanent account, Post-Closing Trial Balance,
Reversing Entry, Correcting Entries, Trial Balance, Objectives of Trial
Balance, Limitation of Trial balance, Suspense account, When suspense
Accounting Cycle account created, When trail balance will give equal balance in spite of having
errors, by account reconciliation, Bank reconciliation statement (BRS)

Regulatory requirements, parts of FS, Techniques or Tools of Financial


81-93
Analysis, Types of Balance Sheet, Other types of Balance-sheet, Fair
Appraised andmarket value, CapitalEquity vs Capital, Different types of share
capital, Different types of reserve, Capital Reserves Vs Reserve Capital
Reserve VS Provision, Two conditions to keep provision out of income for a
contingency, Appropriation, Some balance sheet assets, Copyright VS Patent,
Other usual assets, Cash equivalents, Accounts Receivable, Credit terms,
Factoring, Inventory, 3 Types of inventory, Work in process (WIP), Cost of
Financial Statements Goods sold (CGS), Operating cycle (OC), Cash conversion cycle,
Periodic vs perpetual inventory systems

Treasury Stock, Retained Earnings, Deferred tax as asset or liability, Letter of


81-93
Credit, CAD (Cash Against Documents), LC vs CAD (Cash against
Documents), Prize bond, Off Balance Sheet Items, Banks’ off-Balance sheet
items, Contingent Asset, Contingent Liability, activities Ratio, ratio analysis
Financial Statement and and types of ratio analysis, Liquidity Ratio, Activity Ratio, Profitability Ratio,
analysis Debt Service Coverage Ratio, Coverage ratio/solvency ratio, Leverage ratios,
Pooling of interest method vs purchase method, Proto-type balance Sheet of a
bank

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Business Digest

Chapter Contents Page No.

Audit Auditing, Accounting vs Auditing, Audit vs Inspection, Accounting 94-100


transparency, true and fair view of financial statements, Reliability and
Materiality, Sufficiency and appropriateness, Internal Audit, Fraud Triangle,
Sampling risk and non-sampling risk, Segregation of duties, Restructuring,
Limitation of audit, Window Dressing, Auditor’s opinion/qualified,
unqualified, adverse opinion, disclaimer of opinion

Principles of Business entity assumption (separate entity/economic entity assumption), 101-102


Accounting Going concern principle, Objectivity principle, Historical Cost Principle,
Matching Principle, Revenue recognition principle (Realization principle),
Conservatism Principle, Periodicity assumption, Materiality Concept.
Managerial Accounting Variable cost and Fixed cost, Semi Variable/Semi Fixed/Mixed Costs, 103-111
Relevant Range, Direct vs Indirect cost, Classification of direct cost, Explicit
vs Implicit cost,Overhead,Opportunity cost, Prime cost, sunk cost, marginal
cost, cost driver,Budget,Master budget, Budgetary control,FIFO vs LIFO vs
HIFO vs Frohlich method to choose/best method, Conversion cost, Stock out
costs, Cost estimation methods (Cost-Volume-Profit) Analysis/Break-
Even Analysis, Contribution margin/ratio (CM ratio), Break-even point,
Financial break-even point, Margin of safety (MOS), Leverage; operating
leverage, financial leverage,DOL,DFL,DTL,Operating Leverage, Financial
leverage, Working Capital Leverage, Degree of operating leverage, Degree of
financial leverage (DFL),Degree of total leverage (DTL),Just-in-Time or
JIT,Six-sigma,Value Chain Analysis, Lean thinking model, Lean production,
Balanced Scorecard, Activity-based costing (ABC),Absorption
costing,Absorption vs variable costing.
Lease Finance Sale and Leaseback,Leveraged Leasing, Situations that would normally lead 112-113
to a lease being classified as a finance lease, Inception vs
Commencement,Hire purchase,Reporting Finance lease in the financial
statement of lessee and lessor

Depreciation: A Method Accumulated depreciation,common methods of depreciation,Problems with 114-115


of Cost Allocation Straight line method,Why most firms use declining balance method:,Which
method the firm should chose/which one best,Depreciable value,Salvage
value (scrap/residual value),Cost model vs revaluation model,impairment
expense,Depreciation tax shield,Annuity method of depreciation,depreciation
of intangible assets

Bad Debt and 116


Allowance & Methods
of recording bad debt

Investment, financial Investment,Financial asset,Types of financial asset,Classification of 117-118


investment and investment in equity securities,Summary of investments,Recording of
reporting investment in financial asset,difference between Equity method of
Accounting and cost method of accounting,Equity
method,Subsidiary,Minority Interest

Some Frequently 119-121


Asked Question

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Business Digest 66 Accounting( Basic of Accounting)

What is Accounting?
★ Accounting is an information system that identifies, records and communicates the economic
events of an organization to relevant economic decision maker.
★ Accountancy is the practice of recording, classifying and preparing financial statements based on
business transactions which thereby reflect entity’s financial position and performance resulting in
timely and appropriate decision making by the stakeholders.
What is Book keeping?

★ Bookkeeping usually involves only the recording of economic events. It is therefore just one part
of the accounting process.
Bookkeeping vs Accounting:
Bookkeeping Accounting
√ Bookkeeping is an activity of recording √ Accounting is an orderly recording and reporting of
the financial transactions of the the financial affairs of an organization for a
company in a systematic manner. particular period.

√ Decisions cannot be taken. √ Decisions can be taken on the basis of accounting


records.

√ Major tools are Journal and Ledgers. √ Balance Sheet, Profit & Loss Account and Cash
Flow Statement.

What is Financial Accounting?


★ Financial accounting is the field of accounting that provides information to external users like
investors or creditors to help in decision making.
★ In other words, financial accounting is the process of identifying, measuring and communicating
economic information to external users so that they can make decisions on the basis of that
information and evaluate the stewardship of management.
What is Accounting Information System (AIS)?
★ Accounting Information System is generally a computer-based method for tracking accounting
activity in conjunction with information technology resources.
★ Accounting information system is the unified structure within an organisation that employs
physical resources and other components to transform economic information into accounting
information.

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Usually an information system consists of three steps: input, processing and output. Similarly, In
accounting, three steps happen. Here, input=economic events, Processing=use of accounting cycle,
output= information for decision makers. This is why accounting is nowadays called accounting
information system.

What are the conceptual frameworks of accounting?

Basic Assumptions Principles Constraints


 Economic entity  Historical cost  Cost benefit
 Going concern  Revenue recognition  Materiality
 Monetary unit  Matching  Industry practices
 Periodicity  Full disclosure  Conservatism

What are the objectives of accounting?

★The main objective of accounting is to provide interested users with necessary information to make
relevant decision.
★The primary objective of accounting is to identify and record economic events.
Users of Accounting Information System:

 A) Internal Users: Internal users of accounting information are those individuals inside a
company who plan, organize, and run the business for the interest of the organization. e. g.
Proprietor, Management authority, Internal auditor, Accounts departments, Company officers etc.
★ B) External Users: External users are individuals and organizations outside a company who want
financial information about the company for their own interest. For example, Government,
Shareholders, Lenders, Creditors, Investors, Customers, Researchers, Chamber of commerce,
General public, External Auditor, Stock Exchanges, Tax authority etc .
What is Shadow Accounting?

★ Shadow accounting refers to a system in which two separate sets of financial books and records
are kept for the purpose of detecting mistakes and inconsistencies. It involves to a set of records
maintained at a local, or departmental level independent of the centralized “system of record”
maintained by the larger institution.

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Branches of Accounting:

★ Financial Accounting: The field of accounting that provides economic and financial information
to external users.
★ Managerial Accounting: The field of accounting that provides internal reports to help internal
users make decisions about their companies.
 Types of accounting based on profession:
★ Private Accounting: An area of accounting within a company that involves such activities as cost
accounting, budgeting, design and support of accounting information systems and tax planning and
preparation.
★ Public Accounting: An area of accounting in which the accountant offers expert service to the
general public. Services provided by a public accountant include: auditing, taxation, and
management consulting.
 Other accounting types:
★ Forensic Accounting: Forensic accounting uses accounting, auditing, and investigative skills to
conduct investigations into financial statements. This type accounting is frequently used in fraud
and financial misconduct cases.
★ Fair Value Accounting: Fair value accounting uses current market values as the basis for
recognizing certain assets and liabilities. Fair value is the estimated price at which an asset can be
sold or a liability settled in an orderly transaction to a third party under current market conditions.
★ Responsibility Accounting: Responsibility accounting involves accumulating and reporting costs
and revenues on the basis of the manager who has the authority to make decision about the items.
This is also called reporting on the basis of designated responsibilities
★ Offset Accounting: Offset accounting is not a kind of accounting. It means cancelling an accounting
entry with an equal and opposite entry. It is not permitted by IASs and subject to some exceptions.
What are the four bases of accounting?

1. Accrual Basis (Transactions are recognised when they occur, irrespective of when the cash flow
occurs; recognised by GAAP, IFRS & BFRS).
2. Cash Basis (Only the cash impact of a transaction is recorded; recorded only when cash inflow/
outflow take place; not recognised by GAAP and BFRS).
3. Going Concern Basis (Assumes entity will continue operation for foreseeable future- at least next 12
months).
4. Break-up Basis (Alternative to going concern basis and relevant when firm is at financial
difficulties and to liquidate).

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Business Digest 69 Accounting( Basic of Accounting)

Double Entry System:


★ A system of recording transactions where the dual effect of each transaction is recorded in
appropriate accounts. Where one party is recorded as debit, the other party is recorded as credit with
an equal amount.
★ For each transaction debit must be equal to credit

★ The equality of debits and credits provide the basis for the double entry system.

Single Entry System:

★ A method of bookkeeping relying on a one-sided accounting entry to maintain financial


information. Single entry is not any particular system of book keeping, but it is a mixture of single
entry, double entry and no entry.
Is there any disadvantage of double entry system?

► Not supported by a small business:


► It is a complex system and subject to error of omission
► Errors are difficult and time consuming to find in a diversified system
► Cross-checking of the double entry-system is time consuming
What is accounting error?

★ An accounting error is a non-fraudulent discrepancy in financial documentation.

★ An accounting error is an error in the process of systematically recording, measuring and


communicating information about financial transactions.
Define accounting equation:
★ Accounting equation shows the relationship between asset, liability and owner’s equity of a
business. It is the foundation for the double entry bookkeeping systems.
Basic Accounting Equation: Assets = Liabilities + Owners’ Equity
Expanded Accounting equation: Assets= Liabilities + Capital – Drawings + Revenues –Expenses.

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Business Digest 70 Accounting( Basic of Accounting)

What is account?
★ Simply, account means title of homogenous transactions. It is a formal record of increases and
decreases in specific asset, liability and owner equity items under a homogenous title expressed in
terms of money in a ledger.
What is debit and credit?
★ The directional sign that is used to indicate the left side of a T account is debit and the directional
sign that is used to indicate the right side of a T account is credit.
What is chart of accounts?
★ It is the list of all accounts maintained either through manually or automated system by the entity in
the books of accounts.
What is accounting period?
★ Any meaningful reporting time period that may be length of one month or three months or six
months or one year and such on.
★ But the period of one year is standard.
What is Master Account/Control Account?
★ Master account is an account which consists various homogenous account with small difference in
their identity.
★ In other words, when homogeneous accounts are summarised under a broad account, it is called
master account. It has subsidiary accounts. Accounts Receivable could be a master account for
various individual receivable accounts.
What is economic event?
★ Economic Event is the event which is related with the transfer of control of an economic resource
from one party to another party. Example: Shakib sold a laptop to Tamim for $5, 000. It is an
economic event because Shakib got cash in exchange of a laptop and Tamim transferred the cash in
exchange of cash.
Transaction and its impact of on accounting equation:
► A transaction is an economic event that has a monetary impact on an entity’s financial statements
and is recorded as an entry in its accounting records.
► Every transaction has an impact on the financial position of an entity. The impact can be qualitative
or quantitative:
√ Qualitative or structural change: by qualitative change only one side of accounting equation is
affected and the sum of the balance sheet remains unchanged.
√ Quantitative or net change: by quantitative change both sides of the accounting equation are
affected and the sum of the balance sheet is changed.

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Business Digest 71 Accounting( Basic of Accounting)

What are the classifications of account?

A. Traditional Method: B. Modern/Equation Method:


1. Personal Account, 4. Asset Account,
2. Asset/Real Account, 5. Liability Account,
3. Nominal Account. 6. Owner’s Equity Account,
7. Revenue Account,
8. Expenses Account.

Expenses vs Expenditure:

★ Expenses are the decrease in economic benefits during an accounting period in the form of
outflows, or depletions of assets or increases of liabilities that result in decreases in equity incurred
to generate revenue. Simply, Expenses are the costs incurred to generate revenue. (salary/rent/
wages/depreciation etc)
★ Expenditure, on the other hand, can be defined as the amount spent for the long-term on an asset,
which gives a long-term benefit like building expenditure, furniture expenditure, plant expenditure,
etc. If the benefits are yet to consume, it is called expenditure.
★ The key difference between Expense vs Expenditure is that Expense refers to the amount spent by
the business organization for the ongoing operations of the business in order to ensure the
generation of the revenue, whereas, the expenditure refers to the amount spent by the business
organization for the purpose of purchasing the fixed assets or for increasing fixed assets value.
Capital income vs Revenue income:

★ Capital income: Capital income is the income generated by an asset over time, rather than from
using the asset. It means an income which does not come from the regular business activity.
Example includes income from the sale of a long-term assets.
★ Revenue income: Revenue income arises from the regular business activities of an organization.
For example, proceeds from the sale of products.
Capital expenditure vs Revenue expenditure vs Deferred revenue expenditure:

► Capital Expenditure: Capital Expenditure is a long term expenditure which has been incurred for
the purpose of obtaining a long-term advantage for the business such as operating efficiency,
productive capacity, or expected useful life of the asset. E. g. purchase of Machinery.
► Revenue Expenditure: Revenue expenditure is a short term expenditure that incurred in the course of
regular business such as maintaining the operating efficiency and productive life of an asset. E. g.
purchase of raw material, payment of salary of the staff, depreciation on fixed assets etc.
► Deferred Revenue Expenditure: Deferred revenue expenditure is an expenditure which is
revenue in nature and incurred during an accounting period, but its benefits are to be derived in
multiple future accounting periods. E. g. heavy advertisement, prepaid insurance.

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Business Digest 72 Accounting( Basic of Accounting)

Define: Assets/Liabilities/Equity/Expense/Revenues:

Assets:
★ Assets are the resources owned by a business which have the capacity to provide revenue, future
services or benefit to operations.
★ Similarly, Assets are the resources controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity. Example; machinery, furniture, building etc.
★ Deferred Asset: A deferred asset is an advance expenditure from which benefits will flow to the
entity beyond reporting period. Example: Prepaid insurance, Prepaid rent, Prepaid advertising,
Bond issuance costs.
Liabilities:
★ Liabilities are the claims against assets. (loans/debenture/bond/)
★ Liabilities are obligations of the entity as a result of past events and the settlement of which are
expected to cause outflow of future economic benefits from the entity.
Equity:
★ Equity also known as owner's equity is the residual claim of the owners in the assets of the
enterprise after deducting all the external liability. (Capital provided by owners or shareholders).
Revenues:
★ Revenue is gross increase in the owners’ equity resulting from operational activities. (Product sold at $700)
★ Revenue is the amount for which performance obligations are satisfied irrespective of cash received
for those. Revenue not necessarily be in the form of cash always.
★ Outstanding income: Outstanding income means that amount of income which is due and receivable
but yet not received. (Service worth of $200 is provided but payment is not received yet).

Contra Account VS Contra Asset Account VS Contra Entry:

► Contra account: A contra account is an account that is created to reduce the balance of another
relevant account. Example: Sales return. It reduces the balance of revenue.

► Contra asset account: A contra asset account is a negative asset account that offsets the balance in
the asset account with which it is paired. The purpose of a contra asset account is to store a reserve
that reduces the balance in the paired account. Example: Accumulated Depreciation. It contains the
sum total of all the depreciation expense that has been charged against those assets over time which
offsets the amount of fixed asset.

► Contra Owners Equity account: A contra owner’s equity account is a negative owner’s equity account that
reduces the balance in the paired owners’ equity account. E. g. Drawings, Dividend, Treasury Stock etc.

► Contra entry: In double entry accounting system, a contra entry is an entry which is recorded to
reverse or offset an entry on the other side of an account. If a debit entry is recorded in an account,
contra entry will be recorded on the credit side and vice-versa. Example: Cash 50, 000 withdrawn
for an official purpose from the bank. Journal entry for this transaction will be:
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Business Digest 73 Accounting( Basic of Accounting)

Cash A/C -------------------Dr $50, 000

Bank A/C -------------------Cr $50, 000

★ In the above example, both entries, debit and credit are a contra entry of each other, they both
offset each other. The narration is not required for such an entry and only a “C” is written in the
left column which depicts that it is a contra entry.
Golden Rules of accounting:

These rules are used to prepare an accurate journal entry and these form the very basis of
accounting and act as a cornerstone for all bookkeeping. Before going to rules, let us know three
types of account:
★ Real account: All assets of a firm, tangible or intangible, fall under the category “Real
Accounts”
★ Personal Accounts: These accounts are related to individuals, firms, companies etc. A few
examples of personal accounts include debtors, creditors, banks, outstanding/prepaid accounts,
accounts of credit customers, accounts of goods suppliers, capital, drawings etc.
1. Persons:– Natural Person.
2. Artificial persons:– The person created by human.
3. Representative persons:– Those accounts which represent the person or group of persons.

★ Nominal Account: Accounts which are related to expenses, losses, incomes or gains.

Three Golden Rules Real Account Personal Account Nominal Account


of Accounting

Debit What Comes In The Receiver Expenses and Losses

Credit What Goes Out The Giver Incomes and Gains

Management Information System (MIS) vs Accounting Information System (AIS):

★ MIS and AIS are computer-based information systems. MIS is the use of information
technology, people, and business processes to record, store and process data to produce
information that decision makers can use to make day to day decisions. Accounting Information
System, or AIS, on the other hand is a subset of MIS and pertains to a system of keeping a
record of accounting books and financial statements to provide info to the external users.

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The differences between IAS and IFRS:


★ International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)
are almost the same. The difference between them is that IAS represents old accounting standard
such as IAS 17 Leases while IFRS represents new accounting standard such as IFRS 16 Leases.
Accounting Standards:

★ Generally Accepted Accounting Principles (GAAP) are the common set of accounting
principles recognised as common guidelines for accounting recordings and reporting. GAAP
are the accepted accounting principles in America. GAAP is issued by Financial Accounting
Standards Board (FASB) (1973).
★ International Financial Reporting Standards (IFRS) are the accepted accounting standards in
most of the countries. IFRS is issued by International Accounting Standards Board (IASB).
★ Bangladesh Financial Reporting Standards (BFRS) are the accepted accounting standards in
Bangladesh. BFRS is adopted by ICAB from IFRSs. (IFRS (Officially renamed as IFRSs from
the reporting of 2018). Bangladesh Financial Reporting Standards (BFRS) in Bangladesh is
determined by -ICAB.
★ International Accounting Standards Committee Foundation (IASCF) is the parent entity of
International Accounting Standards Board (IASB).
★ In Bangladesh CA degree is provided by Institute of Chartered Accountants of Bangladesh
(ICAB)1973
★ In Bangladesh CMA degree is provided by Institute of Cost and Management Accountants of
Bangladesh (ICMAB)1977.

Basic characteristics of a company:

■Separate Legal Entity (distinct and different from its members in law)
■Limited Liability (limited up-to the face value of shares held by investor)
■Perpetual Succession (does not cease to exist)
■Transferability of Shares (Shares in a company are freely transferable)
■Common Seal (Contracts must be under the seal of the company)
■Capacity to sue and being sued
■Separate Management (managed by its managerial personnel)
■One Share-One Vote (Each shareholder will have one voting right).

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Business Digest 75 Accounting(Accounting Related Documents)

Invoice/Voucher and Debit/Credit Notes:


★ Invoice: An invoice is a document sent by a provider of a product or service to the purchaser. In
other words, the invoice is a written verification of the agreement between the buyer and seller of
the goods or services.
Over-invoicing: The act or practise of increasing fraudulently the price of a good or service.
The overpayment is returned to the customer in the form of liquid or various benefits. It is one of
the oldest methods of fraudulently transferring money across the borders, remains a common
practice today.
★ Voucher: Vouchers are the documentary evidences of cash transaction. Such as- cash sales, cash
purchase expenditure and income etc. It is documentary evidence in support of a transaction in the
book of accounts.
Debit Voucher: Debit vouchers are the documentary evidence of cash payments.
Credit Voucher: Credit vouchers are the documentary evidence of Cash receipts.

★ Debit Note: Debit Note is issued by the purchaser, at the time of returning the goods to the vendor,
which indicates that his/her account has been debited with the respective amount. .
★ Credit Note: The vendor issues a Credit Note to inform that he/she has received the returned
goods, which shows that his account has been credited with the amount indicated in the note.

Freight, FOB Shipping Point vs FOB Destination:


► Free on board (FOB) shipping point" and "Free on-board (FOB) destination" are international trade
terms that specify where the title of goods is transferred from the seller to the buyer.
► FOB shipping point indicates that the title of goods is transferred from the seller to the buyer
when the goods are placed on a delivery vehicle. Thus, freight is borne by buyer
► Conversely, FOB destination indicates that the title of goods transfers from the seller to the
buyer when the goods are delivered to the buyer's destination. Thus, freight is borne by seller.
Debit memorandum vs Credit memorandum:
★ Debit memorandum are the notification by which the banks notify the client that his account has
been debited by fees, charges or check bounce whereas credit memorandum notify the client that
his account with bank is credited with notes receivable collection, interest on deposit or dividend
received on behalf of client.
Consignment/Consignor Vs Consignee:
 Consignment is the ownership of the goods.
 Consignor Vs Consignee: A consignor is the person who sends the consignment. The consignee is
the receiver of consignment to whom the goods are transferred. The consignee may be just an agent
who acts on behalf of the consignor.
IOU:
An IOU (I Owe You) is an informal document that acknowledges a debt owed, and this debt does not
necessarily involve a monetary value as it can also involve physical products.

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Business Digest 76 Accounting( Accounting Cycle)

★ Accounting cycle is a series of steps performed during the accounting period to analyse record,
classify, summarize and report useful financial information for the purpose of preparing financial
statements. Compulsory Steps of accounting cycle:
1. Identification of transaction 6. Adjusted Trail Balance
2. Journalizing 7. Preparation of Financial statement
3. Posting to the Ledger Account 8. Closing Entries
4. Preparation of Trail Balance 9. Post-Closing Trail Balance

★ There are also two optional steps in the accounting cycle e. g. Worksheet and Reversing Entries.
★ Correcting Entries is an avoidable step in accounting cycle.
 Journal:
★ Journal is an accounting record in which transactions are initially recorded clarifying debit and
credit account in chronological order. The journal is referred to as the book of original entry.
㊣ Typically, a general journal has spaces for dates, account titles and explanations, references,
and two amount columns. Entering transaction data in the journal is known as journalizing.
㊣ Simple Journal Entries: Some entries involve only two accounts, one debit and one credit. When one
debit and one credit involved in journal entries then they are called simple journal entries.
㊣ Compound Journal Entries: Some transactions, however, require more than two accounts in
journalizing. An entry that requires three or more accounts is a compound entry.
 Special Journals:
㊣Sales Journal: It includes all credit sales
㊣Cash receipt journal: It includes all cash receipts including cash sales
㊣Purchase Journal: It includes all credit purchase
㊣Cash Payments journal: It includes all cash payments including cash purchase.
㊣Sales Return Journal: In which seller records all the sales that have been returned by customers.
㊣Purchase Return Journal: It records the goods which are returned to the suppliers.

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 Special Journals:
㊣Sales Journal: It includes all on credit sales
㊣Cash receipt journal: It includes all cash receipts including cash sales
㊣Purchase Journal: It includes all on credit purchase
㊣Cash Payments journal: It includes all cash payments including cash purchase.
 Ledger:
★ Ledger is the collection of all the accounts maintain by a company. Ledger is called king of all
books. It is the permanent store house of all the transactions. The ledger keeps in one place all the
information about changes in specific account balances. The process of transferring journal entries
to the ledger account is known as posting.
㊣ General Ledger: Companies may use various kinds of ledgers, but every company must
maintain general ledger. A general ledger contains all the asset, liability, and owner’s
equity accounts.
㊣ Subsidiary Ledger: Subsidiary Ledger is a ledger in which individual (Asset, Liability &
Owner’s Equity) accounts of the same type are kept in details. Two main types of
subsidiary ledger are: Accounts Payable Ledger and Accounts Receivable Ledger.
 Cash Book:
★ Cash book is the Journal in which all cash receipts and payments (including bank deposits and
withdrawals) are recorded in chronological order, for posting to the ledger. Cash book is regularly
reconciled with the bank statements as an internal auditing measure. Cash Book is called both
Journal and Ledger.
㊣ Discount: Discount is the incentive for early payment. Discount is of two types-
㊣ Trade Discount: Trade discount is the percentage deduction from the list price of goods at
the time of selling.
㊣ Cash Discount: The credit terms of a purchase on account may permit the buyer to claim a
cash discount (also called purchase discount) for prompt payment. Cash discount is usually
allowed for making the payment early; example; 2/10, net30- If cash is paid within 10 days,
2% discount will be achieved.
 What is Worksheet:
► It is a multiple column form used in the adjustment process and in preparing financial statements.
Using a worksheet, companies can prepare financial statements before they journalize and post
adjusting entries. However, the completed worksheet is not a substitute for formal financial
statements. A worksheet is a working paper used by the accountant.
► As its name suggests, the worksheet is a working tool. It is not a permanent accounting record; it is
neither a journal nor a part of the general ledger. The worksheet is merely a device used in
preparing adjusting entries and the financial statements. The use of worksheet is optional.
Companies do not distribute it to management and other parties.
► The steps of worksheet are:1) Trial balance 2) Adjustment 3) Adjusted Trail Balance 4) Income
Statement 5) Balance Sheet.
 What is Adjusting Entry?
★ Adjusting entries are journal entries made at the end of an accounting period to allocate income
and expenditure to the period in which they are actually occurred. Adjusting entries ensure that the
revenue recognition and matching principles are followed.

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 What is Adjusting Entry?


★ Adjusting entries are journal entries made at the end of an accounting period to allocate income and
expenditure to the period in which they are actually occurred. Adjusting entries ensure that the
revenue recognition and matching principles are followed.
㊣ There are four major types of adjusting entries. These are:
1. Prepaid Expenses: Expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned Revenues: Cash received and recorded as liabilities before revenue is earned.
3. Accrued Revenues: Revenues earned but not yet received in cash or recorded.
4. Accrued Expenses: Expenses incurred but not yet paid in cash or recorded.
 What is Closing Entry? (temporary vs permanent account):
★ Closing Entries are made at the end of the accounting period to transfer the balances of temporary
accounts (nominal accounts) to a permanent owner’s equity account.
★ Temporary accounts (revenue, expense, profit/loss and drawings) relate only to a given accounting
period. In contrast, permanent accounts relate to one or more future accounting periods.
★ Closing entries are prepared based on the account balances in an adjusted trial balance. Companies
record closing entries in the general journal. Closing entries also produce a zero balance in each
temporary account. Permanent accounts are not closed.
 Post-Closing Trial Balance:
★ Post-closing trial balance lists permanent accounts and their balances after journalizing and posting
of closing entries. The purpose of the post-closing trial balance is to prove the equality of the
permanent account balances carried forward into the next accounting period. Since all temporary
accounts will have zero balances, the post-closing trial balance will contain only permanent
accounts.
 Correcting Entries
★ Correcting entries are entries that are made to correct errors in recording process. Correcting entries
must be posted before closing entries. Correcting entries is an avoidable step in accounting cycle.
 Reversing Entrries:
► Reversing journal entries are entries made at the beginning of the next accounting period, which is
exactly opposite of the adjusting entry made in the previous period.
► Reversing entries are journal entries made to remove certain adjusting entries made in the previous
accounting period. Use of reversing entries is an optional bookkeeping procedure.
► Reversing entries are the effective way to rectify errors in the accounting software.

 Trial Balance
★ Trial Balance is a list of closing balances of general ledger accounts on a certain date and is the first
step towards the preparation of financial statements. It is usually prepared at the end of an
accounting period to assist in the drafting of financial statements.

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 Objectives of Trial Balance


► To check arithmetical equality of debits and credits after posting
► To help in preparing Financial Statements (basis of preparing financial statement)
► Helps in locating errors (identification and rectification of errors)
► Helps in making adjustments.
 Limitation of Trial balance
 It only confirms that the total of all debit balances matches the total of all credit balances.
 Trial balance totals may agree in spite of errors
 Trial balance gives no proof that all transactions have been recorded.
 Suspense Account:
√ A suspense account is an account used on a temporary basis for any transaction or balance that has
not yet been identified (unclassified or disputed funds).
√ It is a temporary resting place for an entry that will end up somewhere else once its final destination
is determined.
√ Any amount that is posted to the suspense account should be investigated and posted to the correct
account before preparing the financial statements.
 When suspense account is created?
Bookkeeper is unsure where to post an item
There is a difference in a trial balance
It is not clear from where the transaction came from and/or what it is meant for.
When trial balance balances in spite of having errors/ Limitations of Trial Balance:
► Error of principle – violation of accounting principles. When an item is posted to the correct side
of the wrong type of account (Capital expenditure is recorded as operating expense, for example:
purchase of machinery is recorded as expense)
► Clerical Errors/mistakes (Trial balance can’t detect these errors)
㊣ Errors of omission- A transaction is completely omitted/unrecorded
㊣ Errors of original entry--Transaction is recorded with incorrect amount (more or less) in both
debit and credit side
㊣ Errors of complete reversal of entries (Debit is recorded as credit and vice versa)
㊣ Errors of double entry--One journal entry is recorded twice
㊣ Compensating error (one error is compensated by another error)
㊣ Errors of posting- (Incorrect account of same kind is credited/debited instead of correct account,
for example, purchase is recorded as salary).
What do mean by account reconciliations?
★ Account reconciliations is the process that ensure that account balances are correct and alignment
exists between accounts at the end of a particular accounting period.
What is Bank Reconciliation Statement (BRS)?
★ BRS is a statement which is prepared by depositors for reconciling the balances as per cash book to
the balances of passbook on a given date.

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★ Bank reconciliation statement is a report which compares cash book balance and passes book
balance and subsequently conciliates the balances as shown in the cash Book and pass book.
√NSF check= Not sufficient fund and thereby not honoured
√Check in transit: deposit recorded by depositor but not by bank
√Outstanding check: check issued and recoded by client but not paid by bank.
Example
I. XYZ Company is closing its book and must prepare a bank reconciliation for the following items:
II. Bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the
company’s ledger shows an ending balance of $260,900
III. Bank statement contains a $100 service charge for operating the account
IV. Bank statement contains interest income of $20
V. XYZ issued checks of $50,000 that have not yet been cleared by the bank

VI. XYZ deposited $20,000 but this did not appear on the bank statement
VII. A check for the amount of $470 issued to the office supplier was misreported in the cash payments
journal as $370.
VIII.A note receivable of $9,800 was collected by the bank.

IX. A check of $520 deposited by the company has been charged back as NSF.

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Regulatory requirements to produce financial statements in Bangladesh:


★ Must comply provisions of company act, 1994
★ Statements must provide true and fair view
★ Formats must be in accordance with schedule XI to CA 1994.
What are the parts of FS?
There are Five Components of Financial Statements:
1.Balance Sheet or, Statement of Financial Position
2.Income Statement or, Statement of Comprehensive income
3.Statement of Changes in Shareholders’ Equity or Retained Earnings Statement
4.Statement of Cash Flow
5.Notes to the financial statements.

Financial Position Financial Performance Changes in financial position


 Balance sheet  Income statement  Statements of changes in equity
What information they provide? Why firm prepare financial statement?

 Liquidity position, Funds flow, Capital structure and long-term solvency, Return on
capital invested
 Operating performance
 Asset utilization

Types of Balance Sheet:


► Classified balance sheet: Assets, liabilities, and shareholders' equity are aggregated (or
"classified") into subcategories of accounts. It is the most common type of balance sheet
presentation. A Classified balance sheet contains the three major categories; assets, liabilities and
stockholder’s equity and subdivides them to provide useful information for interpretation and
analysis by users of financial statements.
► Common size balance sheet: This format presents the same information as a percentage of the
total assets and as a percentage of total liabilities and shareholders' equity.
► Comparative balance sheet: This format presents side-by-side information about an entity's
assets, liabilities, and shareholders' equity at the end of each year for the past three years. It is
useful for highlighting changes over time.
► Vertical balance sheet: This format is a single column of numbers, beginning with asset line items
followed by liability line items and ending with shareholders' equity line items.

★ Unclassified Balance Sheet:An unclassified balance sheet has three major categories; assets,
liabilities, and stockholder’s equity.

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Name of Financial Explanation


Statement

★ It shows the company’s revenues and expenses during a particular


Income Statement
or, period.
Statement of
Comprehensive ★ It indicates how the revenues (money received from the sale of
income products and services before expenses are taken out, also known as the
“top line”) are transformed into the net income (bottom line)
★ It presents a summary of the changes in shareholders’ equity accounts
over the reporting period. Its components are following:
Statement of Changes
in Shareholders’ Retained Earnings in the beginning---------***
Equity or,
Retained Earnings (+) Net Income of the current year---------***
Statement
(-) Cash Dividend-----------------------------***

(-) Share Dividend-----------------------------***

Retained Earnings in the ending-------------***


★ Balance sheet is the snapshot of a company’s financial condition at a
Statement of specific point of time
Financial Position
★ A balance sheet reports a company's assets, liabilities and
shareholders' equity at a specific point of time
★ It provides aggregate data regarding all cash inflows and cash
outflows during a given period under: Main three sections of such
statement are:

ÞCash flow from operating activities


Statement of Cash
Flow ÞCash flow from investment activities

ÞCash flow from financing activities

Note:

★ 1) Cash Flow Statement is prepared according to IAS-7 of IFRS


which is BAS-7 in Bangladesh.
Notes to the Accounts ★ The notes to the accounts are a series of further details that are
referred to in the main body of the financial statements.

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Fair, Appraised and Market value:

► Fair Market Value: Fair market value is the price received for an item sold in the normal course
of business.
► Appraised value: An appraised value is an expert’s opinion of an item’s fair market price if the
items were sold.
► Book Value: The book value of an asset is its recorded cost less accumulated depreciation.

Capital:

★ Capital is the total funds and resources the firm used, collected from internal and external sources
in order to generate revenue and profit.
Equity vs Capital:

★ Equity is the owner's claim on the assets (Cash, inventory, equipment, movable/immovable
property, profits) of a business.
★ Capital is the owner's investment in assets of the business. Capital is received from the equity
holder and debtholder.
★ Capital=Equity + Debt.

Different types of share capital:

★ Share capital can be categorized as authorized share capital, issued share capital, subscribed share
capital, called up share capital and paid up share capital.
► Authorised/Nominal/Registered Capital: The maximum amount of capital a company is
authorised to raise from the public by selling shares is known as Authorised Capital
► Issued Capital: It is a part of the total authorized share capital which has been issued by a
company for subscription by investors.
► Subscribed Capital: The part of issued share capital for which subscription has been received is
known as subscribed share capital.
► Called-Up Capital: The part of subscribed share capital which has been asked for payment by
the issuer is called-up share capital.
► Paid Up Capital: The amount actually paid by the shareholders is known as paid-up Capital.
Paid up capital = Called up capital – Call in arrears. Paid up capital is the amount for which the
company has received the full amount from the investors
► Reserve Capital: Reserve Capital shows the part of the authorized capital that has not yet called
up by the company and is available for drawing, if necessary.
► Seed Capital: Seed capital is the initial capital used when starting a business, often coming from
the founders' personal assets, friends or family, for covering initial operating expenses and
attracting venture capitalists.

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Different types of reserve:


★ General Reserve: General reserves are the retained earnings of a company which are kept aside out
of company's profits to meet future (known or unknown) obligations or unexpected situations.
★ Statutory Reserve: Statutory reserve is the minimum amount of money that financial institutions
such as banks, building societies, credit unions and insurance companies are required by law to keep
as security.
★ Revaluation Reserve: The revaluation reserve refers to the specific record required when the
revaluation of an asset, accepted as a part of the organization's equity, has resulted in a surplus.
★ Capital Redemption Reserve: When the company proposes to redeem the preference shares or
buyback its own common shares, a certain amount is kept aside out of the profits known as capital
redemption reserve which it cannot be paid to shareholders as dividends.
★ Secret Reserve: It is a reserve which maintained to strengthen the financial position of the business
without disclosing it in the book is known as secret reserve. A secret reserve is created in any of the
following ways:
㊣By depreciating the fixed assets at excessively high rates.
㊣By undervaluing the current assets.
㊣By over-valuing the liabilities.
㊣By showing contingent liabilities as real assets.
Capital Reserves Vs Reserve Capital?
★ “Capital Reserve” means the part capital surplus reserved by the company for a long-term
particular purpose such as to finance long-term projects or to write off capital expenses.
★ While “Reserve Capital” shows the part of the authorized capital that has not yet called up by the
company and is available for drawing, if necessary.
Capital Reserve Vs General Reserve:

 Capital Reserve is created out of the profit earned not in the normal course of business. For
example, to a bookseller, profit on sale of books is a regular profit. But profit earned on sale of
something other than books is capital profit. It is usually not available for the payment of dividends.
 General Reserve is created out of profit earned in the normal course of business. It is available for
the payment of dividends.
Two conditions to keep provision out of income for a contingency:
1.The probability of creation of labiality for due to an event is very high
2.The amount of probable loss can reasonably be estimated.
Appropriation:
★ Appropriation is the act of setting aside money for a specific purpose.

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Some balance sheet assets:

► Tangible Assets: Tangible assets are those that maintain a physical existence or form. They can be
seen and touched and occupy space. Equipment, land and automobiles are examples of tangible
assets.
► Intangible Assets; Intangible assets have no physical existence but exist in contracts or rights.
Patents, copyrights and goodwill are examples of intangible assets.
► Patent: A patent is an exclusive right of the developer of an innovation or technology-based
product or process. Patent gives the owner the supreme authority over the product or process. He
might rent, grant or render it to specific people.
► Copyright: A copyright is a legal right created by the law of a country that grants the creator of an
intellectual work or product, exclusive rights to its use and distribution, usually for a limited time.
Reserve VS Provision:

Reserves Provisions

■ Reserves are made to strengthen the ■ Provisions are made to meet specific liability
financial position of a business and to or contingency, e. g. a provision for doubtful
meet unknown liabilities & losses. debts.

■ It is not mandatory to create reserves but ■ It is mandatory to create provisions as per


done out of prudence. various laws.
√ (International Accounting standards
37:Provisions, contingent liabilities &
contingent assets)

■ Reserves are only made when the business ■ Provisions are made irrespective of profits
is profitable earned When following conditions are met:
√Present obligations (legal or constructive)

√Probable payment
√Reliable measurement

■ They can be used to distribute dividends ■ They cannot be used to distribute dividends

■ Reserves are shown on the liability side ■ Provisions are either shown on the liability side
of a balance sheet or as a deduction from the
concerned asset.

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Copyright VS Patent:

★ Copyright protects creative and intellectual works, which covers artistic, literary, musical and
dramatic work. On the other hand, a patent protects new inventions from being used or produced
by others such as solar panels, engines, batteries etc. Simply, Copyright protects idea while Patent
protects innovation.
 Franchise:
★ A franchise is a contract between two parties granting the franchisee (the purchaser of franchise) a
certain rights and privilege. Such privileges might include: the business or brand name, the system
of doing business, the operations manual, marketing materials or software
 Trade Mark:
★ A trade mark is a symbol, design or logo used in conjunction with a particular product or company.
Goodwill:
 Generally, goodwill can be defined as the extra profit or super profit earning capacity of a firm
 Goodwill is an intangible asset associated with the purchase of one company by another.
Specifically, purchased goodwill is recorded in a situation in which the purchase price is higher
than the sum of the fair value of all identifiable tangible and intangible assets purchased in the
acquisition and the liabilities assumed in the process. (Simply, Goodwill=Purchase Price – book
value)
 Non-purchased goodwill is the value of a company’s brand name, solid customer base, good
customer relations, good employee relations, and any patents or proprietary technology that ensures
extra profit or super profit earning capacity of a firm.
Other usual assets:

 Cash Equivalents
★ Cash equivalents are the short-term highly liquid investments that are readily available to be
converted to known amounts of cash and subject to insignificant risk of change in value. Example:
commercial paper, treasury bills, short term government bonds, marketable securities.

 Accounts Receivable/ Accounts Payable:


★ Receivable are amounts due arising generally from the sale of goods and services on credit
Example: Product sold to Liton at $4, 000. Here Liton is account receivable. Which is a current
asset.
Discount on acquisition:
★ A discount on acquisition arises if the target firm’s net worth is higher than acquisition cost of the
target. Such benefits are bargain profit and thereby recognised as profit in the year acquisition
taken place.
★ Notes: Research and development costs are recognized in profit and loss as incurred.

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Credit terms:
★ Credit terms indicate payment requirements or conditions to be obliged for sales made on account
(or credit). For example, the credit terms might be 2/10, net 30. This means the amount is due in 30
days; however, if the amount is paid in 10 days a discount of 2% will be permitted.
Factoring:
★ Factoring is a service of financial institution involving the conversion of credit bills into cash at a
lower value stated in the face of the bill.
★ Example: ABC Company Ltd. has notes receivable worth of $7, 500 which is expected to be
received 3 months later. Suddenly ABC faces lack of money of $7, 000 to execute a necessary
transaction in this month. So, ABC is to go to bank to discount the notes receivable at $7, 000. This
event is considered as Factoring and the profit of the bank is 7, 500-7, 000=500 which the bank will
receive after 3 months.
Operating Cycle (OC):
★ An Operating Cycle (OC) refers to the days required for a business to receive raw material, convert
it into products, sell the inventory, and collect cash from the sale of the inventory. The cycle plays a
major role in determining the efficiency of a business.
★ Operating Cycle = Inventory Period + Accounts Receivable Period
Cash Conversion Cycle (CCC):
★ The time requires for the company to covert its investment in inventory and other resources into
cash flows from sales.
★ CCC = Days Inventory Outstanding +Days Sales Outstanding - Days Payable Outstanding .
Inventory:
★ Inventory can be defined as the physical substances or components that is used in the different levels
of production
 3 Types of inventory
1.Raw material

2.Work-In-Progress (WIP)

3.Finished Goods
 Work in process (WIP)
★ Work in process (WIP) or in-process inventory are a company's partially finished goods waiting for
completion
 Cost of Goods sold (CGS)
a) Adjusted purchase= Beginning inventory+ cost of goods Purchased- ending inventory
b) Goods available to sale= beginning inventory+ cost of goods Purchased
c) Goods available to sale = Cost of goods sold+ ending inventory

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Periodic vs Perpetual inventory systems:


★ The periodic and perpetual inventory systems are different methods used to track the quantity of
goods on hand.
★ Periodic system relies upon an occasional physical count of the inventory to determine the ending
inventory balance and the cost of goods sold, while the perpetual system keeps continual track of
inventory balances.

Periodic Perpetual
 Inventory is updated only at the end of  Updated continuously during the period.
the period.

√ Purchase, purchase discount or purchased √ Purchases are directly debited to inventory


return account exist to record account and purchase returns are directly
corresponding event credited to inventory account
√ There is no Purchases, purchase discount or
purchased return account.

√ Closing Entries are only required in √ No closing entry required


periodic inventory

√ In periodic inventory system, only one √ Sale Transaction is recorded via two journal
entry is mad for the sale of goods. entries in perpetual system. One of them
records the sale value of inventory whereas the
other records cost of goods sold.
Journal for Cash Purchase: Journal for Cash Purchase:

Purchase---------Dr Inventory -----------Dr


Cash----------------Cr Cash ----------------Cr

Journal for Cash Sales: Journal for Cash Sales:

Cash ---------------Dr 1) Cash -------------Dr


Sales revenue ------Cr Sales revenue------------------Cr
2) Cost of goods sold-----------Dr
Inventory-----------------------Cr

Some very important items of Balance Sheet:

 Treasury Stock:
► Treasury stock represents the number of shares repurchased from the open market by the issuing
company, it reduces shareholder's equity by the amount paid for the stock and the corporation has
not retired the repurchased shares
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► Under the cost method of recording treasury stock, the cost of treasury stock is reported at the end
of the Stockholders' Equity section of the balance sheet. Treasury stock will be a deduction from
the amounts in Stockholders' Equity.
 Retained Earnings:
★ Retained earnings are the cumulative net earnings or profits of a corporation that is retained after
dividend payments. It represents the reserve money which is available to the company management
for reinvesting back into the business.
 Deferred tax as asset or liability.
★ Deferred tax is the difference between tax liability as per provisions of tax ordinance and tax
reported in the financial statements. Such discrepancy happens because the treatment of
depreciation under reporting system and taxing system is not identical. If tax paid is higher than tax
reported, it is reported as asset and if the opposite happens it is recorded as liability.
 Deferred tax as asset or liability.
★ Deferred tax is the difference between tax liability as per provisions of tax ordinance and tax
reported in the financial statements. Such discrepancy happens because the treatment of
depreciation under reporting system and taxing system is not identical. If tax paid is higher than tax
reported, it is reported as asset and if the opposite happens it is recorded as liability.
 Letter of Credit
★ It is a documentary guarantee provided by banks on behalf of its client ensuring the payment in
case client’s default in foreign trade.
★ A letter of credit is a promise by a bank on behalf of the buyer (customer/importer) to pay the seller
(beneficiary/exporter) a specified sum in the agreed currency, provided that the seller submits the
required documents by a predetermined deadline.
 CAD (Cash Against Documents)
★ Cash against documents is a financial arrangement in which an importer can only have possession
of goods ordered after paying for them in full. CAD financing is a method in which an importer
pays for goods before receiving them.
 LC vs CAD (Cash Against Documents)
★ Both the terms are related to international trade. Letters of credit tend to be more secure but also
costlier to obtain, making them a good choice for two parties who are new to doing business with
each other.
★ In the case of cash against documents, banks have no responsibilities against exporters. CAD is a
little easier to deal with in operational terms and much less costly to obtain than letters of credit but
doesn't offer quite as much security. In contrast to letters of credit, cash against documents are well
suited to partners who have a history of trade together, a mutual trust and confidence in or
familiarity with the country of destination.

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Prize Bond:
► A Prize Bond is a lottery bond, a non-interest bearing security issued on behalf of the Minister
for Finance. Funds raised are used to offset government borrowing and are refundable to the
bond owner on demand.
► Interest is returned to bond owners via prizes which are distributed by means of random
selection of bonds,
► Prize Bond, a public savings scheme, was introduced by the government of Bangladesh in 1974
with a view to mobilizing domestic resources and providing incentive to the small savers.
Off Balance Sheet Items:
★ Off balance sheet refers to those assets and liabilities not appearing on balance sheet, but which
nonetheless effectively belong to the enterprise. These are presented as the notes to the financial
statements according to full-disclosure principle. These are not presented in balance-sheet because,
the events have not yet come to reality or ended in transaction but sooner or later they will surely
come into existence as liability or asset. Banks might keep provision for such off-balance sheet
items.
Banks’ off-Balance sheet items:
Letters of credit (L/C)
Inland bill purchases (IBP),
Foreign bill purchases (FBPs),
Loans against trust receipts (LTRs),
Bills for collection,
Payments against documents (PADs),
Loans against Imported Merchandise (LIM) etc.
Loan guarantee.
Contingent Asset:
★ A contingent asset is a possible asset that may arise on the happening or non-happening of any
future events that are not under an entity’s control.
★ Examples: A lawsuit filed by Company A against Company B for infringement of Company A's
patent.
Contingent Liability:
★ A contingent liability is a possible liability that may arise because of an obligation that is
contingent on future events that are not under an entity’s control.
★ Examples: Acceptances and Endorsements, Letters of Guarantee, Irrevocable Letters of Credit,
Bills for Collection.
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Pooling of interest method vs Purchase method:


★ When business combination is in the nature of merger the method of accounting used is the pooling
of interest method, whereas if the combination is in the nature of the purchase (acquisition),
purchase method of accounting is used.

Pooling of interest Purchase method


►Assets and liabilities appear at book values in ►Assets and liabilities appear at fair market
merged firm values in acquiring firm
►No goodwill asset is created ►goodwill asset is created
►Typically, more accurate than the purchase method ►Typically distorts growth perception of the
acquiring company
►Transferor company's reserves are kept intact. ►Transferor company’s reserves except
statutory reserves is not kept intact.

What method should be used as layouts for cash generated from operation?
★ BAS (Bangladesh Accounting Standards) allows two possible layouts for cash generated from
operation:
Indirect method Direct Method
Net income Cash collected from customers for sales goods
Add: interest expense Add: Cash collected for services rendered
Add: tax expense Add: Cash inflows related to royalties, dividends and
interest earned
Add: loss on disposal of assets Less: Cash paid to suppliers and service providers
Add: depreciation expense Less: Other operating expenses paid
Add: increase in current
liabilities
Less: increase in current assets
Less: interest paid
Less: Profit on disposal of PPE
Net cash flows from operating Net cash flows from operating activities

Common investing activities:


► Cash payment to acquire property, plan, machinery, equipment intangibles
► Cash payments acquire financial assets such as bonds or equity instruments
► Cash receipts as interest/dividend from bond or equity instruments
► Cash receipt from sale of PPT, financial assets.

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Ratio analysis and types of ratio analysis:

★ Ratio analysis is a medium to understand the financial position, performance and the strengths and
weakness of an organization. Simply stating, ratio analysis is a tool to evaluate the performance &
Financial position of an organisation from different point of views.
 Liquidity Ratio: (See Formula: F-121-124)
★ Those ratios are calculated to judge the short-term capabilities of paying current liabilities. These
ratios measure liquidity position of a business organisation. Example: Current ratio, Acid-test
(quick) ratio etc.
 Activity Ratio: (See Formula: F-135-141)
★ These ratios measure the effectiveness of the invested capital of an organization. These determine
the efficiency in using resources of the business. Example: Stock or inventory turnover, Debtor or
receivable turnover, Creditor or Payable turnover etc.
 Profitability Ratio: (See Formula: F-126-132)
★ The ratios, that measure the earning capabilities of an organization are called the profitability
ratios. It includes ratios such as gross profit margin, net profit margin, return on equity, return on
asset, return on capital ratio. Example: Gross Profit margin, return on assets (ROA), Return on
equity (ROE), Earning per share (EPS)
 Debt Service Coverage Ratio:
★ The debt service coverage ratio (DSCR), also known as "debt coverage ratio" (DCR), is the ratio of
cash available for debt servicing to interest, principal and lease payments. Example: Interest
coverage ratio or, Times interest earned.
 Coverage Ratio/Solvency Ratio: (See Formula: F-133-134*)
★ Coverage ratios measure the ability of an organization to meet its financial obligations and
liabilities. In general, a higher coverage ratio denotes a greater ability of the organization to meet
its creditors' obligations while a lower coverage ratio means less ability. Example: Debt to assets
ratio, Debt to equity ratio
 Leverage Ratios: (See Formula: F-42,46,45,77-79)
★ Leverage ratios are financial ratios used to measure a company’s capital structure, financial
obligations and its ability to clear those obligations. It is meant to evaluate a company's debt levels.
The most common leverage ratios are the debt ratio and the debt-to-equity ratio.

Techniques or tools for financial statements analysis


√Comparative financial statement (year-to year √ Fund flow analysis
changes)— Horizontal analysis
√ Trend analysis
√Common size financial statement (structural
analysis)—Vertical analysis √ Sensitivity analysis
√ Specialized analysis (Cash forecast,
√Ratio analysis Break even analysis, Variability analysis)
√Free cash flow analysis

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Xclusive Publications
Statement of Financial Position
As at 30 June 2020
PROPERTY AND ASSETS LIABILITIES AND SHAREHOLDERS'
EQUITY
Cash Liabilities
Cash in Hand Borrowings from Other Banks,
Balance with Bangladesh Bank Financial Institutions and Agents
Balance with Other Banks and Financial Subordinated non-convertible bonds
Institutions Deposits and Other Accounts
Money at Call and Short Notice
Current Accounts
Investments Savings Bank Deposits
Fixed Deposits
Investments in Government Securities Bills Payable
Treasury bills Other Liabilities
Government notes/bonds/other securities
Shareholders' Equity
Prize bond
Reverse –repo Paid-up capital
Other Investments Statutory/Legal reserve
Revaluation reserve
Debentures General reserve
Corporate bond Retained earnings
Ordinary shares Foreign Currency Translation Reserve
Preference share
Loans and Advances
Loans
Cash Credits
Overdrafts
Bills Purchased and Discounted
Fixed Assets including
Land, Building, Furniture and Fixtures
Other Assets
Investment in subsidiary companies
Stationery, stamps and materials
Interest accrued on investment
Advance deposit
Suspense account
Non-Banking Assets

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Business Digest 94 Accounting( Audit)

Auditing:
★ Audit is an independent examination of accounting and financial records and financial statements
of a firm to determine whether the financial statements of the entity present fairly or give true &
fair view and conform to the law (accepted principles & standards, IFRS, BFRS etc) and to
generally accepted accounting principles (GAAP).
★ It is the most important type of assurance in Bangladesh. It enables the auditor to express an
opinion whether the financial statements are prepared, from all materials aspect, in accordance with
applicable accounting standards and framework.
Accounting vs Auditing:
★ Accounting involves tracking, reporting, and analysing financial transactions whereas audit is an
independent examination of accounting and financial records and financial statements to determine
if they conform to the law and to generally accepted accounting principles (GAAP).
Audit vs Inspection:

Audit Inspection
■ An audit is most often associated with a higher- ■ Inspection is most often associated with
level review of the system that is designed to inspecting a product or a service to make sure
produce and inspect the product or service. it is right
■ Audit includes visual, document based, ■ Inspection has only visual observation
interview oriented observation
■ Audit analysis effectiveness, efficiency and ■ Inspection analyses safety, physical conditions
compliance and probable hazards
■ Audit is an actual consultation, verification of ■ Inspection is an observation
items, goods and documents

The process of auditing relies on 3 types of evidence being analysed:


1.Documentation– reviewing appropriate documents
2.Physical evidence – carrying out interviews on a cross-section of personnel
3.Inspection and observation – from a workplace inspection
Principles of audit:
► Integrity: Auditors are committed to the highest level of ethical conduct in their performance.
► Service excellence: Auditors deliver unquestionable stakeholder value and satisfaction by
continuously improving the quality of services.
► Confidentiality: Auditors strive to consistently maintain confidentiality in all circumstances as
required by professional standards.
► Accountability: Auditors should willingly accept responsibility for their actions and take
ownership of the work assigned to them.

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Fundamental principle of audit:

According to ISO 19011:2011, audits should be based on these six principles:


► Integrity: foundation of professionalism.
► Fair presentation: obligation to report truthfully and accurately.
► Due professional care: application of diligence and judgment in auditing.
► Confidentiality: security of information.
► Independence: basis for impartiality of audit and objectivity of audit conclusions.
► Evidence-based approach: rational method for reaching reliable and reproducible audit
conclusions in a systematic audit process.
Roles of Auditors:
► Identifies and assesses the risks of material misstatement of the entity’s financial statements
► Obtains an understanding of internal control relevant to the audit in order to design audit procedures
► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the directors.
► Concludes on the appropriateness of the directors’ use of the going concern basis of accounting
► Evaluates the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in
a manner that achieves fair presentation.

Auditor’s opinion: Qualified, Unqualified, Adverse opinion, Disclaimer of opinion:-

★ In financial reporting, an auditor's opinion is the outcome of an auditor's review of an organization's


financial statements. The auditor's opinion does not judge the financial position of the reporting entity.
Nor does it otherwise interpret accounting data. Instead, the published opinion addresses two questions:
★ Firstly, do the statements conform to Generally Accepted Accounting Principles (GAAP)?
★ Secondly, do they fairly represent the entity's financial accounts?
★ Formal opinions from independent auditors fall into four categories. (1) Unqualified Opinion, (2)
Qualified Opinion, (3) Adverse Opinion, and (4) Disclaimer of Opinion.
1.The unqualified opinion is the best possible audit outcome. It means the financial statements are
prepared in compliance with GAAP and BFRS and statements represent true and fair view.
2.A qualified opinion means the auditor finds that reports conform to GAAP, except in just a few areas.
For these areas, the auditor cannot assert conformance and cannot be sure of true and fair view.
3.Adverse" opinion means the auditor finds the financial statements are materially misstated.
4.Auditors may issue a disclaimer of opinion. Note especially that this is not an opinion.
Instead, it means that auditors choose not to audit because they believe they cannot
audit impartially or the auditor's scope is limited.
Going Concern Qualification:
★ Going Concern Qualification means an opinion of an independent auditor that there is substantial doubt
regarding the entity's ability to continue into the future, generally defined as the following year.

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Limitation of audit:
►Auditors cannot provide absolute assurance.
►Auditor does not oversee start to finish financial statements building process
►Accounting systems might have some inherent limitations in responding to users’ needs
►Auditor does not test every item in subject matter rather tests based on sampling
►Auditors are dependent on staffs and responsible parties to get information.

Internal Audit:
★ Internal Audit is the appraisal and monitoring activity established within the entity to examine,
evaluate and report to the management and directors on the adequacy and effectiveness of the
accounting and internal control system.

Internal audit vs external audit:

Internal Audit √ External Audt


√ Performed within an organization by a √ performed by the independent body
separate internal auditing department. which is not a part of the organization
√ To review the routine activities and provide √ To analyse and verify the financial
suggestion for the improvement statement of the company.
√ It checks operational Efficiency and provide √ It checks accuracy and validity of
suggestions Financial Statement
√ It’s a continuous process √ It’s a one-year one-time statutory
requirement

Five components of an effective "internal control system":

1) Control Environment
2) Risk Assessment
3) Control Activities
4) Information and Communication
5) Monitoring

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Accounting Transparency:
★ Transparency is the extent to which investors have ready access to required financial information
about a company such as price levels, market depth and audited financial reports.
What do you mean by true and fair view of financial statements?
► True means factually accurate and correctly extracted from the books and accounts within the
boundary of materiality and fair means unbiased and objective.
► True and fair view of financial statements thus ensures the statements are prepared in compliance
with accounting standards and adherence to the all applicable laws, rules and regulations.
Reliability and Materiality:
★ Reliability ensures the information being Information free from material error and bias and can be
depended by users to represent faithfully
★ Information can be said material if its omission or misstatements could influence the economic
decision of user.
Sufficiency and Appropriateness:
Sufficiency is the measure of the quantity of audit evidence whereas appropriateness is the
measure of quality or reliability of the audit evidence.
Types of assurance Evidence sought Conclusion given
Reasonable assurance Sufficient and appropriate Positive (unqualified opinion)

Limited assurance Sufficient and appropriate (lower level) Negative (qualified opinion)

Fraud Triangle:
★ It’s a common internal control related jargon which states that when opportunity, financial
pressure and rationalisation push together a fraudulent activity is done by the employee.
Sampling risk and Non-Sampling risk:
★ Sampling risk is the possibility that the auditor’s conclusion based on a sample might be different
from the conclusion they would reach if they examined every item in the entire population.
Sampling risk is reduced by increasing the size of the sample.
★ Non-sampling risk arises If auditor’s conclusion could be erroneous from any factors other than
sampling size chosen by the auditors.
Audit Risk:

★ Audit risk refers to the risk that an auditor may issue an unqualified report due to the auditor's

failure to detect material misstatement either due to error or fraud.


Audit Risk = Inherent Risk x Control Risk x Detection Risk.
Code of Ethics:
★ The Code of Ethics is a statement of principles and expectations governing behaviour of
individuals and organizations in the conduct of internal auditing.

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Segregation of Duties:
► Segregation of Duties (SOD) is a basic building block of sustainable risk management and internal
controls for a business. It is designed to prevent error and fraud by ensuring that at least two
individuals are responsible for the separate parts of any task.
► Different individual should be responsible for related activities
► Responsibility for record keeping of an asset should be separate from responsibility of physical
custody of that asset.
Restructuring:
1.Restructuring might include:
2.Material change in business scope
3.Material change in product/service delivery process.
Window Dressing:
★ Window dressing is the deceptive practice of using accounting tricks to make a company’s
financial statements appear better than they really are.
★ It is the act of showing an unfavourable financial condition as favourable condition in an artificial way
★ Example: Showing current asset items at higher amount and debt instrument at lower amount so
that current ratio and debt to equity ratio will seem to be satisfactory. And it will help the business
to get loan from bank as bank will see their creditworthiness is good.
Objectives of window dressing:
► To obtain funding (to borrow money),
► To increase profits and liquidity ratios,
► Showing the firm as profitable and sustainable,
► Showing less liability, mainly to impress and attract investors, financial lenders and employees-
mostly managers.
Code of Ethics for Professional Accountants:
The Code of Ethics is a statement of principles and expectations governing behaviour of individuals
and organisations in the conduct of auditing. Code of Ethics for Professional Accountants includes:
★ Integrity
★ Objectivity
★ Professional Competence and Due Care
★ Confidentiality
★ Professional Behavior
Why Ethics are so Important in Auding?

Ethical conduct is essential when performing an audit in order to meet the defining characteristics of
the auditing profession which are trust, independence and integrity. The auditing standards, along with
the code of ethics, reflect ethical behaviour. Respecting the audit rules and standards is not enough,
while in fact legislation is a minimum to respect in the audit process. Often the rules need to be
interpreted and auditors find themselves is a need for reliance on good judgment and so, professional
awareness as well as respect of moral and ethical precepts are key in conducting an audit.

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Types of Audit:
★ 3 primary types of audit performed by CPAs are;
• Financial audit,
•Operational audit, and
•Compliance audit.
Financial Audit:
★ Financial audit refers to the audit of the entity’s financial statements by an independence auditor
where audit opinion will be provided on those financial statements after auditing works are done.
Operational audit:
★ Operational audit is the type of audit service that the review is mainly focused on the key
processes, procedures, system, as well as internal control which the main objective is to improve
productivity, as well as efficiency and effectiveness of the operation.
Compliance audit:
★ A compliance audit examines your business’s policies and procedures to see if they comply with
internal or external standards. Compliance audits can help determine whether or not your business
is compliant with paying workers’ compensation or shareholder distributions.
Other Types of Audit:
Forensic Audit
★ The forensic audit is normally performed by a forensic accountant who has the skill in both
accounting and investigation.Forensic Accounting is the type of engagement that undertaking the
financial investigation in response to a particular subject matter, where the findings of the
investigation normally are used as evidence in court or conflict resolution among the shareholders.
Environmental & Social Audit
★ Environmental & Social Audits involve the assessment of environmental and social footprints that
an organization leaves as a consequence of its economic activities.
Management Audit
★ A management audit is an independent appraisal activity for the review of the control of
managerial functions to ensure compliance with the organizational objectives, policies and
procedures and management methods and purposes.
Tax Audit
★ Tax audit is a type of audit that performing by the government’s tax department or tax authority.
★ A tax audit could be performed as the result of in-compliant found by a government agency or the
schedule set by the government tax department.
Performance Audit
★ Performance audits, the public version of operational audits, are conducted to determine if an
entity's operations, programs, or projects are functioning effectively and efficiently to achieve
goals established.

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International Accounting Standards:


# Name
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 4 Depreciation Accounting
IAS 5 Information to Be Disclosed in Financial Statements
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 9 Accounting for Research and Development Activities
IAS 12 Income Taxes
IAS 13 Presentation of Current Assets and Current Liabilities
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits (2011)
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 25 Accounting for Investments
IAS 28 Investments in Associates and Joint Ventures (2011)
IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions
IAS 33 Earnings Per Share
IAS 34 Interim Financial Reporting
IAS 35 Discontinuing Operations
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 41 Agriculture

International Financial Reporting Standards:


# Explanations
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 3 Business Combinations
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 7 Financial Instruments: Disclosures
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
IFRS 14 Regulatory Deferral Accounts
IFRS 16 Leases

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Business Digest 101 Accounting(Principles ofAccounting )

In preparing financial statements firms follow GAAP. GAAP is an acronym for Generally
Accepted Accounting Principles. GAAP can be defined as, “The common set of accounting
principles, standards and procedures that companies use to compile their financial statements. ” In
addition to that, Bangladeshi companies follow Bangladesh Financial Recordings Standards
(BFRS) adopted by ICAB (In support with International Accounting Standard Boards-IASB) in
preparing financial statements. Firms are also supposed to comply with provisions of Companies
Act 1994 (regarding format and additional information), Bangladesh Bank ordinance 1972,
Banking Company act 1991 and financial institution act 1993.
Business Entity assumption (Separate entity/Economic entity assumption):

★ Business entity concept states that the transactions related to a business must be recorded
separately from those of its owners and any other business.
★ For example, if the owner of a company lends loan to his company. It would be strictly recorded as
company’s liability and that has to be paid back to the own.

Going Concern Principle:


★ The going concerns principle states that businesses should be treated as if they will continue to
operate indefinitely or at least next 12 months (not close or be sold in the immediate future) in a
profitable way to accomplish their objectives.
★ Based on this principle:
Assets are classified as short and long term
Expenditure is classified as operating expense and capital expenditure
Companies record prepaid or accrue expense/revenue
Assets are reported at historical cost
Depreciation, amortization, depletions and bad debt are determined.

Periodicity assumption/ Time Period Assumption:


★ The periodicity assumption or time period assumption states that businesses can divide up their
activities into artificial time periods
★ This allows us to prepare financial statements on a monthly, quarterly and annual basis.

Objectivity Principle:
► The objectivity principle states that financial and accounting information needs to be independent
straightforward.
► This means that financial reporting like a company’s financial statements need to be based on
evidence and not opinions.
► The two concepts of relevance (have predictive value and feedback value) and reliability (can be
verified by evidence) encompass the objectivity principle.

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Materiality Concept:
★ The materiality concept, also called the materiality constraint, states that financial information is
material if it would change the opinion or view of a reasonable person.
Historical Cost Principle:
★ The historical cost principle states that businesses must record and account for most assets and
liabilities at their purchase or acquisition price.
★ Historical cost of an asset is completely reliable whereas market value is subject to estimate and opinion.
★ The record of PPE at acquisition cost (long term asset) follows historical cost principle
Matching Principle:
► The matching principle states that expenses should be recognized and recorded when those
expenses can be matched with the revenues those expenses helped to generate.
► This is the key concept behind charging depreciation, bad debt.
► COGS (instead of purchase) is deducted from sale based on this principle
► Adjusted journals are prepared due to this principle.
Revenue Recognition Principle (Realization Principle):
★ The revenue recognition principle states that revenue should be recognized and recorded when it is earned.
★ In other words, companies shouldn’t wait until revenue is actually collected
★ This is a key concept in the accrual basis of accounting because revenue can be recorded without
actually being received.
Conservatism Principle:
► The principle of conservatism states that you should always error on the most conservative side of
any transaction.
► The principle of conservatism also applies to estimates. Generally, a more conservative estimate
should always be used
► Current assets are recorded at LCM (Lower of Cost or Market Value)
► Account receivables are recorded at net realizable value.

Full Disclosure Principle:


The full disclosure principle is a concept that requires a business to report all necessary information about
their financial statements and other relevant information to any persons who are accustomed to reading this
information. The most common items that the companies must report include the following:
 Audited financial statements
 Employed accounting policies and changes in the accounting policies
 Non-monetary transactions
 Material losses
 Asset retirement obligations
 Details and reasons for goodwill impairment
 Existing litigation

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Business Digest 103 Accounting( Managerial Accounting )

★ See Formula: (F-87-100)


★ Managerial Accounting, a branch of accounting, is a set of practices and techniques aimed at
providing managers with financial information to help them make decisions and maintain effective
control over corporate resources. It is intended primarily to supply knowledge to decision makers
within an organization whereas cost accounting is the process of determining and analysing the
cost of a specific output or activity. Cost accounting information is used by decision makers both
inside and outside an organization. Managerial accounting goes beyond the role of cost accounting
by combining multiple management disciplines with financial information to facilitate internal
decision making. Financial accounting, in contrast, is concerned with providing information to
stockholders, government agencies, creditors, and others who are outside the organization whereas
managerial accounting deals with internal users and it does not require following GAAP or IFRS.
Sometimes Managerial accounting deals with future projections whereas financial accounting
deals with historical information.
Now we know:
 What is managerial accounting?
 What is cost accounting?
 What is financial accounting ?
 Managerial vs cost vs financial accounting .
What is cost?
★ Cost is the amount to be paid or given up in order to get something
★ Cost is the monetary value that a company has spent in order to produce a product.
★ Cost is defined as the cash amount (or the cash equivalent) given up for an asset.

Cost vs. Expense:


► The difference between cost and expense is that cost identifies an expenditure, while expense refers
to the consumption of the item acquired. (Purchase of land= cost, salary=expense)
► A cost might be an expense or it might be an asset where an expense is a cost that has expired or
was necessary in order to earn revenues
► Costs are related to business assets and they are shown on the balance sheet. Expenses are related
to business income, and they are shown on the business net income (profit and loss) statement.
Variable cost and Fixed cost:
► A variable cost is an expense that rises or falls in direct proportion to production volume
► Fixed cost is an expense or cost that does not change with an increase or decrease in the number of
goods or service.

Semi Variable/Semi Fixed/Mixed Costs:


★ Mixed costs are costs that contain both a variable element and a fixed element. Mixed costs,
therefore, change in total but not proportionately with changes in the activity level. For example,
the cost of your electricity bill which includes some fixed cost (such as the holding charge) and
some variable cost such as the number of unit you consumes .

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Relevant Range:
★ In most business situations, a straight-line relationship does not exist for variable costs throughout
the entire range of possible activity. The range over which a company expects to operate during a
year is called the relevant range of the activity. Within the relevant range a straight-line
relationship generally exists for both variable and fixed costs.
Overhead:
★ Overhead is those costs required to run a business, but which cannot be directly attributed to any
specific business activity, product or, service.
Direct cost vs Indirect cost:
★ Direct costs are traceable to the production of a specific good or service. Indirect costs may be
necessary to production, but they are not traceable to the act of production.
★ Direct costs are expenses that a company can easily connect to a specific "cost object, " which may be a
product, department or project. Indirect costs go beyond the expenses associated with creating a
particular product to include the price of maintaining the entire company. Examples of direct costs are
direct labour, direct materials, commissions, piece rate wages and manufacturing supplies. Examples of
indirect costs are production supervision salaries, quality control costs, insurance and depreciation.
Classification of direct cost:
1.Direct raw material cost
2.Direct labour cost
3.Other direct manufacturing overhead.
Explicit cost vs Implicit cost:
★ An implicit cost is a cost that has occurred but it is not initially shown or reported as a separate cost and
doesn’t require cash outflow. For example: expanding a factory onto a land already owned.
★ On the other hand, an explicit cost is one that has occurred and is clearly reported as a separate
cost and requires cash-out flow. For example: payments for wages and salaries, rent or, materials.
Opportunity Cost, Prime Cost, Sunk Cost, Marginal Cost, Cost Driver:
► Opportunity cost is the next most potential benefit that is given up when one alternative is
selected over another. Examples of Opportunity cost:
i) Someone gives up going to see a movie to study for a test in order to get a good grade. The
opportunity cost is the cost of the movie and the enjoyment of seeing it.
ii) When the government spends $15 billion on interest for the national debt, the opportunity
cost is the programs the money might have been spent on, like education or healthcare.
► Prime cost is the direct material cost plus direct labour cost. Example: Raw material cost, wages.
► Sunk Cost is a cost that has already been incurred and that cannot be changed by any decisions
made now or in the future. Example: A restaurateur is considering expanding his restaurant into a
chain. They spend $10,000 on market research, and using that research determine that opening a
new location in a specific area isn't likely to be profitable. They don't move forward with the
expansion, and that $10,000 is a sunk cost..
► Marginal cost is the additional cost incurred for the production of an additional unit of output.
Example: The total cost of producing one pen is $5 and the total cost of producing two pens is $9,
then the marginal cost of expanding output by one unit is $4 only (9 - 5 = 4).

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Business Digest 105 Accounting( Managerial Accounting )

Budget:
★ Budget is a detailed formal statement or plan of estimated income and expenses based on future
plans and objectives expressed in formal quantitative terms.
★ A budget is an estimation of revenue and expenses over a specified future period of time; it is
compiled and re-evaluated on a periodic basis.
Master budget:
★ The master budget is the aggregation of all lower-level budgets produced by a company's various
functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan.
Budgetary control:
★ Budgetary control is the use of budgets and budgeting reports throughout the period to coordinate,
evaluate and control day-to-day operations in accordance with the goals specified by the budget.
What is Zero-based budgeting?
★ Zero-based budgeting (ZBB) is an approach to making a budget from scratch. The budget is not
based on previous budgets. Instead, the budget starts at zero.
★ With zero-based budgeting, you need to justify every expense before adding it to the official budget. The goal of
zero-based budgeting is to reduce spending by looking at where costs can be cut.

FIFO vs LIFO vs HIFO vs NIFO:


★ FIFO stands for First in, First Out (FIFO). the inventory is assumed to be sold in the chronological
order in which it was purchased.
★ LIFO stands for Last In, First Out in which the most recently acquired items are assumed to have
been the first sold.
★ HIPO stands for Highest-in-First-Out, in which the inventory with the highest cost of purchase is
the first to be used or taken out of stock.
★ NIFO (Next In First Out) is a cost flow assumption, in which cost of an item is recorded at its
replacement value as opposed to its purchased cost. NIFO is not acceptable for financial
reporting since it calls for a future cost.

Which method is to choose/best method?


► In the time of rising inflation LIFO shows higher cost whereas FIFO shows lower cost and
conversely in the lowering period of inflation FIFO shows higher cost
► In most cases weighted average and FIFO demonstrates similar cost if there is almost no or little
ending inventory.
► From the standpoint of cost control FIFO is superior to weighted average method
► FIFO method also provides more up-to date cost data for decision making purpose.
► But, weighted average method is simpler to apply than FIFO method.

Conversion cost:
★ A conversion cost is the amount incurred during the transformation of raw materials inventory into
finished goods. Conversion costs exclude the cost of direct materials
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Stock-out costs:
√Delays in supply of sales
√Lost production
√Loss from profit sale
√Loss of future profit due to loss of goodwill.
Cost estimation methods:
 High-Low Method
 Least square regression method.
★ High-Low method is one of the several techniques used to split a mixed cost into its fixed and
variable components or similarly away of attempting to separate out fixed and variable costs given
a limited amount of data assuming linear relationship. Variable cost = (change in cost/change in
activity)
CVP (Cost-Volume-Profit) Analysis/Break-Even Analysis:
★ CVP/BE analysis is a technique to examines the interaction of a firm’s sales volume, selling price,
cost structure and profitability.
★ It is used to determine how changes in costs and volume affect a company's operating income and
net income.
Contribution Margin/ratio (CM ratio): (See Formula: F-87-100)
√ Contribution margin is defined as revenues minus variable expenses. In other words, the
contribution margin reveals how much of a company's revenues will be contributing (after
covering the variable expenses) to the company's fixed expenses and net income.
√ This is the amount which is left to cover the fixed expenses of an organization, or to add to the
profits of the organization.
√ Contribution margin ratio (CM ratio) is the ratio of contribution margin to net sales. It tells
what percentage of sales revenue is available to cover fixed cost and generate profit.
Break-Even Point (BEP) :
★ Break-even point can be defined as a point where total costs (expenses) and total sales (revenue)
are equal. Break-even point can be described as a point where there is no net profit or loss. The
firm just “breaks even”.
Financial Break-Even Point:
★ It denotes the level at which a firm’s EBIT is just sufficient to cover interest and preference
dividend.
Margin of Safety (MOS):
► Margin of safety (MOS) is the difference between actual sales and break-even sales. In other
words, all sales revenue above the break-even sale represents the margin of safety.
► It’s called the safety margin because it’s kind of like a buffer. This is the amount of sales that the
company or department can lose before it starts losing money.
Value Chain Analysis:
► A value chain is the full range of activities – including design, production, marketing and
distribution – businesses conduct to bring a product or service from conception to delivery.
► Value chain analysis leads to creating or strengthening business's competitive advantage.

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Business Digest 107 Accounting( Managerial Accounting )

Leverage; Operating Leverage, Financial Leverage, DOL, DFL, DTL:


★ Leverage is any technique that amplifies investor profits or losses. It's most commonly used to
describe the use of borrowed money to magnify profit potential.
 Operating Leverage:
★ In managerial accounting, operating leverage is a measure of how sensitive net operating income is
to a given percentage change in dollar sales. It acts as a multiplier.
★ In finance, Operating leverage measures a company’s fixed costs as a percentage of its total
costs. High operating leverage means higher portion of fixed cost as a percentage of total cost.
★ Operating leverage is the fraction of a company's costs that are fixed.
 Financial Leverage
► Financial leverage simply means the presence of debt in the capital structure of a firm.
► In other words, we can also call it the existence of fixed-charge bearing capital which may include
preference shares, bonds or debentures
► The use of borrowed money to increase production volume, and thus sales and earnings.
► It is measured as the ratio of total debt to total assets. The greater the amount of debt, the greater
the financial leverage.
 Working Capital Leverage:
★ A measure of the responsiveness of the return on investment (ROI) to changes in the level of
current assets (CA).
 Degree of Operating Leverage; (See Formula: F-77)
★ The degree of operating leverage (DOL) is a financial ratio that measures the sensitivity of a
company’s operating income to its sales. It is the multiple by which operating income of a business
changes in response to a given percentage change in sales. The DOL ratio shows the percentage
change in operating income in response to a 1% change in Sales!
 Degree of Financial Leverage (DFL) (See Formula: F-78)
★ The degree of financial leverage (DFL) measures the sensitivity of earnings per share (EPS) to the
fluctuation in the operating income. The DFL ratio shows the percentage change in EPS in
response to a 1% change in EBIT!
 Degree of Total Leverage (DTL):
★ Degree of total leverage is the ratio of percentage change in earnings per share to percentage
change in sales revenue. It is also called degree of combined leverage. It measures the impact on
EPS as a result of 1% change in sales. Degree of Total Leverage = DOL x DFL.
Balanced Scorecard:
★ The Balanced Scorecard is a strategic performance measurement model, a business framework
used for tracking and managing an organization’s strategy. It tells the firm whether or not it is
accomplishing its goals and whether it is on the right track to accomplish future goals. It answers
the questions (from four perspective);
√How do customers see us? (customer perspective)
√What must we excel at? (internal perspective)
√Can we continue to improve and create value? (innovation and learning perspective)
√How do we look to shareholders? (financial perspective)

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Six-sigma:
√ Six Sigma is a disciplined, statistical-based, data-driven approach and continuous improvement
methodology for eliminating defects in a product, process or service based on customer feedback,
fact-based data gathering analysis techniques. It is sometimes associated with the term zero defects
√ Six Sigma is a system of statistical tools and techniques focused on eliminating defects and reducing
process variability.
Just-in-Time or JIT:
★ Just-in-Time or JIT is an inventory management system wherein the material, or the products are
produced and acquired just before the material is needed in the manufacturing process in order to
reduce inventory storage and maintenance expense.
Lean thinking model:
★ Simply, lean means creating more value for customers with fewer resources. The core idea is to
maximize customer value while minimizing waste. Lean is about focus, removing waste and
increasing customer value.
★ It is a model of five step management approach that organizes resources around the floor of business
process and that pulls units through these processes in response to customer order.
Lean Production:
★ Lean Manufacturing is all about the optimizing processes and eliminating way, a systematic
manufacturing method used for eliminating waste within the manufacturing system. It takes into
account the waste generated from uneven workloads and overburden and then reduces them in order
to increase value and reduce costs.
Activity-Based Costing (ABC):
★ Activity-based costing (ABC) is a method for assigning costs to products (services projects, tasks, or
acquisitions) based on the activities that go into them or resources consumed by these activities.
★ It precisely allocates overhead to those items that actually use it (directly traceable).

Absorption Costing:
► Absorption costing means that all of the manufacturing costs are absorbed by the units produced.
► In other words, the cost of a finished unit in inventory will include direct materials, direct labour and
both variable and fixed manufacturing overhead.
► As a result, absorption costing is also referred to as full costing or the full absorption method.
Absorption costing vs Variable costing:
★ Under variable costing the fixed manufacturing overhead costs are not assigned to (not absorbed by)
the products manufactured but in absorption costing such fixed costs are absorbed. In absorption
costing a large proportion of a product's costs may not be directly traceable to the product which is
not true in variable costing. Manufacturing cost under absorption costing tends to be higher than
variable costing.

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Business Digest 112 Accounting (Lease Finance )

Lease is a contract between two parties where the owner of the asset gives the right to use the
asset to another party over an agreed period of the time for payment or series of payment. Lessor
is the owner of the asset and lessee is the user of the asset. There are mainly two types of lease:
Financial lease and operating lease. In finance lease (capital lease) substantially all the risk and
rewards of ownership are transferred to the lessee whereas in operating lease the risk and reward
keep with original owner (lessor). Sometimes all other lease other than finance lease are classified
as operating lease. A finance lease’s lease term can be subdivided into two parts: primary period
(non-cancellable time length) and secondary period (cancellable time period). The lessee can
terminate the contract in secondary period. In Bangladesh many firms such as IDLC, Lanka
Bangla Finance, BIFFL are engaged in lease business.
Now we know:
 What is lease/lessee/lessor?
 What is finance lease and operating lease (difference)?
 When lease contract can be terminated?
Situations that would normally lead to a lease being classified as a finance lease:

► Terms are such that ownership of the asset transfers to the lessee by the end of the lease term.
► The lessee has the option to purchase the asset at a price which is expected to be sufficiently
lower than fair value at the date of inception of option.
► The lease term is for the major part of the economic life of the asset.
► The present value of the minimum lease payments amounts to at least substantially all of the
fair value of the leased asset.
► The lease assets are of a specialised nature such that only the lessee can use them without
major modifications being made.
Sale and Leaseback:

√ In sale and leaseback arrangement, a firm sells an asset to another party who in turn leases it
back to the firm.
√ First, the owner sells it to another party and subsequently leases it back from the buyer.

√ Thus, original owner receives the sales price in cash, on the one hand, and economic use of the
asset sold, on the other.
Leveraged Leasing:

★ A lease arrangement in which the lessor provides an equity portion (say 25%) of the leased
asset’s cost and the third-party lenders provide the balance of the financing.

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Business Digest 113 Accounting (Lease Finance )

Inception vs Commencement:
★ Inception is the date when the lease terms are agreed (classified and determined the terms)
whereas commencement is the date when the lessee can use the leased asset.
Hire purchase:
★ Hire Purchase is a kind of instalment purchase where the businessman (hirer) agrees to pay the
cost of the equipment in different instalments over a period of time. This instalment covers the
principal amount and the interest cost towards the purchase of an asset for the period the asset is
utilized.
Lease vs Hire purchase:
Lease Hire purchase
In a lease, ownership lies with the The hirer becomes the owner of the asset/equipment
lessor. immediately after the last instalment is paid.
Down payment is not required Down payment is required

Periodic interest payment required Instalment include principle and interest

Reporting Finance lease in the financial statement of lessee and lessor :

Income statement Balance sheet


Lessor ■ Report Interest revenue on lease ■ Remove asset from the Balance
receivable sheet
■ Recognise lease receivable as
asset
Lessee ■ Report Interest expense for leased ■ capitalise the finance leased
liability asset
■ Report depreciation against leased ■ Set up a lease liability for the
asset value of the asset recognised

■ Depreciation----------------Dr. ■ Non-current assets ----Dr.


Accumulated Dep---------------Cr Finance lease liability------Cr.

■ Finance lease liability-----Dr. (lower of the fair value of the asset


Interest expense------------Dr. or the present value of the
minimum lease payments)
Cash-------------------Cr.
(Principle and interest)

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Business Digest 114 Accounting( Depreciation)

Depreciation is the systematic allocation of the cost of a long-term tangible asset to expense over its
useful life in a rational and systematic way. To determine the depreciation, one must know (3 Factors):
depreciable base (acquisition cost minus scrap vale), estimated useful life, method of cost
apportionment or rate of depreciation. Depreciation (cost allocation) is charged to match costs with
revenues according to the matching principle. The term “depletion” is used to describe the reduction
in the value of natural resources (timber, oil, coal) over a period of time whereas amortization is the
allocation of cost of an intangible asset such as patents or copyrights over its estimated useful life. On
the other hand, as a result of significant fall in the market value of long-lived assets companies prefer
to write-off some of their long-lived assets and these write-offs (reduction) are referred to as
impairments. Impairment of Assets seeks to ensure that an entity's assets are not carried at more
than their recoverable amount.
Now we know:
 What is depreciation? Formula for every method is prescribed
 Factors need to know to calculate depreciation at the end of the book.
 Depreciation vs depletion vs amortisation vs
impairment .
Accumulated depreciation:
★ Accumulated depreciation is the total amount of a plant asset's cost that has been allocated to
depreciation expense since the asset was put into service.
What are the common methods of depreciation? (See Formula: F-101-104)
1. Straight Line Method (same rate or amount are always charged against the assets)
2. Activity method (calculated on the basis of asset's activity such as the number of units produced or
the number of hours the asset is used during the period)
3. Declining balance method (depreciation is calculated on book value and size of depreciation falls
over time and it does not deduct salvage value)
4. Double declining method
5. Sum of the years’ digit method
6. Special depreciation method (composite or hybrid or combination).
Problems with straight line method:
★ Economic usefulness is considered same for every year
★ The repair and maintenance expense is not essentially same for each period.
Salvage Value (scrap/residual value):
★ An estimate of an asset’s value at the end of its useful life. Salvage value is an estimated amount
that is expected to be received at the end of a plant asset's useful life.
Why most firms use declining balance method?
√ It charges high depreciation in the initial periods and low at later periods thereby the asset’s high
productivity and high use in the beginning is reflected.
√ It does best suit with expense recognition principle
√ It helps to get tax benefit as higher depreciation will result in lower income which will result in
lower tax.
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Which method the firm should chose/which one is best?


√ The method that matches revenues with expense should be used
√ If revenue generated by the asset is constant over useful life, use straight line.
√ If revenue generated is higher at the beginning of asset’s life, use declining balance method
√ Companies may develop their own customised method such as real estate firm prefer increasing
charge method (lower depreciation at the beginning and higher at the later periods).
Depreciable Value:
★ The total amount of acquisition cost of an asset that will be expensed (depreciated) over the useful
life of the asset, calculated as purchase cost plus instalment and transportation cost less salvage
value.
Cost model vs Revaluation model:
★ In cost model, PPE should be valued at cost less accumulated depreciation whereas in revaluation
model PPE can be carried at a revalued amount less any subsequent accumulated depreciation.
How to measure impairment expense?
 Review events that might cause drastically fall in the market value (possible impairment)
 If the review demonstrates impairment, apply recoverability test
 If the sum of expected future net cash flow from the asset is higher than carrying amount then no
impairment occurred
 If otherwise happens, it means impairment has occurred and thereby the impairment expense is the
difference between carrying amount of asset and sum of present value of expected future net cash
flows.
 Record impairment (debit) as “loss on impairment” in income statement as expense against
accumulated depreciation (credit).
Depreciation Tax Shield:
★ Depreciation tax shield is the amount of money companies can save on income tax payments by
using depreciation deductions. Higher savings are attained when the tax shield is high.
(Depreciation* tax rate= depreciation tax shield). Companies usually prefer declining method to
get tax benefit.
Annuity method of depreciation:
► This method of depreciation considers the cost of the asset and the amount of interest lost on the
capital expenditure.
► Thus, it is based on the assumption that if the amount that is spent on the purchase of the asset was
invested elsewhere, it would have earned a certain amount of interest.
► Therefore, not only the cost of the asset should be allocated but also the amount of interest on it
should be allocated over the useful life of the asset.
How depreciation of intangible assets and land should be recoded?
★ Intangible assets with indefinite lives should not be amortised rather they should be reviewed
periodically to determine whether there is any fall in value. If fall is found its impairment loss
should be recognised.

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Business Digest 116 Accounting (Bad debt and Allowance)

★In modern Business world most of the of the transactions are credit transactions. For different
reasons sometimes collecting all the amounts from receivables becomes impossible. The
amount which becomes uncollectible is called bad debt. And allowance for that bad debt is
called allowance for bad debt. Bad debt is an expense account where as bad debt allowance is a
contra asset account.
► Bad debt (Charged according to matching principle and determined according to going
concern principle)
► Bad debts usually refers to part of the accounts receivable that will not be collected.
► The portion of accounts receivable that a company believes is uncollectible is called “bad debt
expense.
Methods of recording bad debt:
★ Direct Write-Off Method of recording Bad Debt

★ Allowance Method recording Bad Debt

Direct Method Allowance method

★Records bad debt expense when the amount ★ Firms estimate the amount of receivables
become uncollectible. that may become uncollectible and create a
provision for bad debt. After that, firms
write off accounts receivables when it
becomes uncollectible.

★ Journal to record bad debt expense: ★Journal to record provision for bad debt:
Bad Debt Expense-------Dr Bad debt expense-----Dr
Accounts Receivable ------------Cr Bad debt allowance-----Cr

★Journal to record bad debt expense:


Bad debt allowance—Dr.
Accounts Receivable ----------
Cr.
★This method is not accepted by GAAP and ★This method is accepted by GAAP and Other
Other standards. May be followed according standards. This methods comply with
to materiality constraints. matching & revenue recognition principles.

How to estimate bad debt expense:


★ Percentage of Sales (A predetermined experience-based percentage of net sale- (focuses on the
matching principles).
★ Percentage of Receivables (percentages are determined by past experience and past data) (focuses
on the conservatism principles).

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Business Digest 117 Accounting (Investment, Financial investment and Reporting)

Investment:

► An investment is an asset or item that is purchased with the hope that it will generate income or
appreciate in the future.
► Investment can be defined allocating money to assets with the hope that in the future it would provide
some benefit such as generation of income.
Financial asset:

► Financial assets refer to assets that arise from contractual agreements on future cash flows or from
owning equity instruments of another entity.
► A contractual agreement to receive cash or another financial asset from another entity.
► Financial assets, defined is a contractual security that possesses a claim upon a company or person's real assets
Types of financial asset:

► Money, shares, bonds, checks, loans, accounts receivable and marketable securities rather than a
physical asset such as property or machinery.
Classification of investment in equity securities:

★ Investment in Financial Asset: less than 20% equity holdings (no significant influence)—Recorded
mostly at fair market value
★ Investment in Associate: 20% to 50% equity holdings (significant influence but not significant
control); To record, equity method is used
★ Investment in Subsidiaries: more than 50% equity holdings (significant control); To record,
consolidated financial statements are prepared.
Recording of investment in financial asset:

Types Income statement Balance sheet


√ Held to Maturity (HTM) √ Change in value is √ Initially Recognised at
(must have a positive intent and ignored unless cost plus transaction cost
ability to hold till maturity) impairment occurred
√ Held for Trading (HTT) √ Change in value is √ -Reported at fair value
(must have a positive intent for recorded as profit/loss (no transaction cost)
trading) in income statement) √ Revalued at every period
as unrealized gain or
loss
√ Available for sale √ Change in value is √ Initially reported at fair
(Not held for the purpose of recognised in equity as value plus transaction cost
trading but ready to be sold) other comprehensive √ revaluated and reorganised
income at every reporting date

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Subsidiary :
★ A subsidiary is company controlled by another company, often called the parent company,
which owns at least 50% of its voting stock.

Minority Interest:

★ Minority interest represents a percentage of ownership in a company by less than 50% of the
outstanding shares with a voting right
★ Minority interest is reported in the consolidated financial statements of the parent company.

Equity Method Cost Method


► This is relevant in recording investment ► Investment is recorded on a balance sheet as
in associates (20%-50% voting right) a non-current asset at the historical purchase
► Initially investment is recorded at cost price, and is not modified unless investments
are sold, or additional financial investments
in balance sheet
are purchased. Revenue from such
► In subsequent periods, carrying amount investment is recorded only when cash
of investment is adjusted to recognise dividends are received.
investee’s earnings proportionately
► Earnings or losses are reported in
income statement

Different Method s of Recording investment in Accounting :

Initial Investment Equity Income Cash Dividend

Investment in Associate-------Dr Investment in Associate-----Dr Cash-------------Dr


Cash ----Cr Equity income in Associate ----Cr Investment in Associate----Cr

Equity method:

Investments Criteria Treatment


Subsidiary Control (>50%) Consolidation

Associate Significant influence (20%+) Equity method

Investment Asset held for sale Usually at cost

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Business Digest 119 Accounting (FAQ)

1. What are the skills needed to work as an accountant?


★ Skills needed to work as an accountant are:
Excellent at math
Strong analytical skills
Structured work style
Aptitude for technology.
2. Mention some accounting software
★ The best accounting software are:
•FreshBooks
•NetSuite ERP
•Tipalti
•FreeAgent
•Zoho Books
•Sage Business Cloud Accounting
•Sage 50cloud
•Tally
3.What is the abbreviation for the accounting terms debit and credit?
 The debit abbreviation is "dr" and credit abbreviation is "cr".
4. How many types of business transactions are there in accounting?
★ There are two types of transactions in accounting, i.e., revenue and capital.

5. What is the key difference between inactive and dormant accounts?


 Both are different terms in accounting. Inactive accounts mean that accounts have been closed
and will not be used in the future as well. Dormant accounts are those that are not functional
today but may be used in the future.
6.Tell me the golden rules of accounting, just mention the statements.
 There are three golden rules of accounting –
1. Debit the receiver, credit the giver
2. Debit what comes in, credit what goes out
3. Debit all expenses and losses, credit all incomes and gains
7.What is a CPA?
★ CPA stands for Certified Public Accountant. To become a CPA, one should have to do many
other qualifications as well. It is a qualification with a 150-hour requirement. It means that one
should complete 150 credit hours at an accredited university.
7(A).What is the primary difference between public and private accounting?
 Public accounting is a type of accounting that is done by one company for another company.
Private accounting is done for your own company.

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9.Name different branches of accounting


★ There are three branches of accounting:
1. Financial accounting
2. Management accounting
3. Cost accounting
10.What is the basic difference between accounting and auditing?
★ Accounting is all about recording daily business activities. Auditing is the checking whether all
these events have been noted down correctly or not
11.Define balancing in accounting
★ Balancing means to equate both sides of the account, i.e., the debit and credit sides of an
account must be equal/balanced.
12.Define balancing in accounting
★ Balancing means to equate both sides of the account, i.e., the debit and credit sides of an
account must be equal/balanced.
13.Define overhead in terms of accounting
★ It is the indirect expenditure of a company such as salaries, rent dues, etc.
14.List out the stages of double entry system
★ The stages of the double-entry system are:
1.Recording of transactions in the journal
2.Posting of a journal entry into the respective ledger accounts and then preparing a trial balance
3.Preparing final accounts and closing of books of accounts
15.What are the disadvantages of a double-entry system?
★ The disadvantages of the double-entry system are:
a.If there are any compensatory errors, it is difficult to find out by this system
b.This system needs more clerical labor.
c.It is difficult to find errors if the errors are in the transactions recorded in the books.
d.The double-entry system is not preferable to disclose all the information of a transaction, which is
not properly recorded in the journal.
16.Explain deferred asset with example
★ A deferred asset refers to a deferred debit or a deferred charge. An example of a deferred
charge is bond issue costs. These costs involve all of the fees or charges that an organization
incurs to register and issue bonds. These fees are paid in a near time when the bonds are issued,
but it will not be expensed at that time.
17.Deferred taxation is a part of which equity?
★ Deferred taxation is a part of the owner's equity.

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18. Mention the types of ledgers


★ There are three types of ledger
a. General ledger
b. Debtors ledger
c. Creditors ledger
19. Define creative accounting
★ Creative accounting is a practice to create a picture that is not technically correct from the
perspective of the intended user.
20. What Is accounting normalization?
★ Accounting normalization is a process of removing items from the statement of income or
balance sheet. Once the normalization process is done, the result shows the future earning
capacity of the buyer.
21. What is a normative theory?
★ The normative theory is a theory that prescribes how the accounting process should be done.

22. Define cost sheet


★ The cost sheet is a cost statement of product for a specific period of time. It contains direct and
indirect expenses involved in producing a product.
23. What is an invoice?
★ Invoice is a statement that contains:
a. Invoice Number
b. Invoice date
c. Name and address of the person
d. Name and address of the buyer
e. Description of services or goods involved
f. Applicable rates and taxes with percentages
g. Rate of the service or goods.
h. Quantity of the services and goods.
i. Price of the services and goods.
j. The invoice should be signed by the person making it.
k. Conditions of making the payment.
24. What are some of the ways to estimate bad debts?
★ Some of the popular ways of estimating bad debts are – the percentage of outstanding
accounts, ageing analysis and percentage of credit sales.
-----------------------------------------------------------------------------------------------------------------

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Business Digest

Chapter Contents Page


No.
Bank,bank account,Fiduciary relationship,the types of banks,the deposit sources of
Basics of Banking banks the types of bank accounts/types of bank deposits,FDR,the types of bank 121-125
loans,Types of Loans,Seven Ways to Make Loans,loan agreement,Evaluating a Loan
Agreement,‘Pricing commercial loan’’,key areas to formulate pricing
policy,Components of Pricing Decision,collateral,Hypothecation,the characteristics of
Good Collateral,Types of collateral,Co-signer,The Three Lines of Défense
Model,Nominal Interest Rate vs Real Interest Rate
Types of credit instruments,negotiable & non-negotiable instruments,the parties of a 126-128
Banking Cheque,the types of cheque,the causes of dishonor of a cheque by a bank,stale
Instruments Cheque,Bank Draft,demand Draft,the differences between Cheque and Demand
draft,the difference between Cheque and Money (Banknote),differences between
Payment Order and Demand Draft
Banking Sector in Banking Sector in Bangladesh,Non-bank Financial Institutions (FIs, Works of 129-130
Bangladesh NBFI, Differences between banks and NBFI
Bangladesh Bank,Important information about Bangladesh Bank,the Vision of 131-135
Bangladesh Bank Bangladesh,the Mission of Bangladesh Bank,the functions of Bangladesh Bank,off-
site Supervision of BB,how Bangladesh Bank inject money into the
economy,differences between CRR and SLR,the sources of income of Bangladesh
Bank,lender of the last Resort,monetary authority in Bangladesh,Some requirements
for banks in Bangladesh,discount window

The mechanism to credit risk management,Qualitative approaches (5C),Some other 136-144


Risk Management qualitative approaches,Quantitative risk management models,Asset-Liability
in Banking
Management (ALM),Liquidity Management,liquidity Gap,Liquidity Risk,Basle
Agreement/Accord,Basel I,Problems of Basel I,Basel II ,three pillars of Basel III,The
parts of the capital of the banks,Capital Adequacy Ratio (CAR,Minimum Capital
Requirement (MCR),Requirements to maintain General Provision,The highest credit
approval for a single borrower,Stress testing The techniques for Stress Testing,Interest
rate risk,On Balance sheet adjustments,Off balance sheet adjustment,Other prominent
methods

Duration,The alternative consequences of duration gap,Alternative consequences of 145-146


Duration Analysis gap,Aggressive vs defensive management,Limitations of Duration,Value at risk
model,Immunization,gap analysis,Dollar Gap,maturity Gap,Incremental and
cumulative gap,Measuring risk to net interest income (NII),credit
rating,CAMELS,Monte Carlo simulation,Credit Scoring,credit scoring models,Key
components in credit scoring model.
Sustainability,Green Banking,Green Finance,Online Banking and green 147-153
New trends in banking,Corporate Social Responsibility,Corporate Governance, E-Governance, Core
Banking Banking Solution (CBS),Mobile banking, Agent banking, School banking, Merchant
Bank, Offshore banking,Visa Card,Mastercard, Smart Card, ATM,VIP banking, Fast
track,Nexus Gateway-e-payment,POS Point-of-Sale,Transfer Terminals,POS or point
of sale,Automated Clearing House (ACH),Biometric Account,Standby credit
agreement,Liquidity Indicators,NOW accounts,STD Account,Plastic
Money,Consumer Card,Debit vs credit card,Interest rate cap,Interest rate
floor,Functions of CEO,CEO vs Chairman,Branch Banking,Shell Branches,Unit
Banking, Adverse Selection, Moral Hazard, asymmetric Information, Seigniorage,
Mezzanine Financing,KYC (Know Your Customers),Black Monday,List of Some
mobile banking service providers in Bangladesh,
Common performance measurements tools,Loans and Advances,cash and Cash 154-156
Financial Equivalents,‘Investment in Securities’,The liabilities & capital (Sources of Funds)
Statements of banks,checkable deposit,fictitious asset,The contingent liabilities of a bank,bank's
largest assets and liabilities,Role of Asset Liquidity,Funds-Flow statement,SDR,Loan
Write-off,Non-Performing Loan (NPL),Non-Performing Assets (NPA)
Some Digital Digital paymnt system, Banking scam and regulatory changes 157-160
Paymnt Systm

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Business Digest 121 Banking (Basics of Banking )

What do you understand by bank?


★ Bank is a financial institution which deals with others’ money.
★ A bank is a depository financial institution which collects fund from the savers in small unit in
exchange of a low interest and lends money to the deficit units at a higher interest rate. The
difference between the interest rate is the motive of the bank. Nowadays bank provides a wider
range of services in addition to collecting deposits and providing loans.
What is a bank account?
★ A bank account is a financial account maintained by a bank for a customer for the purpose of
transactions between them.
Fiduciary relationship:
★ An agreement between a bank and its customer in which the bank becomes responsible for
managing the customer’s funds or other property.
What are the types of banks?
㊣ On the basis of enlistment:
Þ Scheduled Banks: The banks that remain in the list of banks maintained under the
Bangladesh Bank Order, 1972.
Þ Non-Scheduled Banks: The banks which are established for special and definite objective
and operate under any act but are not scheduled Banks. These banks cannot perform all
functions as scheduled banks can do.
㊣ On the basis of function:
Þ Commercial Banks: Commercial banks are the banks that accept money in the form of
deposits from the public and give loans and advances to its customers by charging interest.
The primary motive of commercial banking is making money, i; e:being profitable.
Þ Co-operative Banks: Co-operative banks are the banks whose main objective is to provide
financial assistance to economically weaker sections of the society. Cooperatives banks are
owned by members (usually their customers) rather than shareholders. As a result, they
prioritize maximizing customer value over profits.
Þ Central Bank: A central bank is a monetary institution, which fully controls the production,
circulation, and the supply of money in the market, seeking to regulate the member banks and
stabilize a nation’s economy and national currency. Central bank is considered as the apex
institution of the country’s money market.
Þ Foreign Exchange Banks: Foreign Exchange Banks are the banks which provide finance for
foreign trade.
Þ Exchange Banks: Exchange Banks are the banks which operate by financing the imports and
exports of a country.
What are the deposit sources of banks?
1.Core deposits: Deposits of regular bank customers, including business firms, government units
and households. These provide a stable long-term source of funds.
2.Purchase deposits: Acquired from financial market by offering competitive interest rates. These
serve as a liquidity reserve that may be tapped when needed.

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What are the types of bank accounts/types of bank deposits?


★ 1. Savings accounts: A savings account is an interest-bearing deposit account held at a bank or
other financial institution that provides a modest interest rate.
■Allowed to withdraw money from the account as and when required.
■A medium rate of interest is paid to the account holder
■No restriction on the number and amount of deposits
■Withdrawals are subjected to certain restrictions.
■Maintain a minimum amount to keep it functioning .
★ 2. Checking/Current accounts: Current Account is primarily meant for businessmen, firms,
companies, and Public enterprises etc. that have numerous daily banking transactions. Current
Accounts are meant neither for the purpose of earning interest nor for the purpose of savings but
only for convenience of the business, hence are they non-interest-bearing accounts.
■Most liquid deposits
■No limits for number of transactions or the amount of transactions in a day.
■No interest is paid on amount held in the account,
■Bank-charge rate is highest
■Does not have any fixed maturity as these are on continuous basis accounts.
★ 3. Fixed deposit receipt (FDR): Fixed Deposit Receipt-FDR (also known as certificate of
deposit) is a type of account that offers the customers the opportunity to invest a fixed amount of
money for fixed period at a fixed rate of interest.
■ Particular sum of money is deposited in a bank for specific period of time.
■ It’s one-time deposit and one time take away (withdraw) account. The money deposited in
this account cannot be withdrawn before the expiry of period.
■ However, in case of need, the depositor can ask for closing the fixed deposit prematurely
by paying a penalty.
■ A high interest rate is paid on fixed deposits.
What are the types of bank loans?
► Open-Ended Loans: Open-ended loans are loans that you can borrow over and over. Credit cards
and lines of credit are the most common types of open-ended loans. Both of these loans have a
credit limit which is the maximum amount you can borrow at one time.
► Closed-Ended Loans: Closed-ended loans are one-time loans that cannot be borrowed again once
they’ve been repaid. If you want more credit, you have to apply for a new loan.
► Secured Loans: A secured loan is a loan in which the borrower pledges some asset (e. g. a car or
house) as collateral. Example: mortgage loan.
► Unsecured Loans: Unsecured loans don’t require an asset as collateral. These loans may be more
difficult to get and have higher interest rates. Unsecured loans rely solely on borrower’s credit
history and income to qualify you for the loan. Example:
√Credit card debt
√Personal loans
√Bank overdrafts
√Credit facilities or lines of credit
√Corporate bonds (may be secured or unsecured)
√Peer-to-peer lending.
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Types of loans:
► Line of Credit: An agreement between a customer and the bank that the bank will entertain
requests from that customer for a loan up to a predetermined amount.
► Revolving Credit: Similar to line of credit. There are two differences between line of credit
and revolving credit. First one, in revolving credit there is maximum and minimum amount of
bracket that may be borrowed. Second one, revolving credits usually have a maturity of two
years or more while lines of credit are usually for shorter period.
► Term Loan: A single loan for a stated period of time or a series of loans on specific dates.
► Bridge Loan: A short-term financing that is made in anticipation of receiving longer-term
financing on which an agreement has been reached.
► Asset based lending: A commercial lending where the assets of a company are used to secure
the company’s obligation to the lender.
► Leasing
Seven ways to make loans:
1. Banks Solicit Loans: Banks actively solicit loans in person, by mail, and on the internet.
2. Buying Loans: Banks buy parts of loans, called participations, from other banks.
3. Commitments: Agreement between a bank and a firm to lend funds under terms that are
agreed upon in writing.
4. Customer request loan
5. Loan brokers: Individuals or firms who act as agents or brokers between the borrower and
the lender.
6. Overdrafts: An overdraft occurs when a customer writes a check on uncollected funds or
when there are insufficient funds in the account to cover the withdrawal.
7. Refinancing.
What is a loan agreement?
★ When the bank decides to grant a loan, all of the terms of the loan are put into a contract called a
loan agreement. It includes:
■The type of credit facility
■The amount to be borrowed
■The term of the loan
■The method and timing of repayment
■Interest rates and fees to be paid by the borrower to the banker
■Collateral if required
■Other covenants.
What does ‘Pricing commercial loan’’ mean?
★ It means determining what interest rate to charge to the borrower and how to calculate the rate.
What is Collateral?
★ Collateral refers to an asset pledged against the performance of an obligation.

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What are the characteristics of good collateral?


1.Durability
2.Identification
3.Marketability
4.Stability of value
5.Standardization.
Evaluating a Loan Agreement:
Lending process involves the 6C’s of credit:

1.Character 4.Collateral
2.Capacity 5.Conditions
3.Capital 6.Compliance

Formulating Pricing Policy:


►Key areas to formulate pricing policy are-
►Service fees versus minimum balance requirements
►Deposits costs and volumes and their relationship to profits
►Credit availability and compensating balances
►Customer relationship pricing
►Promotional; pricing of new products
►Other marketing elements such as product differentiation.
Components of Pricing Decision:
★ Factors considered by banks in pricing consumer deposit products-
√Wholesale cost of funds
√Pricing strategy of components
√Interest elasticity (or responsiveness) of consumer demand
√Past deposit flows for various kinds of consumer demand
√Maturity structure of deposits.
What is Hypothecation?
★ It is a contract between the lender and borrower where the borrower agrees to take possession of an
asset in case of default. The possession of an asset remains with the borrower itself.
Nominal Interest Rate vs Real Interest Rate:
★ The real interest rate is the nominal rate of interest minus inflation. In the case of a loan, it is this real
interest that the lender receives as income. If the lender is receiving 8% from a loan and inflation is
8%, then the real rate of interest is zero because nominal interest and inflation are equal. A lender
would have no net benefit from such a loan because inflation fully diminishes the value of the loan's
profit. The relationship between real and nominal interest rates can be described in the equation:
(1+r) (1+i) = (1+R).

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Floating rate of interest:


 A floating interest rate, also known as a variable or adjustable rate, is the rate that changes based
on the change of some other external variable.
 It is used to adjust inflation so that borrower or lender is not harmed.
Who is a Co-signer?
★ A third party to a loan agreement who agrees to pay if a borrower cannot repay his or her loan.
Types of collateral:
√Accounts receivable
√Marketable Securities
√Inventory
√Real property and equipment
√Guarantees
The Three Lines of Defense Model:
★ The three lines of defence model enhances the understanding of risk management and control by
clarifying roles and duties. The model provides guidance to implement a balanced structure and the
assigns roles and responsibilities to various parties to increase the effective management of risk and
control.
1.The first line of defence – functions that own and manage risk
2.The second line of defence – functions that oversee or specialise in risk management, compliance
3.The third line of defence – functions that provide independent assurance, above all internal audit.

Difference Between Merchant Bank and Investment Bank:

Topic Merchant Bank Investment Bank


Definition Merchant Bank is a bank that deals Investment Banks are the middle-
mostly in international finance and ful- man (underwriter) between the
fills capital requirements of the compa- issuer of securities and the in-
nies in the form of share ownership, ra- vesting public, and also provides
ther than granting loans. various financial services to the
clients.
Main work International financing activities Underwriting and issuance of
securities
Trade financing Does Doesn’t
Deals with Small companies Large companies

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Business Digest 126 Banking ( Banking Instruments )

What are the types of credit instruments?


★ There are 2 types of credit instruments: negotiable & non-negotiable instruments.

A) Negotiable Instrument: Negotiable instrument is an unconditional promise to pay a specific


amount of money (either on demand or at a predetermined time) in which the name of the payer is
clearly mentioned and it is freely transferable. Examples:
1.Cheque,
2.Demand draft,
3.Bill of exchange,
4.Promissory note or acceptance.
B) Non-negotiable Instrument: Non-negotiable instrument is a conditional promise to pay a specific
amount of money which is not transferable. Examples:
1.Postal order
2.Payment order,
3.Money order,
4.Share certificate,
What are the instruments of banks (negotiable)?

★ Cheque: An order to a bank to pay a stated sum from the drawer's account, written on a specially
printed form.

★ Bank Draft: Bank draft is a type of check issued by one branch of a bank on another branch of the
same bank containing an order to a certain sum on demand to the person named on the draft. It is
issued to transfer funds to a different location. Typically, banks will review the bank draft
requester's account to see if sufficient funds are available for the check to clear. Once it has been
confirmed that sufficient funds are available, the bank effectively sets aside the funds from the
person's account to be given out when the bank draft is used. One must have account and sufficient
funds in the account for a bank draft.

★ Bill of Exchange: A bill of exchange is a written order used primarily in international trade that
binds one party to pay a fixed sum of money to another party on demand or at a predetermined
date.

★ Promissory Note: A signed document containing a written promise to pay a stated sum to a
specified person or the bearer at a specified date or on demand.
What is Demand Draft?
★ It is an instrument used for effecting transfer of money. It is a negotiable instrument. Cheque and
Demand-Draft both are used for transfer of money. We can 100% trust a DD.

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What are the differences between cheque and demand draft?

Factors Cheque Demand Draft


Concept Cheque is a negotiable Demand draft is a pre-paid negotiable
instrument which instrument used to transfer money from
contains an order to the one branch at one city to another branch
bank, signed by the in another city within the same bank so
customer, to pay a that the bank can make payment to its
certain sum of money to specific customer.
a specified person.
Drawer Different persons. Bank itself. (Later the bank will make
and payee payment to the person for whom it was
drawn)
Dishonou Can bounce due to No question of bouncing as it is a pre-
r insufficient balance. paid instrument.
Charge No Yes
Signature Requires signature. Does not require.

What is the difference between cheque and money (Banknote)?


★ Cheque is not a legal tender. It is not obligatory to all to receive it and it is handed over only
for once. But money or banknote is the legal tender. It is legally obligatory to all to receive it.
Banknotes are handed over many times.
What are the key differences between Payment Order and Demand Draft?

Factors Payment Order (Banker’s Demand Draft


cheque)
Definition Banker's Cheque or Payment Demand draft is a pre-paid
Order is a cheque issued for negotiable instrument used to
making the payments within the transfer money from one branch at
same city. one city to another branch in
another city within the same bank
so that the bank can make payment
to its specific customer.

Feature Not a negotiable instrument Negotiable Instrument

Clearance It can be cleared in any branch It can be cleared at any branch of


of the same city. the same bank.

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What are the parties of a cheque?


1.Drawer: Who makes the cheque.
2.Drawee: To whom the cheque is drawn.
3.Payee: Whom the amount is payable.
What are the types of cheque?
Þ Open Cheque: The cheque that is paid across the counter of the bank. Open cheque may be
bearer or order.
Þ Bearer Cheque: If the drawer orders the bank to pay money to person who presents the
cheque for the payment is called a bearer cheque.
Þ Order Cheque An order cheque is always payable only to a certain person. The name of
payee is written on the cheque. Bank pays the check after proper identification of the payee.
Þ Crossed Cheque A cheque is called crossed cheque when two parallel lines are drawn
across the top left corner of the cheque and the words ―A/C Payee are written between the
lines. A cheque is crossed for more security. It can only be credited in the account of payee.
Crossing can be in two ways:
1. General crossing- two parallel lines on the top left corner of the cheque

2. Special crossing- the name of bank is written between two transverse parallel lines.
What are the causes of dishonour of a cheque by a bank?
√If bank balance is less than the amount of cheque
√If the amount written on cheque in words and figure is different
√If the cheque is reported as lost/stolen.
√If the drawee becomes unsound mind and the notice is given to the bank.
√If court order the bank to stop payment of any account
√If the person is declared insolvent by the court
√If the cheque is torn bank refuse payment
√If drawer does not mention the date.
√If the cheque becomes outdated after six months of its date of issue.
√If the signature of drawer is not matched with specimen signature bank refuse its payment
What is stale cheque?
★ It is a cheque presented at the paying bank after a certain period (typically 6 months) of its payment
date. A bank may refuse to honour it unless its drawer reconfirms it payment either by inserting a
new payment date or by issuing a new check.

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Business Digest 129 Banking ( Banking Sector in Bangladesh)

★ After the independence, banking industry in Bangladesh started its journey which has now 6
Nationalized commercial banks, 3 State-owned Specialized banks and 9 Foreign Banks. In the
1980's banking industry achieved significant expansion with the entrance of private banks. Now,
banks in Bangladesh are primarily of two types: Scheduled and non-scheduled.
★ There are 59 scheduled banks in Bangladesh who operate under full control and supervision of
Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. Scheduled Banks are classified into following types:
Þ State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or majorly
owned by the Government of Bangladesh. These are Sonali bank ltd, Janata Bank Ltd,
Agrani Bank Ltd, Rupali Bank Ltd, Basic Bank Ltd and Bangladesh Development Bank
Ltd.
Þ Specialized Banks (SDBs): 3 specialized banks are now operating which were established
for specific objectives like agricultural or industrial development. These banks are also
fully or majorly owned by the Government of Bangladesh. These are Bangladesh Krishi
Bank, Rajshahi Krishi Unnayan Bank and Probashi Kallyan Bank.
Þ Private Commercial Banks (PCBs): There are 41 private commercial banks which are
majorly owned by individuals/the private entities. PCBs can be categorized into two
groups:
Þ Conventional PCBs: 33 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i. e interest-based operations.
Þ Islamic Shariah based PCBs: There are 8 Islamic Shariah based PCBs in Bangladesh and
they execute banking activities according to Islamic Shariah based principles i.e.Profit-
Loss Sharing (PLS) mode.
Þ Foreign Commercial Banks (FCBs):9 FCBs are operating in Bangladesh as the branches of
the banks which are incorporated in abroad. These are Bank Al-Falah, Citibank N. A,
Commercial Bank of Ceylon PLC, Habib Bank Limited, HSBC, National Bank of
Pakistan, Standard Chartered Bank, State Bank of India and Woori Bank.
Non-Scheduled Banks:

★ Non-scheduled banks have special and definitive objectives and operate under the acts
that are enacted for meeting up those objectives.These banks are not under the direct
control of Bangladesh Bank and they also do not get clearing system and rediscounting
of bill facilities. There are now 5 non-scheduled banks in Bangladesh which are:
1)
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1)Ansar VDP Unnayan Bank


2)Karma-shangsthan Bank,
3)Grameen Bank,
4)Jubilee Bank,
5)Palli Sanchay Bank.
Non-bank Financial Institutions (NBFIs):

★ Non-Bank Financial Institutions (FIs) are those types of financial institutions which are
regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 34
NBFIs are operating in Bangladesh while the maiden one was established in 1981. Out of the
total, 2 is fully government owned , 1 is the subsidiary of a SOCB , 15 were initiated by
private domestic initiative and 15 were initiated by joint venture initiative.
★ Major sources of funds of FIs are Term Deposit (at least three months tenure), credit facility
from banks and other FIs, call money, bond and securitization.
NBFI VS Banks:
 The major differences between banks and NBFIs are as follows:
► NBFIs cannot issue cheques, pay-orders or demand drafts.

► NBFIs cannot receive demand deposits,

► NBFIs cannot be involved in foreign exchange financing,

► NBFIs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization instruments,
private placement of equity etc.
List of some mobile banking service providers in Bangladesh:

Serial Name of mobile banking Name of service providing bank


service
01. bKash Brac Bank Limited
02. Rocket Dutch-Bangla Bank Limited (DBBL)
03. mCash Islami Bank Bangladesh Limited (IBBL)
04. MyCash Mercantile Bank Limited
05. UCash United Commercial Bank Limited (UCBL)
06. SureCash National Credit and Commerce Bank Limited (NCC
Bank Ltd. )
07. EasyCash Prime Bank Limited

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Business Digest 131 Banking (Bangladesh Bank)

What is Bangladesh Bank?


► Bangladesh Bank acts as the central bank of Bangladesh which was established on December 16,
1971 through the enactment of Bangladesh Bank Order—1972 [President‘s Order—127 of
1972 (Amended in 2003)]. Bangladesh Bank is an autonomous organization.
► At present it has 10 offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra, Rajshahi,
Sylhet, Barisal, Rangpur and Mymensingh.
► Currently there are 53 Departments in Bangladesh Bank.
Important information about Bangladesh Bank
Bangladesh Bank was established on 16th December, 1971 (As per Bangladesh Bank Order—
1972).
Former name of Bangladesh Bank was State Bank of Pakistan.
The duration of the Governor of Bangladesh Bank is 4 years.
The first governor of Bangladesh Bank was A. N. M. Hamidullah.
The architect of the Bangladesh Bank Building is Shafiul Kader
The first woman director of Bangladesh Bank is Professor Hannana Begum.
There are 10 members of the board of directors of Bangladesh Bank:1 Chairman, 1 Member
Secretary and 8 Directors.
The number of branches of Bangladesh Bank (except Head Office) is 10 (including 1 Local
Office).
The forensics division of cyber security consultancy firm ‘Mandiant’ conducted investigation
into the infamous USD $81 million cyber raid on Bangladesh Bank.
Bangladesh Bank has recently achieved 'Global Inclusion Award 2017' under the category of
Global Money Week Award for its sustainable & innovative financial inclusion and financial
education initiatives.
Bangladesh Bank has recently set the highest interest rate of different types of credit cards
offered to the bank clients by the scheduled banks at 16%.
The customers of Bangladesh Bank are scheduled banks, NBFIs and the government of
Bangladesh.
Income sources of Bangladesh Bank are bank rate, loans provided to other commercial banks and
investment in foreign banks and countries.
Main sources of foreign reserve are remittances, export earnings, foreign loans and foreign aid.
The first and foremost duty of Bangladesh Bank is to issue currency and banknotes.
Bangladesh Bank maintains reserves of foreign currencies against banknotes.
The four microeconomic variables that Bangladesh Bank controls are inflation, interest rate,
money supply and exchange rates.
The four microeconomic variables that Bangladesh Bank controls are inflation, interest rate,
money supply and exchange rates.
Scheduled banks send their reports to Bangladesh Bank about their programmes once a week
(mostly on Thursday).
Bangladesh Bank increases the reserved capital to prevent inflation.

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Bangladesh Bank declares the monetary policy by issuing Monetary Policy Statement (MPS)
twice (January and July) in a year.
The monetary policy undertaken by Bangladesh Bank is Balanced Contractionary Monetary
Policy.
A commercial bank has to mandatorily deposit 13%+5. 5%=18.5% of its total deposit with
Bangladesh Bank (accumulation of the CRR+SLR).
Governors and board of the Bangladesh Bank:(4-year time period):
√ N. M. Hamidullah was the first governor.
√ Fazle Kabir is the 11th and current governor.
√ The Board of Directors of Bangladesh Bank consists of 10 members.
What is the Vision of Bangladesh Bank (From website of Bangladesh Bank)?
★ To develop continually as a forward-looking central bank with competent and committed
professionals of high ethical standards, conducting monetary management and financial sector
supervision to maintain price stability and financial system robustness, supporting rapid broad
based inclusive economic growth, employment generation and poverty eradication in Bangladesh.
What is the Mission of Bangladesh Bank (From website of Bangladesh Bank)?
 Bangladesh Bank is carrying out its following main functions as the country's central bank:
 Formulating monetary and credit policies;
 Managing currency issue and regulating payment system;
 Managing foreign exchange reserves and regulating the foreign exchange market;
 Regulating and supervising banks and financial institutions and advising the government on
interactions and impacts of fiscal, monetary and other economic policies.
What are the functions of Bangladesh Bank (From website of Bangladesh Bank)?
Formulation and implementation of monetary and credit policies

Regulation and supervision of banks and non-bank financial institutions.

Promotion and development of domestic financial markets

Management of the country's international reserves

Issuance of currency notes

Regulation and supervision of the payment system

Acting as banker to the government

Money Laundering Prevention

Collection and furnishing of credit information

Implementation of the Foreign Exchange Regulation Act.

Collection and furnishing of credit information

Implementation of the Foreign Exchange Regulation Act.

How does Bangladesh Bank control the banks and NBFIs?
★ Bangladesh Bank controls these types of institutions by controlling the interest rate, money supply,
reserve requirements (CRR and SLR) and open market operations.

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How does Bangladesh Bank inject money into the economy?


★ By modifying reserve requirements: By reducing the reserve requirements, banks are able to
disburse more money in the form of loan — which increases the overall supply of money in the
economy. Conversely, by raising the reserve requirements of the scheduled banks, Bangladesh
Bank is able to decrease the size of the money supply.
★ By changing short-term interest rates: By lowering (or raising) the discount rate that banks
pay on short-term loans from Bangladesh Bank,
★ By conducting open market operations: If Bangladesh Bank wants to increase the money
supply, it buys government bonds. Conversely, if Bangladesh Bank wants to decrease the
money supply, it sells bonds from its account.
What is lender of the last Resort?
★ A lender of last resort is the institution that acts as the provider of liquidity to a bank or financial
institution which finds itself unable to obtain sufficient liquidity in the inter-bank lending market.
★ In Bangladesh, Bangladesh Bank acts as the lender of last resort to the financial institutions.

Who is the monetary authority in Bangladesh?


★ Bangladesh Bank (the central bank of Bangladesh) has been given the authority by the
government to control money.
★ [Note: Capital market is controlled by Bangladesh Securities and Exchange Commission
and Money market is controlled by Bangladesh Bank].
How does Bangladesh Bank affect the economy of Bangladesh?

► Bangladesh Bank indirectly makes the decision how much amount of money will be in the
hand of general public — thus supply of money may decline or rise which have further effect
on aggregate demand. In order to mobilize/accelerate the growth of the economy of
Bangladesh, Bangladesh Bank can do so.
► Bangladesh bank targets inflation and gives a boost to growth by making credit available at
cheaper rate for investors are two major important concerns which Bangladesh Bank looks at
before taking a stance on monetary policy as these two are on opposite path (one happens at the
expense of other. For example: if we want loan at cheap rate and subsequent growth, we will
have to experience inflation and vice-versa).
► Bangladesh Bank also controls the value of Taka — how well it performs in comparison to
other currencies (Exchange Rate). Foreign exchange reserve is one of the important tools at
Bangladesh Bank ‘s hand which it can use to control exchange rate. If the Taka as a currency
appreciates, exports will reduce because it gets more expensive for buyers to buy. As a result,
imports will increase because it is cheaper than it was before the appreciation.
► Bangladesh Bank regulates the banks in the country and also works as a banker to the government.

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Business Digest 134 Banking (Bangladesh Bank)

What are the sources of income of Bangladesh Bank?

★ Bangladesh Bank earns income mainly from interests. Its main source of income is interest
earned on bond holdings through open market operations or purchase and sale of government
securities. Other sources include:
√ Interest income related to banknote issuance (known as ―seigniorage income)
√ Capital gain on securities and exchange gains
√ Profit on sale of securities (mainly Treasury bills)
√ Yields on government securities and bonds
√ Interest received from foreign exchanges reserves, gold and domestic assets. Interest on these
foreign holdings makes for another major share of the revenue
√ Interest received on loans given to the government.
√ Interest received on loans given to commercial banks by means of liquidity adjustment
facilities (Repo & Reverse Repo) and marginal standing facilities
√ Interest received on loans and advances given to bank employees
√ Discount received from bank rate where Bangladesh Bank earns on rediscounting of bills
from banks
√ Commission received from the government accounts management (by managing public debt)
√ Fees, fines and rents realized.
What is discount window?

★ The discount window is an instrument of monetary policy (usually controlled by central banks)
that allows eligible institutions to borrow money from the central bank, usually on a short-term
basis, to meet temporary shortages of liquidity caused by internal or external disruptions.
Discuss on off-site Supervision of BB:

★ Off-site Supervision is fundamental in monitoring the conduct of business activities of licenses it

entails reviewing and analyzing of the audited financial statements statutory returns and any other
reports submitted by licensees.
Commemorative notes in Bangladesh:
★ Bangladesh Bank released some six types of commemorative notes to make the special events
memorable and the Taka 200 note is the latest version (Tk 200 notes in March to mark
‘Mujib Year’) . Besides, some 12 types of commemorative coins were also released in the past.
★ Earlier,Bangladesh Bank introduced a Taka-40 note to commemorate the “40th Victory
Anniversary of Bangladesh” in 2011.
★ The Taka-40 commemorative note featured a portrait of the Father of the Nation and the National
Martyrs’ Memorial in Savar in the front, and six armed men on the back.

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Business Digest 135 Banking (Bangladesh Bank)

What are differences between CRR and SLR?

Basis for Comparison Cash Reserve Requirement Statutory Liquidity Ratio


(CRR) (SLR)
Meaning CRR is the percentage of deposit SLR is a certain percentage of net
which the bank has to keep with the time and demand deposits as
central bank in the form of cash. specified by central bank a bank
has to keep with itself in the form
of liquid assets.
Form Cash Cash and other assets like gold
and government securities.
Maintained with Central bank Bank itself.
Interest earning Banks do not earn any interest on Interests is earned on SLR
CRR

►In conventional banks, CRR is 5.5% and SLR is 13%. In total it is 18.5%
►In case of Islamic banks, CRR is 5.5% and SLR is 5.5%. In total it is 11%.
Some requirements for banks in Bangladesh:

√ It will be regulated under Banking Company Act 1991 and Basel- II (Basel-3 coming)
√ Status of the new commercial bank must be a public limited.
√ The paid-up capital of new commercial bank shall not be less than Taka 400. 00 Crore and in case
of Islamic bank it should not be less than Taka 200 Crore.
√ New Bank has to ensure finance at least 5% of its total lending into agricultural sector or as per
instruction issued by Bangladesh Bank from time to time.
√ Proposed bank should take part in Corporate Social Responsibility (CSR) activity. The new bank
should spend 10% or more of its previous year's net income to CSR.
√ Cash Reserve Requirement (CRR) at 5. 5% and Statutory Liquidity Ratio (SLR) is 13%. In total it
is 18. 5%
√ In case of Islamic Banks, Cash Reserve Requirement (CRR) at 5. 5% and Statutory Liquidity
Ratio (SLR) is 5. 5%. In total it is 11%.
√ A Director or Advisor to any banking company other than the proposed bank shall not be a
Director of the proposed bank.
√ The Member of Board of Directors shall be restricted to 13.
√ Maximum number of directors from a family shall be restricted to two in case of the total
shareholding of that family exceeds 5% and if the total shareholding is up to 5%, it will be one
director from a family.
√ The Chief Executive Officer (CEO) of the proposed bank shall have at least 15 (fifteen) years of
experience in the banking profession.

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Business Digest 136 Banking ( Risk Management)

What are the major risks to be concerned in Banking?


√ Credit risk: Inability or unwillingness of the borrower to honour the pre-committed
contractual agreements.
√ Interest risk: The risk that changes in interest rate might negatively affect the net worth of
the bank.
√ Foreign exchange risk: The risk that unfavourable changes in exchange rate might
deteriorate the net foreign exposure of the bank.
√ Liquidity risk: The risk of insufficient liquidity (cash) for normal operating requirements.
What is the mechanism to credit risk management?
■ Pricing the loan appropriately (appropriate interest rate)
■ Setting credit limits
■ Non-concentration of credit
■ Requiring adequate collateral as security
■ Diversification
■ Using derivatives and assets securitization.
Qualitative approach of credit risk management (5C):
★ Cash Flow—Does it generates enough cash flow to repay the loan? (check pay-out ratio,
free cash flow)
★ Collateral--- Acts as a secondary source of repayment of the loan (worth of the collateral,
physical assets are preferable)
★ Capital—Does it have sufficient equity in the company? (check Debt to equity ratio. It
must not exceed 2 or 3 times)
★ Character----Historical credit reports of the borrower /Deal with trustworthy people
★ Conditions---Recent performances (profitability ratios), future viability, risk management
system of borrower.
Some other qualitative approaches:
√ Multiple Credit Approval Authorities
√ Segregation of Credit Underwriting from Loan Origination
√ Quarterly Portfolio Review
√ Credit approval is delegated properly
√ Separate Credit Administration Division for documentation.
√ Quantitative risk management models:
√ Credit scoring model (score-based credit sanction)
√ Default model approach
√ Value at Risk model
√ Stress testing model.

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What are the techniques to reduce the credit risk by a bank?


► Avoid making high risk loans
► Taking collateral from the borrower
► Diversify the loan portfolio
► Documentation to legally enforce the loan contract
► Guarantees
► Limit the amount of credit extended to a single borrower
► Monitor the behavior of the borrower
► Transfer the risk to other parties by selling securitized loans by hedging with credit
derivations like credit default swap.

Define Asset- Liability Management (ALM):


★ Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by a
bank due to mismatch between assets and liabilities either due to liquidity or changes in interest
rates. It is the process of effectively managing a bank portfolio mix of assets, liabilities and
applicable off-balance sheet contracts.
★ This process involves two primary financial risks; interest rate and foreign exchange risks. It
directly relates to soundness of overall liquidity management.
★ Asset/Liability Management (ALM): Bankers make decisions every day about buying and selling
securities, about whether to make particular loans, and about how to fund their investment and
lending activities. The process of making such decisions about the composition of assets and
liabilities and the risk assessment is known as asset/liability management.
Define liquidity management:
★ One of the major services of banks is to meet their customers’ requirements on due time. Liquidity
Management is an on-going process to ensure that cash needs can be met at reasonable cost in
order to maintain the required level of reserves with Central bank (CRR) and to meet expected and
contingent cash needs. Maintaining lower liquidity may put bank into a greater risk on the other
hand maintaining a higher level of liquidity may reduce the overall profitability of the bank. So,
banks must manage its liquidity prudently.
What is liquidity gap?
► Liquidity gap is the liquidity risk arising from mismatches in the timing at which assets and
liabilities mature.
► Liquidity gap can be defined as the net liquid assets of a firm. It is the excess value of the firm's
liquid assets over its volatile liabilities.
► A company with a negative liquidity gap should focus on their cash balances and possible
unexpected changes in their values.
How to measure liquidity risk?
√ Static Funding Gap:It defines the short fall in maturing liabilities required to service maturing
assets– it is usually calculated on a maturity bucket basis and is calculated as the net asset position
over total liabilities.
√ Dynamic Cash Flow Gap: This includes a measurement based on maturing assets and liabilities
plus assumed marketable asset liquidation over a given period.

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√ Liquidity Asset Ratios: This is the ratio of liquid assets to total liabilities with liquids defined to
include items such as cash and cash equivalents, trading account securities, repos investments into
government securities etc
√ Concentration Ratios: This is an important ratio that reassures the funding from a particular
source compared to assets /liabilities or capital.
√ Liquidity Stress Measurement: A number of ratios can be examined here looking at multiple low
stress and high stress scenarios.
How to manage liquidity risk?
Sound liquidity risk management employed in measuring, monitoring and controlling liquidity risk is
critical to the viability of any bank. Each bank should have an agreed liquidity strategy for the day-to-
day management of liquidity. Such as:
★ Composition of assets and liabilities: The strategy should outline the mix of assets and liabilities
to maintain liquidity. Liquidity risk management and asset/liability management should be
integrated to avoid high costs associated with having to rapidly reconfigure the asset liability
profile from maximum profitability to increased liquidity.
★ Diversification and stability of liabilities: The board and senior management should specify
guidance relating to funding sources and ensure that the bank has diversified sources of funding
day-to-day liquidity requirements.
★ Managing liquidity in different currencies: The bank should have a strategy on how to manage
liquidity in different currencies.
★ Dealing with liquidity disruptions:The bank should put in place a strategy on how to deal with
the potential for both temporary and long-term liquidity disruptions.
★ Shorten asset maturities:If the maturity of some assets is shortened to an extent that they mature
during the duration of a cash crunch, then there is a direct benefit. In addition to that, shorter
maturity assets are basically more liquid.
★ Lengthen liability maturities: The longer duration of a liability, the less it is expected that it will
mature while a bank is still in a cash crunch.
★ Reduce contingent commitments: Cutting back the amount of lines of credit and other contingent
commitments to pay out cash in the future is a way to reduce cash requirement. It limits the
potential outflow thus reconstructing the balance of sources and uses of cash.
★ Obtain liquidity protection: A bank can scale another bank or an insurer, or in some cases a
central bank, to guarantee the connection of cash in the future, If required.
What is Basel Agreement/Accord?
★ Basel agreement is an agreement between the United States, Japan, Canada and the nations of
Western Europe to adopt common capital requirements for all of their banks.
What is Basel-I? what was the problem of it?
★ Basel-1 is a set of international banking regulations put forth by the Basel Committee on bank
supervision (BCBS) that sets out the minimum capital requirements of financial institutions with
the goal of minimizing credit risk. Banks that operate internationally are required to maintain a
minimum amount of capital (8%) based on a percent of risk-weighted assets.
Problems of Basel-I:
► It addresses only credit risk not considering operational risk, market risk, liquidity risk etc.
► It deals with only minimum capital requirement.

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Business Digest 139 Banking ( Risk Management)

What is Basel-II? what are three pillars of it?


The Basel II Accord is a set of international banking regulations put forth by the Basel Committee
on Bank Supervision (BCBS) that sets out three pillars for financial institutions with the goal of
minimizing credit risk, market risk, and operational risk etc. Bangladesh bank uses Basel-II for
the scheduled banks of Bangladesh.
1) The minimum capital requirements (10% of RWA)
2) Supervisory review and
3) Market discipline.
What is Basel-III?
★ Basel-III is an extension of the existing Basel-II Framework, and introduces new capital and
liquidity standards to strengthen the regulation, supervision, and risk management of the whole of
the banking and finance. CAR is 12.5% under Basel-III.
What are the parts of the capital of the banks?
★ Under the Basel Accord, a bank's capital consists of Tier-1 Capital and Tier-2 Capital. These two
types of capital are different. Tier-1 Capital is a bank's core capital whereas Tier-2 Capital is a
bank's supplementary capital. A bank's total capital is calculated by adding its Tier-1 Capital and
Tier-2 Capital together. Regulators use the capital ratio to determine and rank a bank's capital
adequacy. Tier-3 Capital: Same as Tier-2 Capital but with a higher amount in order to face the
market risks of the bank, commodities risk and foreign currency risk.

Tier(1):Capital Tier (2):Capital


Called ‘Core Capital’ comprises of highest Supplementary Capital represents other
quality of capital elements. elements which fall short of some of the
characteristics of the core capital but
contribute to the overall strength of a
bank.
√ Paid up capital √ General provision
√ Non-repayable share premium account √ Revaluation reserves
√ Statutory reserve √ Revaluation reserve for fixed assets
√ General reserve √ Revaluation reserve for securities
√ Retained earnings √ Revaluation reserve for equity
√ Minority interest in subsidiaries instrument
√ Non-cumulative irredeemable preference √ All other preference shares
shares √ Subordinated debt.
√ Dividend equalization account

What is Minimum Capital Requirement (MCR)?


★ Minimum Capital Requirement (MCR) for each scheduled bank in Bangladesh is at least 10% of
total RWA (Risk Weighted Asset).

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Business Digest 140 Banking ( Risk Management)

What is Capital Adequacy Ratio (CAR)?


★ CAR is the ratio of a bank’s available capital in relation to its risk weighted assets and current
liabilities. It is decided by central banks and bank regulators to prevent commercial banks from
taking excess leverage and becoming insolvent in the process.
★ Capital Adequacy Ratio = (Tier I + Tier II + Tier III ) ÷ Risk weighted assets .
What are the conditions for maintaining regulatory capital?
★ The calculation of Tier 1 capital, Tier 2 capital, and Tier 3 capital shall be subject to the following
conditions:
√ The amount of Tier 2 capital cannot be more than Tier 1 capital.
√ 50% of revaluation reserves for fixed assets and securities eligible for Tier 2 capital.
√ 10% of revaluation reserves for equity instruments eligible for Tier 2 capital.
√ Subordinated debt shall be limited to a maximum of 30% of the amount of Tier 1 capital.
√ Limitation of Tier 3:A minimum of about 28.5% of market risk needs to be supported by Tier 1
capital. Supporting of Market Risk from Tier 3 capital shall be limited up to maximum of
250% of a bank’s Tier 1 capital that is available after meeting credit risk capital requirement.
At what time RBCA report needs to be submitted?
★ All banks are required to submit the RBCA (Risk Based Capital Adequacy Ratio) report (according
to the prescribed formats) on quarterly basis within the next 30 days of each quarter-end.
What are the Requirements to maintain General Provision?
 Banks will be required to maintain General Provision in the following way:
► @ 0.25% against all unclassified loans of SME and @ 1% against all unclassified loans to
Brokerage House, Merchant Banks etc.
► @ 5% on the unclassified amount for Consumer Financing and @ 2% on the unclassified
amount for Housing Finance
► @ 2% on the unclassified amount for Loans to Brokerage House, Merchant Banks, Stock
dealers etc.
► Rate of provision on the outstanding amount of loans kept in the 'Special Mention Account'
will be same as the rates stated in (1), (2), (3).
► @1% on the off-balance sheet exposures.
What is the highest credit approval for a single borrower?
★ A single individual is allowed to have highest 10% as loan of a commercial bank by the act of
Bangladesh Bank.
How Interest rate risk is faced?
►On Balance sheet adjustments:
√ Gap analysis and changing asset-liability composition
√ Duration analysis and portfolio immunization
√ Matching: It requires a business to have both assets and liabilities with the same kind of
interest rate

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►Off balance sheet adjustment:


√ Forward rate agreements (FRA)
√ Use derivatives for hedging interest rate risk such as futures, options, swap etc.
►Other prominent methods:
√ Development of Asset-liability management committee
√ Decide acceptable risk level, risk limit and risk hedging instruments
√ Engage in floating interest rate agreement with floor, ceiling and collar.
What is Stress Testing?
► Stress testing is a simulation technique which are used to determine the reactions of different
financial institutions under a set of exceptional, but plausible assumptions through a series of battery
of tests.
► At institutional level, stress testing techniques provide a way to quantify the impact of changes in a
number of risk factors on the assets and liabilities portfolio of the institution.
► For instance, a portfolio stress test makes a rough estimate of the value of portfolio using a set of
exceptional but plausible events in abnormal markets.
► Calibration of Shocks:1. Credit Risk, 2. Interest Rate Risk, 3. Exchange Rate, 4. Equity Price Risk
and 5. Liquidity Risk.
What are the techniques for stress testing?
1. Sensitivity Analysis: Sensitivity Analysis is a tool used in financial modeling to analyze how one
factor (dependent variable) reacts due to change in another factor (independent variable).
2. Scenario Analysis: It encompasses the situation where a change in one risk factor affects a number
of other risk factors or there is a simultaneous move in a group of risk factors. Scenarios can be
designed to encompass both movements in a group of risk factors and the changes in the underlying
relationships between these variables (for example correlations and volatilities).
What is Immunization?
★ Immunization is a strategy that matches the duration of assets and liabilities, minimizing the impact
of interest rate change on the net worth. When some asset is immunized it is separated from the risk
associated with it.
What is gap analysis? (See Formula: F-105-115)
★ The simplest way of measuring interest rate risk is by using gap analysis. This method measures the
gap between the volumes of interest-rate sensitive assets and liabilities that are repriced after specific
time periods.
What is maturity Gap?
★ This is the difference between weighted average rate sensitive asset and weighted average rate
sensitive liabilities
★ The higher the maturity gap the more a bank’s net worth will be affected by interest rate change.

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Business Digest 142 Banking ( Risk Management)

What is dollar gap? (See Formula: F-105-115)


√ The gap is the difference between interest rate sensitive assets and liabilities for a given time
interest. (normally, less than one-year maturity)
√ Gap management is about trying to close that gap
√ Gap management is making sure that interest rate rises on borrowed funds are offset by interest
rate income from interest earning investments.
Incremental and cumulative gap:
 Incremental gap is the difference between rate sensitive asset and rate sensitive liabilities in each
time bucket.
 Cumulative gap is the cumulative sum of all previous buckets’ incremental gap
Measuring risk to Net Interest Income (NII):
★ Gap schedules can provide an estimate of changes in bank’s net interest income to given
changes in interest rates. The gap for particular time band can be multiplied by a hypothetical
change in interest rate to obtain an approximate change in net interest income.
Define CAMELS:

★ CAMELS Rating is the rating system wherein the bank regulators or examiners evaluate overall
performance of the banks and determine their strengths and weaknesses. CAMELS Rating is
based on the financial statements of the banks. In this Rating system, the officers rate the banks on
a scale from 1 to 5, where 1 is the best and 5 is the worst.
★ Because of the government safety net and in support of financial stability, bank supervisors
monitor the health of banks through periodic examinations. At the conclusion of its exam, each
bank is assigned a rating—called CAMELS—that allows comparisons of bank health over time
and with peers. CAMELS is an acronym representing its six components:
1.Capital adequacy- Capital to Risk Weighted Assets determines the bank’s capital adequacy
(CAR) .
2.Asset quality-- Through this indicator, the performance of an asset can be evaluated. The ratio
of Gross Non-Performing Loans to Gross Advances is one of the criteria to evaluate (NPL).
3.Management- effectiveness of the board of directors and top-level managers are the key
persons who are responsible (ROA).
4.Earnings- Return on Assets Ratio measures the earnings of the banks. (NIM/ROE).
5.Liquidity- The ratio of Cash maintained by Banks and Balance with the Central Bank to Total
Assets determines the liquidity of the bank. (Quick Ratio).
6.Sensitivity to market risk-- the bank’s sensitivity towards the changing market conditions is
checked (Duration).

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Business Digest 143 Banking ( Risk Management)

Define Value at Risk model: (See Formula: F-105-115)

★ VAR is a statistical technique that measures the amount of potential loss that could happen in a
portfolio of investment/loan assets over a period of time.
★ A statistical model for measuring a bank’s portfolio exposure to change in market prices or market
rates of interest over a given period of time subject to a given probability model.
★ It measures and quantifies the level of financial risk within a firm, portfolio or position over a
specific time frame.
How Value at Risk model helps?

★ Value at Risk (VaR) analyses provides a single measurement of risk faced by a company at a
particular time. The VaR approach attempts to give an indication of the maximum loss that a
company could face when market rates (i;e:interest rates) change adversely. The typical VaR
statistic includes three elements –a time period, a confidence level and a loss amount (or loss
percentage). VaR is therefore the maximum loss that a company is likely to face within a given
time period for a specific, typically 95%, probability.
Define Monte Carlo simulation:

★ The Monte Carlo method simulates the effect of random events on a company’s portfolio. This
involves the development of a model that would be able to incorporate more exotic instruments, for
which companies often do not have sufficient data to employ the historical method. This method
expresses the results in a histogram generated from a simulation of interest rate price changes and
their effects on asset value volatility. A Monte Carlo simulation is typically the most complex,
expensive and time-consuming method.
What is credit rating?
★ It is an assessment of the likelihood of an individual or business being able to meet its financial
obligations. Credit ratings are provided by credit agencies or rating agencies to verify the
financial strength of the issuer for investors.
㊣There are 8 credit rating agencies in Bangladesh:
1. Credit Rating Agency of Bangladesh Ltd. (CRAB)
2. Credit Rating Information and Services Limited (CRISL)
3. Bangladesh Rating Agency Ltd (BDRAL)
4. ARGUS Credit Rating Services Ltd. (ACRSL)
5. Emerging Credit Rating Limited (ECRL)
6. National Credit Ratings Limited (NCR)
7. Alpha Credit Rating Ltd.
8. WASO Credit Rating Company (BD) Ltd. (WCRCL).

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What is credit scoring?


★Credit Scoring is the use of statistical models to determine the likelihood that a prospective
borrower will default on a loan.
What is credit scoring models?
 A lender commonly makes two types of decisions: first, whether to grant credit to a new
applicant, and second, how to deal with existing applicants, including whether to increase their
credit limits. These credit scoring models help in making these two decisions.
 Credit scoring is the set of decision models and their underlying techniques that aid lenders in
the granting of consumer credit based on their own developed credit criteria. Criteria are first
set and then compared to decide. These techniques determine who will get credit, how much
credit they should get, and what operational strategies should they bank incorporate to
minimise credit risk.
 Examples of credit scoring model include:
■FICO Score
■Vantage Score
■CreditXpert Credit Score
■CE Credit Score.
Key components in credit scoring model:

Major Component Sub-component Weight Total score


(hypothetical)
Financial Risk Leverage, liquidity, profitability, 50 26
coverage
Business/Industry Size, age, growth, market share, 18 11
Risk competition, product
Management Risk Experience, succession, team work 12 7

Security Risk Value of collateral, location of 10 8


collateral, support/guarantee
Relationship Risk Duration of relation, deposit with 10 9
banks, historical compliance,
previous utilization of loans
Total 100 61
Rating

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Business Digest 145 Banking (Duration Analysis)

★ See Formula: F-105-115


★ Duration analysis enables the risk manager to gain a more accurate understanding of the interest
rate risk the company faces by recognising the importance of the timing of cash flows.
★ Duration gap is the difference between the average duration of bank’s risk sensitive assets and
average duration of risk sensitive liabilities. If the duration of weighted asset is not adjusted with
weighted duration of liabilities that bank is exposed to interest rate risk.
★ Duration gap analysis, examines the sensitivity of the market value of the financial institution’s net
worth to changes in interest rates.
What is Duration?

► Duration is an approximate measure of a bond's price sensitivity to changes in interest rates. In


another way, Duration measures the average time to recover the present value of the project.
► From Macaulay point of view, duration is a measure of present-value weighted maturity of an
individual security or portfolio of securities, which considers timing and all expected cash flows
from the security.
► From modified duration view, duration is a measure of approximate sensitivity of the price or
value of a bond or other debt instrument or other interest rate sensitive assets and liabilities to a
change in interest rates.
► Modified duration measures the expected change in a bond's price to a 1% change in interest
rates.
► The larger the duration, the higher the sensitivity to interest rate changes.

► it provides a good approximation, particularly when interest-rate changes are small

► Unadjusted duration assumes a linear relationship between asset/liability prices and interest rate
changes even though the relationship is actually convex. Thus, there should have adjustment for
this convexity.
What is convexity?

★ The extent to which the price or value of bonds or interest-rate sensitive asset-liabilities changes
asymmetrically, other than extent of change explained by duration, in response to change in interest
rate is called convexity.
Aggressive vs Defensive management relating duration:

★ In aggressive management, the banks continuously change its portfolio of assets and liabilities to

change the duration either positive or negative in order to capitalize the changes in interest rate
resulting positive impact on net worth. If it expects interest rate fall, positive gap is positioned if it
expects interest rate rise, negative gap is expected to increase net worth of the bank.

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Business Digest 146 Banking (Duration Analysis)

★ In defensive managenet, zero gap is always expected because zero gap protects equity from the
valuation effects of interest rate changes. Whatever interest rate changes, there will be no effect on
net worth.
What are the limitations of duration?
► Duration assumes linear relationship between price and interest rate although in reality the
relationship is convex.
► Management through duration would be effective if interest rate changes for all maturity
securities, in either direction, is exactly the same. But in reality, short term rate is more sensitive
and volatile than long term rate. Thus, same interest rate change for all maturity is not realistic
Duration drift:
★ Duration of different financial assets with different initial maturity changes differently with the
passage of time at different speeds. Although at the beginning duration were matched as time
passes the mismatch will be higher as durations were matched but maturities were not matched.

 The alternative consequences of duration gap, interest rate changes and change in
net worth

Duration Gap If interest rate changes Outcome: Change in net worth


Positive Increase Decrease
Positive Decrease Increase
Negative Increase Increase
Negative Decrease Decrease

Zero Increase No change


Zero Decrease No change

Gap If interest Outcome:


rate………
(Changes in) Interest income
Positive RSA > RSL Increase Will Increase
Positive RSA >RSL Decrease Will decrease
Negative RSA < RSL Increase Will decrease
Negative RSA < RSL Decrease Will Increase
Zero RSA = RSL Increase Will have no change
Zero RSA = RSL Decrease Will have no change

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Business Digest 147 Banking ( New Trends in Banking)

What is Sustainability?
★ Some projects/activity/development/plans are called sustainable when it meets the needs of the
present without compromising the ability of future generations to meet their own needs.
What is Green Banking?
★ Green Banking means promoting environment-friendly banking practices and reducing carbon
footprint from banking activities. It aims to make banking processes as efficient and effective as
possible, with zero or minimal impact on the environment through the use of IT and physical
infrastructure
√Finance green technology and pollution reducing projects
√Setting up Solar-powered branches or Green branches
√Incorporation of paperless checking through IT based banking activities
√Formulation of bank specific environmental risk management plan and guidelines
√E-Payment Gateway facilities.
What is Green Finance?
► Green Finance encompasses all the financial tools and initiatives taken in developing, promoting,
Implementing and supporting projects with sustainable and positive externalities.
► The promotion of renewable energies, energy efficiency, water sanitation,
► The reduction of transportation and industrial pollution, climate change, deforestation, carbon
footprint.
Online Banking:
★ Online banking, also known as internet banking or web banking, refers to banking services where
depositors can manage more aspects of their accounts over the Internet, rather than visiting a
branch or using the telephone. It allows a user to execute financial transactions via the internet. It is
comprised of a secure connection to banking information through the depositor's home computer or
another device.
Advantages of online banking:
* 24/7 account and service access
* Speed and efficiency
* Online bill payment
* Low overhead means low fees
Drawbacks of Online Banking:
* Risk of identity theft if hackers gain unauthorized access to one’s account via a hacked
or stolen password.
* Requires internet connection which is difficult for the poor and in the remote area.
Relation between Online Banking and Green Banking:
★ Online Banking is an electronic payment system that enables customers of a financial institution to
conduct financial transactions on a website operated by the institution. It is also referred as internet
banking, e-banking and virtual banking. Online banking reduces the use of papers and thereby
cutting trees and thus considered as pro-green banking approach.

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Define Corporate Social Responsibility (CSR):


★ CSR is a company's sense of responsibility towards the community and environment in which it
operates. The firm considers itself a citizen of the community and acts accordingly.
★ CSR aims to ensure that companies conduct their business in a way that is ethical. This means
taking account of their social, economic and environmental impact and consideration of human
rights. CSR ensures firm fulfils its responsibility towards people-planet and profit.
Common CSR practices include:
㊣ Taking up actions to reduce social exclusion and inequality
㊣ Relief Fund for the flood affected people, cold-affected or other deprived people
㊣ Donation to the fund for underprivileged people
㊣ Donation to green plantation program.
㊣ Educational scholarship and infrastructural development help
What do you understand by corporate governance?
★ Corporate Governance is the system of rules, practices and processes, mechanisms, relations by
which a company is directed and controlled.
★ It is both the structure and the relationships with the stakeholders which determine corporate
direction and performance. The board of directors is typically central to corporate governance.
What is E-Governance?
★ E-Governance is the public sector ‘s use of information and communication technologies with
the aim of improving information & service delivery, encouraging citizen participation in the
decision-making process & making the government more accountable, transparent &
effective.
Agent Banking:
 Agent Banking means providing limited scale banking and financial services to the
underserved population through engaged agents under a valid agency agreement, rather than a
teller/cashier, usually with a single room office.
 Agents are assisted with a bank employee in that office.
 It reduced the cost and time of setting up a new branch.
Core Banking Solution (CBS):
► CORE is an acronym for "Centralized Online Real-time Exchange"
► Core Banking Solution (CBS) a is networking of bank branches which allows customers to
manage their accounts and use various banking facilities from any part of the world.
► It refers to a centralized system established by a bank which allows its customers to conduct
their business irrespective of the bank’s branch.
► In simple term, there is no need to visit your own branch to do banking transactions. You can
do it from any location, any time. It increases customers’ convenience and saves time
► The most significant core banking solutions are:

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√Internet Banking
√Phone Banking
√Automated Teller Machines (ATMs)
√Fund Transfers remotely and immediately
√Point of Sale systems.
School Banking:
★ It is a banking service, meant for inclusion of unaddressed students, the future generations, who are
to be introduced to financial institution, to grow their saving habit and to make them provident. It
enables students to save money in a bank account without paying any service charges.
Offshore Banking:
★ Offshore banking is a term used to describe banking activity in currencies other than the currency
of the country in which the bank accounts are held.
★ When the customers have money deposited in or invested with a bank in a country outside the
home country in foreign currency they are, in fact, banking offshore. Reasons to engage in offshore
banking includes:
► Greater privacy.
► Low or no taxation (i. e. Tax havens).
► Easy access to deposits (at least in terms of regulation).
► Protection against local, political, or financial instability.
Visa Card:

► A Visa card is any type of payment card utilizing the Visa network and branded by Visa Inc.
Cards may include credit, debit or prepaid cards.
Mastercard:
★ It is an American multinational financial services corporation. Its principal business is to process
payments between the banks of merchants and the card issuing banks or credit unions of the
purchasers who use the "Mastercard" brand debit, credit and prepaid to make purchases.
Smart Card:
★ Smart Card is a security device that uses a small microchip to store and process data. It is the
advanced paid debit card by which the cash money is transferred from the client ‘s account
electronically. This is a card with all personal information of any individual in financial and money
market. For example: phone card is a smart card used in Bangladesh.
ATM:
★ ATM is a machine that serves as a computer terminal and allows a customer to access account
balance and information on a bank (through the use of a magnetically encoded plastic card) and
conduct financial transactions. ATMs are available 24 hours.

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VIP Banking:
★ VIP Banking offers a thoughtful bouquet of exclusive services, benefits and banking solutions to
the Bank's prime customers through dedicated relationship manager. Services might include
specially priced services and products.
Fast Track:

 Fast track banking service avails the customer of banking services for round the clock and 365
days a year. It enables the depositor to deposit money through a cash deposit machine installed in a
single room branch. Reporting of lost card, collecting cheque books, PIN (personal identification
number) collection and reissue, internet banking, SMS and alert banking would be among the
other services of the Fast Track.
★ These FTs are comprised of ATMs, Deposit Kiosks and Customer Service help desk officers.
Nexus Gateway- E-payment:
★ It gives a person the liberty to purchase online, pay utility bills etc. Most importantly, the person
does not need to be a bank cardholder. It allows customers in e-ecommerce trade and they can use
their regular PIN for e-commerce transactions.
What does POS mean on a bank statement?
 If one has a checking account at a bank or credit union, he receives a monthly statement showing
the account's beginning and ending balances, as well as all the transactions for the month. A
transaction type labelled "POS" means that your debit card was used to make a purchase at a point-
of-sale location, such as a store's cash register or electronic checkout terminal. It also allows him/
her to watch for any unauthorized use of his/her debit card. If s/he sees a POS transaction at a shop
that s/he never made or authorized, s/he can check with his/her bank. Banks may offer
reimbursement for unauthorized card use. A new card also is issued when the bank thinks
transactions are fraudulent.
Point-of-Sale Transfer Terminals:
★ Point-of-Sale Transfer Terminals allow consumers to pay for retail purchase with a check card, a
new name for debit card. This card looks like a credit card but with a significant difference, the
money for the purchase is transferred immediately from your account to the store's account.
POS or Point Of Sale:

★ POS or point of sale purchase is the “point” where a transaction is finalized or the moment where a
customer executes payment in exchange for goods and services. Any form of payment can be
used, such as cash, debit cards, credit cards, mobile payments and even Bitcoin.
Automated Clearing House (ACH):

★ A computerized facility used by member depository institutions to electronically combine, sort and
distribute inter-bank credits and debits.

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Biometric Account:
★ Biometric Account is an account opened by the customer registering his Finger-Print.
Standby Credit Agreement:

 A bank pledges to guarantee repayment of a customer’s loan received from third party.
Liquidity Indicators:
★ Ratios or other measures of changes in a bank’s liquidity position.

NOW accounts:
 Interest bearing deposits that allow checks to be written against them (available in the United
States only to individuals and non-profit associations).
STD Account:
★ The term “Short Term Deposit (STD)” refers to an account in which an amount of money is placed
in a bank or financial institution for a term no longer than 01 year. An STD will usually earn a
fixed rate of interest.
Plastic Money:
★ Plastic money is a kind of card working as the alternative to the cash or the standard currency to
purchase items or withdraw money. Plastic Money is referred to all Cards that can be used to
purchase commodities from market
★ It is a card made out of polymer and acts as money in transaction. Example includes debit card,
credit card, master card, visa card, cash card and ATM card.
Consumer Card:
 It is a debt that someone incurs for the purpose of purchasing a good or service. This includes
purchases made on credit cards, lines of credit and some loans. Consumer credit is basically the
amount of credit used by consumers to purchase non-investment goods or services that are
consumed and whose value depreciates quickly.
What is Adverse Selection?
★ Adverse Selection means that high risk borrowers try to get loans from banks they are willing to
pay the average rate of interest, which is less than they would have to pay if their true condition
were known to the bank.
What is Moral Hazard?
★ Moral Hazard is the risk that the borrower who now has the loan might use the funds to engage in
higher risk activities in expectation of earning higher returns.
What is Asymmetric Information?
★ The inequality of information between the bank and the borrower is called asymmetric
information.

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Interest rate cap:


★ A contract which sets the maximum interest rate a lender can impose on a flexible rate loan.
Interest rate floor:
★ A contract which sets the lowest interest rate a borrower is allowed to pay on a flexible rate loan.
Branch Banking:
★ Banks that sell their services through multiple offices.
Unit Banking:
★ It is single (usually small) bank that provides financial services to its local community. It does not
have other bank branches elsewhere.
Shell Branches:
★ Special offshore facilities set up to raise new funds and avoid some regulations.
What is Seigniorage?
★ Seigniorage is an issue involved with electronic money. It originally indicates the difference
between the monetary value of a coin or currency and the cost of production.
Debit vs Credit card:
★ Debit Card is a plastic card issued by banks to customers to withdraw money electronically from
their accounts. When a bank client purchases thing on the basis of Debit Card, the amount due is
debited immediately to the account. Many banks issue Debit-Cum-ATM Cards. It is a type of
plastic money which provides an alternative payment method for cash withdrawals through ATM
and this is a prepaid ATM card.
★ Credit Card allows a bank customer to borrow money when he purchases. It does not directly debit
from his bank account at the time of purchase instead he is sent a bill every month for the sum of
total of his purchase.

Debit card Credit Card


Debit cards are like digitized versions of Credit cards offer a line of credit (i. e., a
check books. They are linked to your bank loan)that is interest-free if the monthly credit
account and money is debited(withdrawn) card bill is paid on time.
from the account as soon as the transaction
occurs.
Bank account is a must for issuing a debit Bank account is not prerequisite for credit
card. card.
Payments for goods and services are made out Cardholders allowed to purchase goods and
of customers’ money. No money, no services on credit up-to the limit
payment.
No interest is charged because no money is Interest is charged when payment is not made
borrowed. to the bank within a specified time period. The
interest rate is usually very high.

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Functions of CEO:
Þ Formulates policies and planning recommendations to the Board
Þ Making major corporate decisions, managing the overall operations and resources of a
company
Þ Coordinates between departments, subsidiaries, organization and community
Þ Maintaining good relationship with all the stakeholders of the firm.
CEO vs Chairman:

CEO Chairman/ Board of Directors


√ CEO is an employee of the firm √ Chairman is elected to represent and prioritize
selected by the Board of the interest of the stockholders.
directors.
√ CEO is a company’s top decision- √ The board is elected by shareholders and is
maker, and all other executives responsible for protecting investors’ interests, such
answer to him or her as the company’s profitability and stability.

√ CEO cannot make major moves √ Directors appoint–and can fire–upper-level


without the board’s assent. managers such as the CEO.

What do you mean by KYC (Know Your Customers)?


★ It is a term commonly used for customer identification process for banks.

★ Sometimes this means the guidelines issued by Bangladesh Bank for financial institutions. The
KYC guidelines of Bangladesh Bank mandate banks to collect three proofs from their customers.
They are- (1) Photograph, (2) Proof of identity and (3) Proof of address.
What is Black Monday?
★ It refers to October 19, 1987 when stock markets around the world crashed — shedding a huge
value in a very short time. The crash began in Hong Kong and spread west to Europe — hitting the
United States after other markets had already declined by a significant margin. The Dow Jones
Industrial Average (DJIA) lost almost 22% in a single day.
What is Black Monday?
★ It refers to October 19, 1987 when stock markets around the world crashed — shedding a huge
value in a very short time. The crash began in Hong Kong and spread west to Europe — hitting the
United States after other markets had already declined by a significant margin. The Dow Jones
Industrial Average (DJIA) lost almost 22% in a single day.
Mobile Banking:
★ It is a system that allows customers of a financial institution to conduct a specific number of
financial transactions and some banking services through a mobile device such as a mobile phone
or tablet.

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Common performance measurements tools:


★ Profitability ratios: It measures the effectiveness of expense management and pricing of loan
policies.
√Return on Equity (ROE): Return to every taka of equity
√Return on Asset (ROA): Return to every taka of banks asset
√Net interest margin (NIM): Spread earned for every taka of asset
√Profit margin: Net profit out of every interest income generated.
√Earnings per share (EPS): Earnings for every share.
★ Efficiency ratios: It reflects effectiveness of bank’s portfolio management policy and mixture of
loans and advances.
√ Asset utilisation/Turnover: Operating revenue generated for every taka of asset
√ Operating efficiency ratio: Operating expense as a percentage of operating revenue.
The less is better. Calculated by (op expense/op revenue)
√ Employee productivity ratio: net operating income divided by number of employees.
The higher is better.
★ Financing effectiveness: It measures the effectives of bank’s financing policies. The collection and
use of funds).
√Equity multiplier: Higher multiple means higher return along with higher risk and leverage.
√WACC (Weighted cost of capital)/Cost of capital.

★ Credit management: NPL ratio is often used to determine the credit managementt performance
and NPL ratio is calculated by dividing NPL with total loan and advance. Other mechansms
include:
CAR (Capital adequacy ratio)
VAR (Value at risk)
Non-Performing loan ratio
Provision for loss ratio (a percentage of total loan asset)
Interest rate risk:
Duration is mostly used to determine the impact on net worth due to change in interest rate.
Dollar gap ratio (Dollar gap/total asset)
Define Loans and Advances:
★ Loans and Advances made by the banks are the most important assets for all banks. Loans are the
primary source of interest revenue. While a loan is a liability for the borrower, it is an asset for the
bank, for the lender. This asset includes loans to consumers (home loans, personal loans,
automobile loans, credit card loans) and businesses (real estate development loans, capital
investment loans).

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Define Cash and Cash Equivalents:


★ One of the major services of a bank is to supply cash on demand. A bank must hold some cash as
reserves. Reserves (cash and cash equivalents) are what banks use for daily transactions, such as
processing checks or satisfying cash withdrawals. Two varieties of reserves banks keep are vault
cash and deposits with central and other banks.
Discuss ‘Investment in Securities’:
★ Investment in securities acts as a buffer between loans and cash and cash equivalents. They are
safer than loans, but not as safe as cash and cash equivalents. They pay more interest than cash and
cash equivalents, but not as much as loans.
What are the liabilities & capital (sources of funds) of banks?
★ A bank’s liabilities are, of course, what the bank owes. Liabilities are either the deposits of
customers or money that banks borrow from other sources to use to fund assets that earn revenue.
What is checkable deposit?
★ Checkable deposits are deposits where depositors can withdraw the money at will. These include
all checking accounts.
What is fictitious asset?

★ Fictitious Assets are not assets at all, but they are shown as assets in the financial statements only
for the time being. They are recorded as assets in financial statements only to be written off in a
future period. Fictitious assets are shown in the balance sheet on the asset side under the heading
―Miscellaneous Expenses‖. Examples of Fictitious Assets:
√ Promotional expenses of a business
√ Preliminary expenses
√ Discount allowed on issue of shares
√ Loss incurred on issue of debentures .
What are the contingent liabilities of a bank?

★ Contingent Liability is a liability or a potential loss that may occur in the future depending on the
outcome of a specific event. Potential lawsuits and product warranties are some examples of
contingent liability. Contingent liabilities related to banks include both explicit guarantees (such as
deposit insurance programmes) and implicit guarantees (such as guarantees on bank debt that may
be provided during a banking crisis).
What is Funds-Flow statement?

★ A report of the sources and uses of funds for a bank as reflected in its net income, non-cash
expenses, and balance sheet changes.

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What is a bank's largest assets and liabilities?

★ Loans and advances are the largest asset and deposits are the largest liability of a typical bank.

What is asset liquidity?

★ Asset liaquidity is the primary means by which banks met cash demands. Example- T-bills and
short-term obligations like municipal securities.
★ Two roles of asset liquidity:

1.As an alternative source of funds for the bank to meet cash needs
2.As a reserve to maintain business operations
What is SDR?

► SDR (Special Drawing Rights) is a form of imaginary international money created by the IMF
in 1969. It is designed to augment international liquidity by supplementing the standard reserve
currencies. IMF provides loans to its members in case of exchange rate instability in SDRs.
► SDR basket now consists of the following five currencies: U.S. dollar 41.73%, Euro 30.93%,
Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%
► 1 SDR= Taka 116.11 (till 21 August, 2019).

What do mean by loan Write-off?

► Loan Write-off is a reduction in the value of asset or earnings by the amount of an expense or loss.
Banks use write-offs to remove toxic loans from their balance sheets and reduce their overall tax
liability.
What is Non-Performing Loan (NPL)?

► Non-Performing Loan (NPL) is an obligation payable to the bank which has not been made or
the interest and principal amount has not been paid on the due time. Institutions holding non-
performing loans in their portfolios may choose to sell them to other investors in order to get
rid of risky assets and clean up their balance sheets. If a bank has too many bad loans on its
balance sheet, its profitability will suffer because it will no longer earn enough money from its
credit business.
What are the Non-Performing Assets (NPA) of a company?

★ An NPA is an obligation payable to the bank which has not been made or the interest and principal
amount has not been paid on the due time. NPA is the loan or credit provided by the bank to its
customers which could not be recovered in due time. NPA is also known as ―bad debts.

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Business Digest 157 Banking (Digital payment Sysytem)

► Clearing House is the computerised inter-bank central office for exchanging cheques and bills.
It is a central collection place where banks exchange cheques. The participants maintain an
account against which credits or debits are posted.

► SWIFT (Society for Worldwide Interbank Financial Telecommunication) provides a network


that enables financial institutions worldwide to send and receive information about financial
transactions in a secure, standardised and reliable environment. The members of this society can
exchange the international financial news easily, quickly and accurately by this network.

► CHIPS (Clearing House Interbank Payments System) is an electronic funds transfer system
that handles over 95 percent of all international dollar payments. It is the largest private-sector
US dollar funds-transfer system in the world, clearing and settling an average of $1. 5 trillion in
cross-border and domestic payments daily.

► Bangladesh Bank launched several technologies driven systems — such as Bangladesh


Automated Cheque Processing Systems (BACPS) in 2010, Bangladesh Electronic Fund Transfer
Network (BEFTN) in 2011, Mobile Financial Services in 2011 and the National Payment Switch
of Bangladesh (NPSB) in 2012 for improving the retail payments segment of the country.

► With the launching of Bangladesh Real Time Gross Settlement (BD-RTGS) System in 2015,
the large value payments have also been modernised. These modernisations took the Payment
Systems of Bangladesh as per with the international standard.

► BD-RTGS System (Bangladesh Real Time Gross Settlement) is an electronic inter-bank


settlement system where transfer of funds takes place from one bank to another bank on a real
time and on gross ‘basis. Settlement in real time means transaction is not subjected to any waiting
period. Gross Settlement means the transaction is booked in the central bank ‘s account on one to
one basis without netting with any other transaction. BD—RTGS system accommodates high
value (Taka 1, 00, 000/- and above) local currency and domestic foreign currency transactions in
five different currencies.

► Automated Clearing House (ACH) is a computer-based clearing and settlement facility


established to process the exchange of electronic transactions between participating depository
institutions. Such electronic transactions take the place of paper cheques. BACH (Bangladesh
Automated Clearing House) is the first ever electronic clearing house of Bangladesh. It is an
electronic payment platform for inter-bank clearing of both instrument and instruction-based
payment and ensures prompt, efficient, cost effective and secured payment and settlement for the
whole economy.

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Business Digest 158 Banking ( Banking Scams in Bangladesh)

Bank/ Institution Involved Scam Measures

Sonali, Janata, NCC, Bank loan of BDT4.89 On August 1st 2013, the ACC filed cases
Mercantile and Dhaka crores with forged land against Sonali Bank, Fahim Attire Limited
Bank documents and some individuals; after the
(2008 -2011) (Dhaka Tribune, 28th investigation BDT 1 crore was returned to
August 2013) SonaliBank (making the total BDT 4.89
from initial 5.89 crore). (Dhaka Tribune,
2nd August 2013; New Age, 2ndAugust
2013; The DailyStar, 2ndAugust 2013)
BASIC Bank Embezzlement of BDT4, In September 2015, the ACC filed 56
(2009-2013) 500 crores through fake cases against 120 people on charge of
companies and dubious swindling.
accounts. (New Age Bangladesh, 13th August 2018)
(The Daily Star, 28th June
2013)
Sonali Bank Hall Mark and some other In October 2012, the ACC filed 11 cases
(2010-2012) businesses embezzled against 27 people, including Hallmark
BDT 3,547 crores. Group Chairman and Sonali Bank's 20
(The Daily Star, 14th former and present officials.
August 2012) (Dhaka Tribune, 11th July 2018)

Janata Bank Fraudulence by Crescent On 30th October, 2018, an inquiry


(2010-2015 & 2013 to and AnonTex involving committee, headed by an Executive
present) BDT 10, 000 crores. Director of BB, submitted a report to the
(Dhaka Tribune, 3rd BB on the scam.
November 2018) (Dhaka Tribune, 3rd November 2018)

Janata Bank, Prime Embezzlement and On November 3, 2013, the ACC filed
Bank, Jamuna Bank, laundering of BDT1, 12 cases against 54 people over the
Shahjalal Islami Bank 174.46 by Bismillah scam.
Ltd and Premier Bank Group and its fake (The Independent, 11th September
(June 2011-July 2012) sister concerns. 2018)
(The Daily Star, 7th
October 2016)

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Business Digest 159 Banking ( Banking Scams in Bangladesh)

Bank/ Institution Scam Measures


Involved
AB Bank Money laundering of On January 25, 2018, the ACC filed a
(2013-2014) BDT165 crores. case against former AB Bank chairman
(The Daily Star, 12th June and officials.
2018) (The Daily Star, 12th March 2018)
Farmers Bank Fund embezzlement of by 11 In January 2018, Farmers Bank was
directed by the BB to conduct a
(2013-2017) companies e. g. : NAR
functional audit on credit accounts with
Sweaters Ltd, Advanced outstanding amount of at least BDT 1
crorein its Motijheel branch.
Development Technologies
(The Daily Star, 24th March 2018)
etc. involving BDT 500 In April 2018, the Anti-Corruption
Commission (ACC) arrested four
crores.
accused, including the Farmers Bank's
(The Daily Star, 24th March former Audit Committee chairman.
(The Independent, 11th April 2018)
2018)

NRB Commercial Gross irregularities over On December 29, 2016, the central bank
Bank disbursing loans of BDT701 appointed an observer at the bank to

(2013-2016) crores. restore discipline and corporate


(New Age Bangladesh, 10th governance.
December 2017) (Dhaka Tribune, 7th December 2017)
Janata Bank Loan scam involving BDT1, In October 2018, Thermaxrequested to
(2013-16) 230 crores reschedule the entire loan again
(The New Nation, 22nd (previously restructured in 2015). Janata
October 2018) Bank’s board endorsed this proposal by
Thermaxand sent it to the BB for
approval.
(The Daily Star, 21st October 2018)
Bangladesh Bank Heist of BDT 679.6 crores On March 19, 2016, the government
(February 5, 2016) (USD 81million) by formed a 3-member investigation
international cyber hackers committee, headed by former governor of
from treasury account of Central Bank Dr. Farashuddin.
Bangladesh Bank with the (The Daily Star, 5th August 2017)
New York's US Federal
Reserve Bank.
(The Daily Star, 5th August
2017)

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Business Digest 160 Banking ( Regulatory Changes)

2009 Anti-Terrorism Act is passed to address terror financing (GoB, 2009)

Banking and Financial Institution Division is formed within the Ministry of Finance,
curtailing the authority of Bangladesh Bank and acting as an obstacle to the monitoring of
state-owned commercial banks (FID, 2010)
‘Guidelines on Risk Based Capital Adequacy for Banks’ is introduced by Bangladesh
Bank, in line with Basel II (Bangladesh Bank, 2008)
2011 Whistleblowers' Protection Act 2011 states that no criminal, civil or departmental
proceedings can be initiated against a person for disclosing information in the public
interest to the authorities, and his or her identity will not be disclosed without his or her
consent. (GoB, 2011)
2012 Customer Interest Protection Centre' (CIPC) is established in the head office and branch
offices of Bangladesh Bank
Money Laundering Prevention Act gives Bangladesh Bank responsibility for money
laundering offences (GoB, 2012)
Bangladesh Financial Intelligence Unit (BFIU) is established for analyzing Suspicious
Transaction Reports (STRs), Cash Transaction Reports (CTRs) & information related to
money laundering (ML) or financing of terrorism (TF) received from reporting agencies
and other sources and disseminating information/intelligence thereon to relevant law
enforcement agencies. (Bangladesh Bank, 2012)
Financial Integrity and Customer Services Department (FICSD) department is established
in Bangladesh Bank with a view to minimizing fraud and forgery in the banking industry.
(Bangladesh Bank, 2014)
2013 Anti-Terrorism Act is amended to make provisions for the prevention of terrorist activities
and ensure effective punishment for such activities (GoB, 2013)
Bank Company Act is amended. More than two members of the same family are not
allowed to be on the board of directors, and the tenure of the directors is restricted to six
years. (GoB, 2013)
2014 ‘Guidelines on Risk Based Capital Adequacy for Banks’ is introduced by Bangladesh
Bank, in line with Basel III (Bangladesh Bank, 2014)
Bangladesh Bank imposes “Regulations on Electronic Fund Transfer” (Bangladesh Bank,
2014)
Bangladesh Payment and Settlement Systems Regulations is introduced by Bangladesh
Bank (Bangladesh Bank, 2014)
2015 Money Laundering Prevention Act is amended to reenact a law regarding the prevention of
money laundering and other connected offenses (GoB, 2015)
Financial Reporting Act is passed which requires the establishment of a new oversight
body, referred to as the Financial Reporting Council (FRC), whose main purpose will be to
regulate the financial reporting process followed by the quoted companies (GoB, 2015)

Bangladesh Bank introduces “Guideline on ICT Security for Banks and Non-bank
Financial Institutions” (Bangladesh Bank, 2015)
2017 Code of Conduct for banks and non-bank financial institutions introduced by Bangladesh
Bank to implement National Integrity Strategy in the financial sector of Bangladesh
(Bangladesh Bank, 2017)

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Business Digest

Chapter Contents Page No.

Basics of Marketing, Need vs Wants vs Demand, market, the marketing management orientation, 162-166
Marketing five main marketing management orientations, marketing myopia, marketing
management, Marketing mix 4P/7P, Marketing Process, Buyer decision making process,
Business buying process, New product development process, The Keys To Marketing
Success, marketing information system (MIS), sustainable marketing, Vertical marketing
system (VMS), Market potential, experience curve, environmentalism, Market
penetration, Positioning, competitive advantage, the 8 Ps of marketing, marketing
environment, market leader, challenger, follower and niche, Business portfolio, return on
marketing investment crowdsourcing or open innovation, commercialization, supply
chain management, Net marketing contribution (NMC), Cannibalization, marketing
logistics, intermarket segmentation, Some frequently asked question in Viva
Product Marketing Offering, value proposition, Product vs Service vs Experience, the levels of 167-169
product, consumer products, Types of consumer products, Deficient products, Pleasing
products, Salutary products, Desirable products, the characteristics of a Service, How
service marketing different from product marketing, product/market expansion grid, line
extensions and brand extension, Product line vs Product mix, Stages in product life cycle,
Steps in launching a new product, Boston Matrix/Boston Consulting Group matrix/BCG
matrix/Growth share matrix
Types of pricing strategies, market-skimming pricing, market,penetration pricing, 170-171
Price psychological pricing, customer value-based pricing , reference price , Price skimming,
market penetration pricing, reference price, lump-sum payment, Major considerations in
pricing a product, Sources of unit cost fall, price elasticity
Place/ Major Consideration in selecting Place/distribution channel, the common distribution 172-173
Distribution channels, the major types of retailer, location economies, Marketing channel, marketing
intermediaries, Disintermediation, Third-party logistics (3PL) provider, perceptual map,
localization Network marketing, Workload method, category killer
Promotion Various Promotional tools, Sales promotion, Push vs Pull strategy, False Advertising, 174-175
public relations (PR), Word-of-mouth, Direct-response television (DRTV) marketing,
Discount vs Allowance, return on advertising investment, first mover advantage,
disruptive technology, Styles vs fashion vs fade, Ambush Marketing, inbound marketing

Customer, Value Customer-perceived value, Customer satisfaction, customer lifetime value, customer 176-177
and Brand value analysis, customer relationship management (CRM), customer equity, Opt-out
provision/clause, Lifestyle, Personality, Perception, Belief and Attitude,
Culture,Group,value,value proposition,brand value/brand equity, Branding, brand
equity,Brand valuation,Co-branding,Motive (drive)
Marketing Marketing strategy, concentrated/niche marketing, differentiated marketing strategy 178-181
Strategy undifferentiated (mass) marketing, inbound marketing, market segmentation, Types of
market segmentation, Four global strategies for expansion/Ansoff matrix, Distinctive
competencies of a firm, Buzz marketing Mobile marketing, Online
marketing, Tele-marketing, Kiosk marketing, Steps in a Marketing Plan, Porter's Generic
Competitive Strategies (ways of competing), Porter's 5 forces/Considering in new
entrance/forces in industry competition, PESTLE analysis, SWOT analysis, do you know
about Ambush Marketing, Six available options for a declining stage industry, divestiture

Marketing Plan The aspects you look while launching a product, essential elements of a marketing 182
campaign of aMarketing Plan, the limitations of online marketing
Online Online Marketing, Vertical marketing system (VMS), Content marketing, How do you 183
Marketing use social media for marketing, Viral marketing, E-procurement, Content marketing
International 183
Marketing International Marketing, the challenges with International Marketing, Globalization,
Choices of entry mode in the global market, Franchising vs Licensing, Off-shoring vs
Outsourcing, Insourcing vs Freelancing, intellectual property

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Business Digest 162 Marketing (Basic of Marketing)

What is Marketing?
► Marketing is the art and science of persuasive communication.
► The management process through which goods and services move from concept to the customer.
► It is the process by which companies create value for customers and build strong customer
relationship in order to capture value from customers in return.
► Philip Kotler is considered as the father of Marketing or father of modern marketing.
Need vs Wants vs Demand:
► Needs is the state of feeling deprived of something such as food, clothing and shelter.
► Wants are form of human needs and shaped by culture and individual personality; For example,
French fries, which is a form of food.
► Finally, demand is human needs when backed by purchasing power. For example, If Rahat wants
French fries and has adequate money to buy, we say that he has demand for French fries.
What is market?
★ In marketing, the term market refers to the set of all actual and potential buyers of a product or
services.
What is the marketing management orientation?
★ Marketing management orientation are different marketing concepts that focus on various
techniques to create, produce and market products to customers.
There are five main marketing management orientations:
1.Production concept (heavily focused on production processes and improving efficiencies)
2.Marketing concept (reacts on customers’ want. Decisions are based on customers' needs and
wants)
3.Selling concept (focusing on sales and selling techniques)
4.Product Concept (continually improving and refining its products)
5.Social marketing concept (policy must consider society's long-term interests, consumers' wants,
company's profit etc. )
What is marketing myopia?
★ Marketing myopia' is a situation when a company views marketing strictly from the standpoint of
selling a specific product rather than from the standpoint of fulfilling customer needs.
What is marketing management?
★ Marketing management is the process of developing strategies and planning for product or
services, advertising, promotions, sales to reach desired customer segment.

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Business Digest 163 Marketing (Basic of Marketing)

Marketing mix: 4P/7P:


★ Marketing Mix is a combination of factors that can be controlled by a company to influence
consumers to purchase its products.

What is Demonstrate Marketing Process:

Buyer decision making process:

Business buying process:

New product development process:

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Business Digest 164 Marketing (Basic of Marketing)

What Are The Keys To Marketing Success?


★ Keys to marketing success can be summarized in below mentioned points:
★ The foremost important point is to “satisfy the customer”.
★ Secondly, company should have a clear image in order to achieve marketing success.
★ Thirdly work should be clearly distinct from other business activities in an organization. It should
be central to the entire organization.
★ Fourthly business should develop a unique strategy that is consistent with the circumstances that it
faces.
Define marketing information system (MIS):
★ Marketing information system (MIS) is a system consisting people and procedures for assessing
information needs, developing the needed information, and helping decision makers use the
information to generate and validate actionable customer and market insights.
What is sustainable marketing?
★ Sustainable marketing means socially and environmentally responsible marketing that meets the
present needs of consumers and businesses while also preserving or enhancing the ability of future
generations to meet their needs.
What is Vertical marketing system (VMS)?
★ Vertical marketing system (VMS) is a distribution channel structure in which producers,
wholesalers, and retailers act as a unified system. One channel member owns the others, has
contracts with them, or has so much power that they all cooperate.
Define Market potential:
★ Market potential is the upper limit of market demand.
Define experience curve:
★ Experience curve (learning curve) demonstrates the results in the drop in the average per-unit
production cost that comes with accumulated production experience.
Define environmentalism:
★ Environmentalism is an organized movement of concerned citizens and government agencies to
protect and improve people’s current and future living environment.
Define Market penetration:
★ It is a strategy of company growth by increasing sales of current products to current market
segments without changing the product.
Define Positioning?
★ Positioning means arranging for a product to occupy a clear, distinctive, and desirable place relative
to competing products in the minds of target consumers.
Define competitive advantage:
★ Competitive advantage means advantage over competitors gained by offering greater customer
value, either by having lower prices or providing more benefits that justify higher prices.

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Business Digest 165 Marketing (Basic of Marketing)

What are the 8 Ps of marketing?

★ The 8 Ps of marketing are – product, place and time, price, promotion, process, physical
environment, people, and productivity and quality.
Define marketing environment:

★ The marketing environment consists of a microenvironment and a macroenvironment.

★ The microenvironment consists of the actors close to the company that affect its ability to serve its
customers—the company, suppliers, marketing intermediaries, customer markets, competitors, and
publics.
★ The macroenvironment consists of the larger societal forces that affect the microenvironment—
demographic, economic, natural, technological, political, and cultural forces. We look first at the
company’s microenvironment.
Define market leader, challenger, follower and niche:

★ Market leader is the firm in an industry with the largest market share.

★ Market challenger is a runner-up firm that is fighting hard to increase its market share in an
industry.
★ Market follower is a runner-up firm that wants to hold its share in an industry without rocking the
boat.
★ Market niche is a firm that serves small segments that the other firms in an industry overlook or
ignore.
Define Business portfolio:

★ Business portfolio is the collection of businesses and products that make up the company.

What is return on marketing investment?

★ Return on marketing investment (or marketing ROI) is the net return from a marketing investment
divided by the costs of marketing investment.
★ It measures the profits generated by investments in marketing activities.

Define crowdsourcing or open innovation:

★ Crowdsourcing or open innovation means inviting broad communities of people— customers,


employees, independent scientists and researchers, and even the public at large—into the new-
product innovation process.
★ For example, when Netflix wanted to improve the accuracy of its Cinematch online
recommendation system, which makes movie recommendations to customers based on their
ratings of other movies they’ve rented, it launched a crowdsourcing effort called Netflix Prize.

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Business Digest 166 Marketing (Basic of Marketing)

Define commercialization:
★ Commercialization means introducing a new product into the market.

What is supply chain management?

★ Supply chain management means managing upstream and downstream value-added flows of
materials, final goods, and related information among suppliers, the company, resellers, and final
consumers.
Define Net marketing contribution (NMC):
★ Net marketing contribution (NMC) is a measure of marketing profitability that includes only
components of profitability controlled by marketing. .
Define Cannibalization:
★ Cannibalization is the situation in which one product sold by a company takes a portion of its sales
from other company products.
Define marketing logistics?

★ Marketing logistics (or physical distribution) explains planning, implementing, and controlling the
physical flow of materials, final goods, and related information from points of origin to points of
consumption to meet customer requirements at a profit.
What is intermarket segmentation?

★ Intermarket segmentation (cross-market segmentation) means forming segments of consumers


who have similar needs and buying behavior even though they are located in different countries.
For example, Lexus targets the world’s well-to-do—the “global elite” segment—regardless of their
country.
Some frequently asked question in Viva:

 Tell us about your university and internship experiences.


 Which skills do you have that would best fit this position?
 Are there any areas where you feel you could improve?
 Where would you like to see your career in three years?
 What attracted you to this job specifically?
 “What kind of management style do you prefer?”
 What motivates you?”
 How would you define the goal of marketing?

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Business Digest 167 Marketing ( Producct )

What is Marketing Offering?

★ Market offerings are some combination of products or services or information, or experiences


offered to a market to satisfy consumer needs or wants. For example, car is a marketing offering
which provides transportation flexibility.
What is value proposition?

► Value proposition refers to a business or marketing statement (promise) that a company uses to
summarize why a consumer should buy a product or use a service.
► In another way, a value proposition is a promise of value to be delivered, communicated, and
acknowledged.
Product vs Service vs Experience:

★ Product is an offering that has physical appearance deriving value or utility for the consumer, for
example, football.
★ Service is an offering that is intangible in nature, deriving value or utility for the consumer; for
example, Playing soccer for a team or treatment by doctor etc.
★ Experience is the sum of all the interactions a customer has with a business and its products or
services. It is the customer's perception of a company. It is known as empirical knowledge.
What are the levels of product?

► Core product:the core customer value that solves the consumer’s problem (transportation service)

► Actual product:The Actual product is the tangible, physical product. (Car)

► Augmented product:The non-physical part of the product. It usually consists of lots of added
value (warranty, customer support service).
Define consumer products:

★ Consumer products are products and services bought by final consumers for personal
Consumption. For example, bread.
Types of consumer products:
4 types of consumer products:
1. Convenience products:That makes the customer's life easier, save time and simplify
2. Shopping products:A product that the customer usually compares on attributes such as
quality, price and style in the process of selecting and purchasing
3. Specialty products:With unique characteristics or brand identification
4. Unsought products:A product that has little or no demand.

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Business Digest 168 Marketing ( Producct )

Define Deficient products:


★ Deficient products are the products that have neither immediate appeal nor long-run benefits.
Deficient products, such as bad-tasting and ineffective medicine, have neither immediate appeal
nor long-run benefits.
Define Pleasing products:
★ Pleasing products are the products that give high immediate satisfaction but may hurt consumers
in the long run. Examples include cigarettes and junk food.
Define Salutary products:
★ Salutary products are the products that have low appeal but may benefit consumers in the long run.
for instance, bicycle helmets or some insurance products.
★ require different forms of strategies to promote the overall sale.
Define Desirable products:
★ Desirable products are the products that give both high immediate satisfaction and high long-run
benefits Desirable products give both high immediate satisfaction and high long-run benefit, such
as a tasty and nutritious breakfast food.
What are the characteristics of a Service?
★ The characteristics include intangibility, inseparability, variability, and perishability.
How is service marketing different from product marketing?
★ Marketing a product and marketing a service both needs a different approach. While selling a
product, we use 4P’s of marketing, i.e. Product, Price, Place, and Promotion. But, when a service
is to be offered, apart from the 4P’s, 3 more P’s are to be taken care of, i.e. People, Process, and
Physical evidence.
What is product/market expansion grid?
★ It is a portfolio-planning tool for identifying company growth opportunities through market
penetration, market development, product development, or diversification.
Define line extensions and brand extension:
★ Line extensions occur when a company extends existing brand names to new forms, colors, sizes,
ingredients, or flavors of an existing product category.
★ A brand extension extends a current brand name to new or modified products in a new category.

Product line vs Product mix:


★ Product line is a group of products that are closely related because they function in a similar
manner, are sold to the same customer groups, are marketed through the same types of outlets, or
fall within given price ranges.
★ A product mix (or product portfolio) consists of all the product lines and items that a particular
seller offers for sale. Colgate’s product mix consists of four major product lines: oral care,
personal care, home care, and pet nutrition.

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Stages in product life cycle:


㊣Product life cycle is the progression of a product through the five stages of its time on the market.
There are five distinct product life cycle stages:
1.Product Development: When the company finds and develops a new product idea. Sales
are zero. The company’s investment costs increase gradually till the product introduction.
2.Introduction: Sales slowly grow as the product is introduced in the market. Profits are still
non-existent.
3. Growth: The growth stage is a period of rapid market acceptance and increasing profits.
4. Maturity. Sales growth slows down because the product has achieved acceptance by most
potential buyers. Profits level off or decline because marketing outlays need to be increased to
defend the product against competition.
5. Decline: Finally, sales fall off and profits drop. After a certain period, the product gets out
of market.
Steps in launching a new product:
► Know your market (and competition)

► Know your product (and how to pitch it)

► Know how to promote it (and pack it)

► Know how to serve it (flawlessly)

► Get ready to launch it (and sell it)


Boston Matrix/Boston Consulting Group matrix/BCG matrix/Growth share matrix:

★ It’s a tool to help with long-term strategic planning, to help a business consider growth
opportunities by reviewing its portfolio of products to decide where to invest, to discontinue or
develop products. It's also known as the Growth/Share Matrix.

√ Dogs:Products with a low share and low growth in market. They do not generate cash for the
company. Get rid of these products.

√ Cash Cows:Products with high share and slow growth in market. Cash Cows generate more
than invested in them. So, keep them in your portfolio.

√ Question Mark (Problem children):Products with a low share of a high growth market. They
consume resources and generate little in return. They absorb most money as you attempt to
increase market share.

√ Stars:Products that are in high growth with a relatively high market share. Stars tend to
generate high amounts of income. Keep and build your stars.

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Business Digest 170 Marketing (Price)

Types of pricing strategies:


★ Generally, pricing strategies include the following five strategies.

Þ Cost-plus pricing—simply calculating your costs and adding a mark-up or profit.

Þ Competitive pricing—setting a price based on what the competition charges.

Þ Value-based pricing—setting a price based on how much the customer believes what you’re
selling is worth.
Þ Price skimming—setting a high price and lowering it as the market evolves.

Þ Penetration pricing—setting a low price to enter a competitive market and raising it later.
What is market-skimming pricing?
★ In market-skimming pricing (price skimming) firms set a high price for a new product to skim
maximum revenues layer by layer from the segments willing to pay the high price; the company
makes fewer but more profitable sales.
★ When Apple first introduced the iPhone, its initial price was as much as $599 per phone. The
phones were purchased only by customers who really wanted the sleek new gadget and could
afford to pay a high price for it. Six months later, Apple dropped the price to $399 for an 8GB
model and $499 for the 16GB model to attract new buyers. Within a year, it dropped prices again
to $199 and $299, respectively, and you can now buy an 8GB model for $99. In this way, Apple
skimmed the maximum amount of revenue from the various segments of the market.
What is market-penetration pricing?
★ Market-penetration pricing means setting a low price for a new product to attract a large number of
buyers and a large market share.
★ For example, the giant Swedish retailer IKEA used penetration pricing to boost its success in the
Chinese market.
Define psychological pricing:
★ Psychological pricing is the pricing strategy that considers the psychology of prices, not simply the
economics; the price says something about the product.
What is customer value-based pricing?
★ Customer value-based pricing is the pricing strategy to set price based on buyers’ perceptions of
value rather than on the seller’s cost.
Define reference price:
★ Reference price is the price that buyers carry in their minds and refer to when they look at a given
product.

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Business Digest 171 Marketing (Price)

What is price skimming?


★ Price skimming is a pricing strategy in which a marketer sets a relatively high initial price for a
product or service at first, then lowers the price over time.
What is market penetration pricing?
★ Market Penetration pricing means setting a low price to enter a competitive market and raising it
later. It is the opposite of price skimming.
What is reference price?
★ Reference price is the price that a consumer considers justified to pay for a product/service in
comparison to competitor products.
What is lump-sum payment?

★ A lump-sum payment is a large sum that is paid in one single payment instead of instalments.

Major considerations in pricing a product:

Internal Factors External Factors

√ Fixed Costs (Overhead) √ Market and Demand


√ Production levels √ Competitors’ Costs,
√ Executive Salaries, Rent √ Economic Conditions
√ Variable Costs √ Reseller Reactions
√ level of production √ Government Actions
√ Raw materials √ Social Concerns
√ Total Costs
√ Level of Production

Sources of unit cost fall:


Learning effects
Technological improvements
Economies of scale
Define price elasticity:
★ Price elasticity is a measure of the sensitivity of demand to changes in price.

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Business Digest 172 Marketing (Place))

Major Consideration in selecting Place/distribution channel:


► How does the end-user like to purchase these types of products?
► Does the consumer want to touch and examine the product or is it a product that the
target audience likes to buy online?
► What, if any, are the local, regional, or national regulations regarding the product
category’s distribution channels?
► Does the customer need personalized service?
► Does the product itself need to be serviced?
► Does the product need to be installed?
► How is the product typically distributed and sold in your industry?
What are the common distribution channels?
Wholesaler/Distributor
Direct/Internet
Direct/Catalog
Direct/Sales Team
Value-Added Reseller (VAR)
Consultant
Dealer
Retail
Sales Agent/Manufacturer’s Rep.
What are the major types of retailer?

★ Department Stores:Several product line, each line managed by separate department.

★ Discount Stores:Sold at lower prices, lower margins and high volumes (Walmart)

★ Supermarkets:Relatively large, low cost, low margin, high volume self-service store

★ Superstores:Giant retail outlets that meets consumers’ total needs (Walmart supercenter)

★ Specialty store:Carries narrow product line with deep assortment (Perfume shop)
What is location economies?
★ They are the cost advantages obtained by performing a value creation activity at the optimal
location for that activity.

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Define Marketing channel:

★ Marketing channel (or distribution channel) is the set of interdependent organizations that help to
make a product or service available for use or consumption by the consumer or business user.
Define marketing intermediaries:

★ Marketing intermediaries are the firms that help the company to promote, sell, and distribute its
goods to final buyers.
Define Disintermediation:

★ Disintermediation means the cutting out of marketing channel intermediaries by product or service
producers or the displacement of traditional resellers by radical new types of intermediaries.
Define Third-party logistics (3PL) provider:

★ Third-party logistics (3PL) provider is an independent logistics provider that performs any or all of
the functions required to get a client’s product to market.
What is perceptual map?

★ Perceptual mapping is a diagrammatic technique used by asset marketers that attempts to visually
display the perceptions of customers or potential customers.
What is localization?

★ Localization is the process of making something local in character or restricting it to a particular


place.
What is Network marketing:

★ Network marketing, also known as multi-level marketing, is a business model which involves a
pyramid structured network of people who sell a company’s products. The participants in this
network are usually remunerated on a commission basis.
What is Workload method?

★ Workload method is an approach to determining sales force size based on the workload required
and the time available for selling.
Define category killer:

★ Category killer is a giant specialty store that carries a very deep assortment of a particular line and
is staffed by knowledgeable employees. e.g., Best Buy, Home Depot.

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Business Digest 174 Marketing (Promotion )

Various Promotional tools:

Off-line promotional Tools On-line promotional tools


 Live stage promotion.  Post to Google My Business
 Little gift, irresistible offer  Offer exclusive preview
 Free workshop  Social media contests
 Referrals and reward  Email Marketing
 Personal branding  Facebook Ads
 Magazine advertising  In-Store promotions
 Free workshops at events  Host an event
 Free products  Offer an upgrade or trade-in
 Direct mail  Share customer reviews
 Free lunches  Share on social media
 Low-cost newspaper ads

Define Sales promotion:


★ Sales promotion is the short-term incentives to encourage the purchase or sale of a product or a
service.
Push vs Pull strategy:
★ Push strategy is a promotion strategy that calls for using the sales force and trade promotion to
push the product through channels. The producer promotes the product to channel members who in
turn promote it to final consumers.
★ Pull strategy is a promotion strategy that calls for spending a lot on consumer advertising and
promotion to induce final consumers to buy the product, creating a demand vacuum that “pulls” the
product through the channel.
What Is False Advertising?
★ False advertising is using false statements to promote products and increase profit lines for a
company or a brand. Such advertisements use deception to persuade people.
Define public relations (PR):
★ Public relations (PR) means building good relations with the company’s various publics by
obtaining favorable publicity, building up a good corporate image, and handling or heading off
unfavorable rumors, stories, and events.
Define Word-of-mouth:
★ Word-of-mouth is the powerful impact of the personal words and recommendations of trusted
friends, associates, and other consumers on consumer buying behavior.
What is Direct-response television (DRTV) marketing?
★ Direct-response television (DRTV) marketing is direct marketing via television, including direct-
response television advertising (or infomercials) and home shopping channels.

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Business Digest 175 Marketing (Promotion )

Discount vs Allowance:
★ Discount is a straight reduction in price on purchases during a stated period of time or of larger
quantities. The many forms of discounts include a cash discount, trade discount, quantity discount,
seasonal discount.
★ Allowance is the promotional money paid by manufacturers to retailers in return for an agreement
to feature the manufacturer’s products in some way. Allowances are another type of reduction
from the list price. For example, trade-in allowances are price reductions given for turning in an
old item when buying a new one. Trade-in allowances are most common in the automobile
industry but are also given for other durable goods. Promotional allowances are payments or price
reductions to reward dealers for participating in advertising and sales support programs.
Define return on advertising investment:
★ Return on advertising investment is the net return on advertising investment divided by the costs
of the advertising investment.
What is first mover advantage?
★ A first mover is a service or product that gains advantage by being the first to market.
Being first typically enables a company to establish strong brand recognition and customer loyalty
before competitors enter the arena. Eg.Sony walkman.
What is disruptive technology?
★ A disruptive technology is one that displaces an established technology and shakes up the industry
or a ground-breaking product that creates a completely new industry.
Styles vs fashion vs fade:
► Style is a basic and distinctive mode of expression

► Fashion is currently accepted or popular style in a given field

► Fade is temporarily period of unusual high sale driven by consumer enthusiasm.

What do you know about Ambush Marketing?


★ Ambush or coat-tail marketing is a form of tactics in which an advertiser takes advantage of a
significant event or campaign to promote their products without actually paying for the event fee
or participating in the sponsorships. This is meant for free promotions and at the same time,
competing from those participants who have actually paid for the event.
What do you mean by inbound marketing?
★ Inbound marketing involves a strategy to pull the audience close to the products/services and
create brand awareness. Some of the popular elements of inbound marketing are – blogs, events,
SEO blogs, social media posts, video content, influencer outreach, and public speaking. Inbound
marketing helps a brand to educate prospects about the products/services they offer, and at the
same time, it helps in establishing trust and credibility of the brand.

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Define Customer-perceived value:


★ Customer-perceived value is the customer’s evaluation of the difference between all the benefits
and all the costs of a marketing offer relative to those of competing offers.
Define Customer satisfaction:
★ Customer satisfaction is the extent to which a product’s perceived performance matches a buyer’s
expectations. If performance matches expectations, the customer is satisfied. If performance
exceeds expectations, the customer is highly satisfied or delighted.
What is customer lifetime value?
★ Customer lifetime value is the value of the entire stream of purchases that the customer would
make over a lifetime of patronage.
What is customer value analysis?
★ Customer value analysis is the analysis conducted to determine what benefits target customers
value and how they rate the relative value of various competitor.
What is customer relationship management (CRM)?
★ It means managing detailed information about individual customers and carefully manage customer
touch points to maximize customer loyalty.. It deals with all aspects of acquiring, keeping, and
growing customers.
What is customer equity:
★ Customer equity is the total combined customer lifetime values of all of the company’s customers.
Define Opt-out provision/clause:
★ Opt-out clause refers to a clause that is contained in many arbitration agreements that allows the
consumers to reject the unacceptable terms of an arbitration agreement within a permitted time
frame by keeping the other terms of the agreement intact.
★ As the name suggests, an opt-out clause in an agreement gives consumers a choice not to be
involved in or opt out of one part of the agreement
Define Lifestyle, Personality, Perception, Belief and Attitude:
★ Lifestyle is a person’s pattern of living as expressed in his or her activities, interests, and opinions.
★ Personality is the unique psychological characteristics that distinguish a person or group.
★ Perception is the process by which people select, organize, and interpret information to form a
meaningful picture of the world.
★ Belief is the descriptive thought that a person holds about something
★ Attitude describes a person’s relatively consistent evaluations, feelings, and tendencies toward an
object or idea.
Define Culture.
★ Culture is the set of basic values, perceptions, wants, and behaviors learned by a member of society
from family and other important institutions.

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What is Group?
★ Group means two or more people who interact to accomplish individual or mutual goals.
What is value?
★ Value in marketing, also known as customer-perceived value, is the difference between a
prospective customer's evaluation of the benefits and costs of one product when compared with
others.
Value = Benefits-Efforts-Risks-Price
What is value proposition?
★ The full positioning of a brand is called the brand’s value proposition—the full mix of benefits on
which a brand is differentiated and positioned.
★ It is the answer to the customer’s question “Why should I buy your brand?”
★ Volvo’s value proposition hinges on safety but also includes reliability, roominess, and styling, all
for a price that is higher than average but seems fair for this mix of benefits.
What is brand value/brand equity?
★ Brand equity refers to a value premium that a company generates from a product with a
recognizable name while brand value refers to the financial asset that the company records on its
balance sheet.
★ Brand strength = reputation X visibility
What is Branding?
★ It is a process involved in creating a unique name and image for a product in the consumers' mind.
Define brand equity:
★ Brand equity is the differential effect to capture consumer preference and loyalty.
★ A brand has positive brand equity when consumers react more favourably to it than to a generic or
unbranded version of the same product. It has negative brand equity if consumers react less
favourably than to an unbranded version.
★ Brands vary in the amount of power and value they hold in the marketplace. Some brands—such
as Coca-Cola, Nike, Disney, GE, McDonald’s, Harley-Davidson, and others—become larger-than-
life icons that maintain their power in the market for years, even generations.
Define Brand valuation:
★ Brand valuation is the process of estimating the total financial value of a brand. Measuring such
value is difficult.
Define Co-branding:
★ Co-branding is the practice of using the established brand names of two different companies on the
same product.
★ For example, Nike and Apple co-branded the Nike_iPod Sport Kit, which lets runners link their
Nike shoes with their iPods to track and enhance running performance in real time.
Define Motive (drive):
★ Motive (drive) is the need that is sufficiently pressing to direct the person to seek satisfaction of
the need.

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Business Digest 178 Marketing (Marketing Strategy)

Define marketing strategy:


★ Marketing strategy is the marketing logic by which the company hopes to create it’s customer
value and achieve profitable relationships. Through Marketing strategy the company decides
which customers it will serve (segmentation and targeting) and how (differentiation and
positioning).
What is concentrated/niche marketing?

★ A marketing approach in which most of the marketing efforts are focused on a specific consumer
segment. Eg. CPAs who do taxes for the self-employed.
What is differentiated marketing strategy?

★ A differentiated marketing strategy is one where a company develops several different brands to
meet the unique needs of each of the consumer segments. Let’s take the example of the organic dog
food business. At first, a differentiated marketing strategy may target the dog-lovers in the local
area. As the business thrives locally, the company may choose to extend their reach to other cities
and states.
What is undifferentiated (mass) marketing?

★ It is a market-coverage strategy in which a firm decides to ignore market segment differences and
go after the whole market with one offer.
What do you mean by inbound marketing?

★ Inbound marketing involves a strategy to pull the audience close to the products/services and create
brand awareness. Some of the popular elements of inbound marketing are – blogs, events, SEO
blogs, social media posts, video content, influencer outreach, and public speaking. Inbound
marketing helps a brand to educate prospects about the products/services they offer, and at the
same time, it helps in establishing trust and credibility of the brand.
What is market segmentation?

★ Market segmentation is the process of dividing a market of potential customers into groups, or
segments, based on different characteristics.
Types of market segmentation:

► Demographic segmentation.

► Behavioral segmentation.

► Psychographic segmentation.

► Geographic segmentation.

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Four global strategies for expansion/What is Ansoff matrix?


★ The Ansoff Matrix is a strategic planning tool that provides a framework to help executives, senior
managers, and marketers devise strategies for future growth. It is named after Russian American
Igor Ansoff, who created the concept.

1. Market Penetration:Market penetration is when firm decides to market existing products within
the same market it has been using. The only way to grow using existing products and markets is to
increase market share.
2. Market Expansion/Market Development: It entails selling current products in a new market.
3. Product Expansion/product Development:Firms expand its product line or add new features to
increase its sales in the existing market.
4. Diversification:Selling new products to new markets.
Distinctive competencies of a firm:
★ Distinctive competencies refer to some characteristics of a business that it does better than its
competitors. It may include a number of areas including
√ Name recognition,
Management, administration,

√ Interpersonal relationship,
√ Marketing, technology,
√ Manufacturing,
√ Economics of scale,
√ Talented workforces.
What is Buzz marketing?
★ Buzz marketing refers to marketing strategies used to capture the attention of the customers and
other influencers to amplify the marketing message to an extent where talking about the brand,
product, or service becomes entertaining, fascinating, and newsworthy.

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What is Mobile marketing?


★ Mobile marketing is a multi-channel, digital marketing strategy aimed at reaching a target
audience on their smartphones, tablets, and/or other mobile devices, via ads, websites, email, SMS
and MMS, social media, and apps.
What is Online marketing?
★ Online marketing is a set of tools and methodologies used for promoting products and services
through the internet.
What is Tele-marketing?
★ Telemarketing is a method of direct marketing in which a salesperson solicits prospective
customers to buy products or services over the telephone, internet or fax.
What is Kiosk marketing?
★ It is a small stand-alone unit that performs a specific function, generally without management
intervention to attract customers to products like- an ATM is an example of a sophisticated
interactive kiosk with high security.
Steps in a Marketing Plan:
√Step 1:Know Your Business
√Step 2:Determine Target Market
√Step 3:Analyze Competitors
√Step 4:Set Goals
√Step 5:Outline Strategies
√Step 6:Set a Budget
√Step 7:Get to Work.
Porter's Generic Competitive Strategies (ways of competing):
► Broad Differentiation Strategy
► Focused Differentiation Strategy
► Low-Cost Provider Strategy
► Focused Low-cost Strategy
► Best-Cost Provider Strategy.
Porter’s 5 forces/Considerings in new entrance/forces in industry competition:

√The bargaining power of suppliers


√The bargaining power of Customers
√The threat of new entrants
√The threat of substitutes
√Competitive rivalry in the existing competitors.
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What is PESTLE analysis?


★ A PESTLE analysis is an acronym for a tool used to identify the macro (external) forces facing an
organization.
★ In marketing, before any kind of strategy or tactical plan can be implemented, it is fundamental to
conduct a situational analysis. And the PESTEL forms part of that and should be repeated at regular
stages (6 monthly minimum) to identify changes in the macro environment.
 Political -What are the political factors that are likely to affect the business?
 Economic –What are the economic factors that will affect the business?
 Sociological -What cultural aspects likely to affect the business?
 Technological -What technological changes that may affect the business?
 Legal -What current and impending legislation that will affect the business?

Environmental- What are the environmental considerations that may affect the business?
SWOT analysis:
★ A SWOT analysis is a high-level strategic planning model that helps organizations identify where
they’re doing well and where they can improve, both from an internal and external perspective. It is
an acronym for “Strengths, Weaknesses, Opportunities, and Threats. ”
★ Strengths and weaknesses are internal to your company—things that you have some control over
and can change
★ Opportunities and threats are external aspects that are going on outside of the company, in the
larger market. The firm can take advantage of opportunities and protect against threats, but it can’t
change them. Examples include competitors, prices of raw materials, and customer shopping trends.
What do you know about Ambush Marketing?
★ Ambush or coat-tail marketing is a form of tactics in which an advertiser takes advantage of a
significant event or campaign to promote their products without actually paying for the event fee or
participating in the sponsorships. This is meant for free promotions and at the same time, competing
from those participants who have actually paid for the event.
Six available options for a declining stage industry:
1. Reduce promotional expenditure on the products
2. Reduce the number of distribution outlets that sell them
3. Implement price cuts to get the customers to buy the product
4. Find another use for the product
5. Maintain the product and wait for competitors to withdraw from the market first
6. Harvest the product or service before discontinuing it.
What is divestiture?
★ A divestiture is the disposal of a business unit through sale, exchange, closure, or bankruptcy.

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What are the aspects you look while launching a product?


★ Launching a product is all about timing, marketing and creating a vibe. There should be a good
build-up to promote the product before its launch so that the interest in the market is captured.
Also, the timing should be perfect so that it does not have to compete with a newly-launched
similar product.
Name 5 essential elements of a marketing campaign:
★ The five essential elements of a successful marketing campaign are – 1) the target, 2) the value
proposition, 3) the call-to-action message, 4) the delivery method and 5) the follow-up.
Contents of a Marketing Plan:
Section Purpose
Executive ★ Presents a brief summary of the main goals and recommendations of the plan for
summary: management review, helping top management find the plan’s major points quickly. A table
of contents should follow the executive summary.
★ Describes the target market and a company’s position in it, including information about the
Current market, product performance, competition, and distribution. This section includes the
Marketing following:
situation  A market description that defines the market and major segments and then
reviews customer needs and factors in the marketing environment that may
affect customer purchasing.
 A product review that shows sales, prices, and gross margins of the major
products in the product line.
 A review of competition that identifies major competitors and assesses their
market positions and strategies for product quality, pricing, distribution, and
promotion.
 A review of distribution that evaluates recent sales trends and other
developments in major distribution channels.
Threats and ★ Assesses major threats and opportunities that the product might face, helping management
opportunities to anticipate important positive or negative developments that might have an impact on the
analysis firm and its strategies.
Objectives and ★ States the marketing objectives that the company would like to attain during the plan’s term
issues and discusses key issues that will affect their attainment. For example, if the goal is to
achieve a 15 percent market share, this section looks at how this goal might be achieved.
Marketing ★ Outlines the broad marketing logic by which the business unit hopes to create customer
strategy value and relationships and the specifics of target markets, positioning, and marketing
expenditure levels. How will the company create value for customers in order to capture
value from customers in return? This section also outlines specific strategies for each
marketing mix element and explains how each responds to the threats, opportunities, and
critical issues spelled out earlier in the plan.
Action ★ Spells out how marketing strategies will be turned into specific action programs that answer
programs the following questions: What will be done? When will it be done? Who will do it? How
much will it cost?
Budgets ★ Details a supporting marketing budget that is essentially a projected profit-and-loss
statement. It shows expected revenues (forecasted number of units sold and the average net
price) and expected costs of production, distribution, and marketing. The difference is the
projected profit. Once approved by higher management, the budget becomes the basis for
materials buying, production scheduling, personnel planning, and marketing operations.
Controls ★ Outlines the control that will be used to monitor progress and allow higher management to
review implementation results and spot products that are not meeting their goals. It includes
measures of return on marketing investment

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Define Online marketing:


★ Online marketing is the efforts to market products and services and build customer relationships
over the Internet by leveraging web-based channels such as email, social media, search engine
optimization etc.
What are the limitations of online marketing?

 There are certain limitations of online marketing, major being –


Chances of cyber attack prevail.
Requires time to generate results.
Takes time to build trust as compared to conventional marketing.
Develops dependability on technology.
How do you use social media for marketing?
★ Social media can be used very smartly to drive traffic and expose brands on the social platforms.
We may attract more users to our brand by posting quality posts, images, videos and other stuff.
Besides, paid marketing is another approach that can help to attract users to the website. However,
this involves money, but the results can be attractive, with increased page links and improved
website visits.
Define Viral marketing:
★ Viral marketing is the internet version of word-of-mouth marketing: Web sites, videos, e-mail
messages, or other marketing events that are so infectious that customers will want to pass them
along to friends.
Define E-procurement:

★ eProcurement, also known as electronic procurement, is the purchase and sale of goods,
works and services through a web interface or other networked system. Bangladesh government
has introduced e-GP method to complete hassle free and transparent tender.
Content marketing:
★ Content marketing is a marketing technique of creating and distributing valuable, relevant and
consistent content (infographics, webpages, podcasts, videos etc) to attract and acquire a clearly
defined audience – with the objective of driving profitable customer action.
What is Vertical marketing system (VMS)?
★ Vertical marketing system (VMS) is a distribution channel structure in which producers,
wholesalers, and retailers act as a unified system. One channel member owns the others, has
contracts with them, or has so much power that they all cooperate.

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Business Digest 183 Marketing (International Marketing )

What is International Marketing?


★ International Marketing is defined as the performance of business activities designed to plan, price,
promote, and direct the flow of a company’s goods and services to consumers in more than one
nation for a profit.
What are the challenges with International Marketing?
 Competition
 Legal Restrains
 Government Controls
 Varied Consumer Behaviour
 Ecological factors – Weather etc.
What is Globalization?
★ Globalization is the process of integration of economies, industries, markets, cultures and policy-
making around the world through information system and technology.
Choices of entry mode in the global market:

Exporting

Licensing

Franchising

Wholly owned subsidiaries (WOS)

Joint venture

Strategic alliance.
Franchising vs Licensing:
★ Franchising is a mechanism where an organization gives the right to use its name and operating
methods to another company. eg. KFC, Domino’s Pizza.
★ On the other hand, Licensing is more pertinent to manufacturing organization and it is the right to
produce or sell using one’s technology or specifications given to another firm by a firm. Eg.
Mickey Mouse offers licensing on their products.
Off-shoring vs Outsourcing:
★ Off-shoring means getting work done in a different country. Outsourcing refers to contracting work
out to an external organization.
Insourcing vs Freelancing:
★ Insourcing is delegating a job to someone within a company.
★ Freelancing is delegating a job to someone outside the company or country. Usually, it is done by
people who are self-employed and seeking employment opportunities.
What is intellectual property?
★ Includes intangible creations of the human intellect such as patents, copyrights, etc.
★ World Trade Organization (WTO) provides the right through TRIPS (Trade Related Aspect of

Intellectual Property Rights) to protect the intellectual properties from being copied.

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Business Digest

Chapter Contents Page


No.
Basics of Management , management strategy, Management by Objective (MBO), 184-188
Management Steps in MBO, Negotiation, The seven major roles played by the manager,
Leadership, Scientific Management, Open-book management, Business
model, Procedure, rule and policy, Capabilities,Core competencies, BCG
matrix, First mover, the Henry Fayol's Principle, Entrepreneurship,
Contingency approach, Bureaucracy, Value, Value chain, Value chain
management, Corporate social responsibility (CSR), mediation, delphi
technique, Non-competing Agreement, Resilience, feedback, 360-degree
feedback, Ethics and Values, ISO 9000, Cloud Computing, Task force (or ad
hoc committee), Job depth, "Boiled frog" phenomenon How to go global
Managers and Manager, First-line managers, the Managers' roles, the Managerial skills, 189-191
Employees Effective vs Efficient Manager, Leader vs Manager,Executives vs
Managers,Self-efficacy, various leadership styles, Committee, change agent,
Managers and Employee,the Contingent workers, Whistle-blower, Type A
personality vs Type B personality, Proactive personality, Authority vs Line
manager vs Staff manager, Recruitment, Selection and downsizing, the Group
development stages, market-skimming pricing
Organisationn Organisation, organizational chart, Types of organizational structure, Vision 192-193
vs Mission, Vision Statement
Mission Statement,Centralization vs Decentralization, Limited Liability
Company (LLC), Authority, Chain of Command, Line authority, Means-ends
chain, Goal vs Objective,
Motivation Motivation,,Maslow’s Need Hierarchy Theory, Herzberg’s Motivation 194-195
Theory (Two-Factor theory, McGregor’s Participation Theory (X and Y
theory), Vroom’s Expectancy Theory
Communication Communication, Modes of Communication, Virtual team, Body language, 196
Jargon, Town-hall meetings, Grapevine
Quality Total Quality Management (TQM), Lockout/Tagout rule, Experience curve, 197
Management learning curve, Efficiency vs Effectiveness, Feasibility study, Creativity,
Innovation
Project Project Management, Project, project management, project Charter, project 198-201
Management scope, Core project Objectives, Criteria to choose a project, Real Option,
Major traits of project manager, Milestone, Some categories of project,
Failure Modes and Effects Analysis (FMEA) Model, Network/Path/Critical/
Slack, Critical Path, Critical Path Method (CPM), Benefits of CPM, PERT
(Program Evaluation Review Technique), the PERT following steps
Principles in cash flow estimation, PERT VS CPM, Gantt chart, Key issues in
project undertakings, feasibility study, How to conduct a feasibility Study,
load chart, PERT network

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What is management?
★ Management is the art of getting things done by and through Others-Mary Parker Follet.
★ Management is the process of reaching organizational goals by working with and through people
and other organizational resources.
★ Management is the continuous process of planning, organizing, motivating, coordinating,
marketing, directing and controlling to achieve an organization’s goal.
√Peter F. Drucker is the father of management theory.
√Henry Fayol is the father of modern management.
√Frederick Winslow Taylor is the father of scientific management
Successful managers Successful entrepreneurs
Tim Cook:CEO, Apple Bill Gates:Microsoft
Jack Dorsey:CEO, Twitter Jeff Bezos:Amazon
Reed Hastings:CEO, Netflix Jack Dorsey:Twitter and Square
Bill Gates: Microsoft Jack Ma:Alibaba Group
Jeff Bezos:CEO, Amazon Mark Zuckerberg:Facebook
Satya Nadella:CEO, Microsoft

What is strategy?
★ Strategy is a set of related actions that managers take to increase their companies’ performance.
What is Management by Objective:(MBO):
★ Management by objectives (MBO) is a management model that aims to improve the performance
of an organization by clearly defining objectives that are agreed to by both management and
employees. According to the theory, participation in goal setting and action plans encourages
participation and commitment among employees.
Steps in MBO:
 The organization’s overall objectives and strategies are formulated.
 Major objectives are allocated among divisional and departmental units.
 Unit managers collaboratively set specific objectives for their units with their managers.
 Specific objectives are collaboratively set with all department members.
 Action plans, defining how objectives are to be achieved, are specified and agreed upon by
managers and employees.
 The action plans are implemented.
 Progress toward objectives is periodically reviewed, and feedback is provided.
 Successful achievement of objectives is reinforced by performance-based rewards.
What is Negotiation?
★ A negotiation is a strategic discussion that resolves an issue in a way that both parties find
acceptable.
★ Negotiation is a process where two or more parties with different needs and goals discuss an issue
to find a mutually acceptable solution.

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The seven major roles played by the manager are:

What is Leadership?
★ Leadership is the ability of an individual or a group of individuals to influence and guide followers
or other members of an organization, eg. Sheik Mujibibur Rahman and Mahatma Gandhi.
★ Leadership is the art of motivating a group of people to act towards achieving a common goal.
Define Scientific Management:
★ It is an approach that involves using the scientific method to find the “one best way” for a job to
be done.
What is Open-book management?
★ A motivational approach in which an organization’s financial statements (the “books”) are shared
with all employees.
What is Business model?
★ Business model is something that tells how a company is going to make money.
Procedure, rule and policy:
Procedure: A series of sequential steps used to respond to a well-structured problem.
Rule: An explicit statement that tells managers what can or cannot be done.
Policy: A guideline for making decisions.
What is Capabilities?
★ Capabilities are an organization’s skills and abilities in doing the work activities needed in its
business.
What is Core competencies?
★ Core competencies are the organization’s major value-creating capabilities that determine its
competitive weapons.
Define BCG matrix
★ It is a strategy tool that guides resource allocation decisions on the basis of market share and
growth rate of SBUs.
What is First mover?
★ First mover can be an organization that’s first to bring a product innovation to the market or to use
a new process innovation.
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What are the Henry Fayol’s 14 Principles:


1. Division of Work: Specialization increases output by making employees more
efficient.
2. Authority: Managers must be able to give orders, and authority gives them this right.
3. Discipline: Employees must obey and respect the rules that govern the organization.
4. Unity of command: Every employee should receive orders from only one superior.
5. Unity of direction: The organization should have a single plan of action to guide
managers and workers.
6. Subordination: Subordination of individual interests to the general interest.
7. Remuneration: Workers must be paid a fair wage for their services.
8. Centralization: This term refers to the degree to which subordinates are involved in
decision making.
9. Scalar chain: The line of authority from top management to the lowest ranks is the
scalar chain.
10.Order: People and materials should be in the right place at the right time.
11.Equity: Managers should be kind and fair to their subordinates.
12.Stability of tenure of personnel: Management should provide orderly personnel
planning and ensure that replacements are available to fill vacancies.
13.Initiative: Employees who are allowed to originate and carry out plans will exert high
levels of effort.
14.Esprit de corps: Promoting team spirit will build harmony and unity within the
organization.
Define Entrepreneurship:
★ Entrepreneurship is the process of starting new businesses, generally in response to opportunities.

Define Contingency approach:


★ It is a management approach that recognizes organizations as different, which means they face
different situations (contingencies) and require different ways of managing.
What is Bureaucracy?
★ It is a form of organization characterized by division of labour, a clearly defined hierarchy, detailed
rules and regulations, and impersonal classical approach relationships.
What is Value?
★ Value is the performance characteristics, features, and attributes, and any other aspects of goods
and services for which customers are willing to give up resources.
What is Value chain?
★ Value chain is the entire series of organizational work activities that add value at each step from
raw materials to finished product.

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What is Value chain management?


★ It is the process of managing the sequence of activities and information along the entire value
chain.
What is Corporate social responsibility (CSR)?
★ Corporate social responsibility (CSR) is a business approach of corporation that contributes to
sustainable development by delivering economic, social and environmental benefits for all
stakeholders.
What is mediation?
★ Mediation is a dynamic, structured, interactive process where a neutral third party assists disputing
parties in resolving conflict through the use of specialized communication and negotiation
techniques.
Define delphi technique:
★ The Delphi Technique refers to the systematic forecasting method used to gather opinions of the
panel of experts on the problem being encountered, through the questionnaires, often sent through
mail.
Define Non-competing Agreement:
★ A non-compete agreement is a contract between an employee and an employer in which the
employee agrees not to enter into competition with the employer during or after employment.
What is Resilience?
★ Resilience was defined by most as the ability to recover from setbacks, adapt well to change, and
keep going in the face of adversity.
What is feedback?
★ Feedback is the information and reactions to a product or to a person's performance of a task.
Feedback is used as a basis for improvement.
Define 360-degree feedback:
★ A 360-degree feedback is a process through which feedback from an employee's subordinates,
colleagues, and supervisor, as well as a self-evaluation by the employee themselves is gathered.
Ethics and Values:
Ethics are principles, values, and beliefs that define what is right and wrong behaviour.
Values are basic convictions about what is right and wrong.
Define ISO 9000:
★ A series of international quality management standards that set uniform guidelines for processes to
ensure products conform to customer requirements.

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What is Cloud Computing?


★ The practice of using a network of remote servers hosted on the internet to store, manage, and
process data, rather than a local server or a personal computer. Surely the data is in the air.
What is Task force (or ad hoc committee)?
★ It is a temporary committee or team formed to tackle a specific short-term problem affecting
several departments.
Define Job depth:
★ It is the degree of control employees have over their work.
“Boiled frog” phenomenon:

★ The phenomenon explains that If you take a frog and put it in a pot of extremely hot water, it's
obvious that frog will jump and try to get out of the water. However, if you put that same frog in a
pot of water that is tepid, and turn the heat on very low, that frog will lay there very quietly; and as
the water gradually heats up the frog will calmly fall in a state of unconsciousness; and eventually
allow itself to be boiled to death.
★ Well a big reason why the Frog did not jump is due to the fact his threat sensing capability is
generated by unexpected changes, not slow ones but changes that are gradual.
★ The whole inference is that we as a whole should try and identify the threats of our survival at an
early stage when we still have time to plan rather than react to that particular threat; which will be
too late.
How to go global:
1.Global sourcing: Global sourcing is purchasing materials or labour from around the world
wherever it is cheapest.
2.Export-Import: Exporting is making products domestically and selling them abroad.
Importing is acquiring products made abroad and selling them domestically.
3.Licencing: Licensing is used by manufacturing organizations that make or sell another
company’s products and gives that organization the right to use the company’s brand name,
technology, or product specifications.
4.Franchising: Franchising is similar but is usually used by service organizations that want to
use another company’s name and operating methods.
5.Strategic Alliance: Global strategic alliance is a partnership between an organization and
foreign company partners in which they share resources and knowledge to develop new
products or build facilities.
6.Joint Venture: Joint venture is a specific type of strategic alliance in which the partners agree
to form a separate, independent organization for some business purpose.
7.Foreign subsidiary: Foreign subsidiary is a direct investment in a foreign country that a
company creates by establishing a separate and independent facility or office.

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Business Digest 189 Mangement (Managers and Employees)

Define Manager:
★ Manager is someone who coordinates and oversees the work of other people so that organizational
goals can be accomplished.
★ Manager manages in three ways: by managing actions directly, by managing people who take
action, and by managing information that impels people to take action.
Define First-line managers:
 They are the lowest level of management. First-line managers manage the work of nonmanagerial
employees who typically are involved with producing the organization’s products or servicing the
organization’s customers.
 First-line managers may be called supervisors or even shift managers, district managers,
department managers, or office managers.
What are the Managers’ roles?
•Interpersonal roles: involve people and other ceremonial/symbolic duties
•Informational roles: involve collecting, receiving, and disseminating information
•Decisional roles: involve making choices.
What are the Managerial skills?
 Technical (job-specific knowledge and techniques), Technical skills are most important for lower-
level managers.
 Human (ability to work well with people), Human skills are equally important for all.
 Conceptual (ability to think and express ideas), conceptual skills are most important for top
managers.
Effective vs Efficient Manager:

► Effective means producing the intended or expected result.

► Efficient means accomplishing the task in the least amount of time possible with the least
amount of resources possible, by utilizing certain time-saving strategies.
► The difference between effectiveness and efficiency can be summed up shortly, sweetly and
succinctly – Being effective is about doing the right things, while being efficient is about doing
things right.
► For example, if you were to call someone an effective speaker, you might think of someone
who is convincing or persuasive, someone whom people understand, someone who is
relatable, etc.
► Conversely, if you were to call someone an efficient speaker, you might think of someone who
says what needs to be said and nothing more. He or she gets to the point and doesn’t waste
time with small talk or pleasantries.

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Leader vs Manager:
★ leader is the one who inspires, encourages and influence his men, to work willingly, in the
attainment of the organization’s objectives whereas a manager manages people and resources
to ensure things are done as aforementioned; a person who manages the organisation and is
responsible for planning, direction, coordination and control.
Executives vs Managers:

★ Managers are the people who plan, decide, organise, lead and control the performances.
Executives are to implement the policies and programs, which have been approved by the top
management.
Define Self-efficacy:
★ Self-efficacy refers to an individual’s belief that he or she is capable of performing a task. The
higher your self-efficacy, the more confidence you have in your ability to succeed in a task.
Discuss various leadership styles:
 Autocratic style: A leader who dictates work methods, makes unilateral decisions, and limits
employee participation.
 Democratic style: A leader who involves employees in decision making, delegates authority,
and uses feedback as an opportunity for coaching employees.
 Define Laissez-faire style: A leader who lets the group make decisions and complete the work
in whatever way it sees fit.
 Transactional leaders: Leaders who lead primarily by using social exchanges (or
transactions).
 Transformational leaders: Leaders who stimulate and inspire (transform) followers to
achieve extraordinary outcomes.
 Charismatic leader: An enthusiastic, self-confident leader whose personality and actions
influence people to behave in certain ways.
 Visionary leadership: The ability to create and articulate a realistic, credible, and attractive
vision of the future that improves upon the present situation.
What is Committee?

★ A group of persons convened for the accomplishment of some specific purpose, typically with
formal protocols
★ The Committees are the association of organizational people who come together to analyse,
investigate and discuss the issues of concern and reach to the final conclusion.
What is change agent?

★ A change agent is a person from inside or outside the organization who helps an organization
transform itself by focusing on such matters as organizational effectiveness, improvement,
and development.

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What are the Contingent workers?


★ Contingent workers are temporary, freelance, or contract workers whose employment is
contingent upon demand for their services.
What is Whistle-blower?
★ It is an individual who raises ethical concerns or issues to others or public.
Type A personality vs Type B personality:
1. Type-A: People who have a chronic sense of urgency and an excessive competitive drive.
2. Type-B: People who are relaxed and easy-going and accept change easily.
Define Proactive personality:
★ A personality trait that describes individuals who are more prone to take actions to influence
their environments.
Authority vs Line manager vs Staff manager:
Authority: The right to make decisions, direct other’s work, and give orders.
Line manager: Those who directly associated with direct work
Staff manager: Those who support or advise the line manager.
Recruitment, Selection and downsizing:
 Recruitment: Locating, identifying, and attracting capable applicants.
 De-recruitment: Reducing an organization’s workforce
 Selection: Screening job applicants to ensure that the most appropriate candidates are hired
 Downsizing: Downsizing (or layoffs) is the planned elimination of jobs in an organization.
What are the Group development stages?
1. Forming: Forming stage has two phases. The first occurs as people join the group. In a
formal group, people join because of some work assignment. Once they’ve joined, Second
phase is defining: define the group’s purpose, structure, and leadership. This stage is
complete when members begin to think of themselves as part of a group.
2. Storming : There’s conflict over who will control the group and what the group needs to be
doing. During this stage, a relatively clear hierarchy of leadership and agreement on the
group’s is developed.
3. Norming: The norming stage is one in which close relationships develop and the group
becomes cohesive. There’s now a strong sense of group identity and camaraderie. This stage
is complete when the group structure solidifies, and the group has assimilated a common set
of expectations (or norms) regarding member behaviour.
4. Performing: The group structure is in place and accepted by group members.. This is the
last stage of development for permanent work groups.

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Business Digest 192 Management(Organisation)

Define organizational chart:

★ An organizational chart is a diagram that shows the structure of an organization and the
relationships and relative ranks of its parts and positions/jobs.
Types of organizational structure:

► Line organizational structure:Authority flows directly and vertically from the top of the
managerial hierarchy ‘down to different levels of managers

► Functional authority organizational structure: In such, Functions are divided such as finance,
production, sales, personnel, office and research and development and each of functions are
performed by an expert. It was evolved by F. W. Taylor.

► Divisional organisational structure:The divisional structure refers to companies that structure


leadership according to different products or projects.

► Matrix organisational structure:In which the reporting relationships are set up as a grid, or
matrix, rather than in the traditional hierarchy. In other words, employees have dual reporting
relationships - generally to both a functional manager and a product manager.
Vision vs Mission:

► Vision is a company’s defined future desired state. It defines what the company would like to
achieve
► Mission is the purpose of the company or a statement of what the company strive to do

► Mission answers the question “Why do we exist?” Vision answers the question “What will the
future look like as we fulfil our mission? What will be different?” While mission is about
today, vision is about the future, what we will become.
Define Vision Statement:

★ A vision statement is a declaration of an organization's objectives, intended to guide its


internal decision-making. Future desired state. eg. P&G- “Be and be recognized as the best
consumer products and services company in the world. ”
★ A mission statement is intended to clarify the "what" and "who" of a company, while a
vision statement adds the "why" and "how" as well. Eg. P&G- “We will provide branded
products and services of superior quality and value that improve the lives of the world’s
consumers, now and for generations to come.”
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Business Digest 193 Management(Organisation)

Define Mission Statement:

★ A mission statement is a short statement of an organization's purpose, what its overall goal is,
identifying the goal of its operations:what kind of product or service it provides, its primary
customers or market, and its geographical region of operation.
Centralization vs Decentralization:

Centralization Decentralization
The retention of powers and authority with The dissemination of authority,
respect to planning and decisions, with the top responsibility and accountability to
management, is known as Centralization. the various management levels, is
known as Decentralization.

What is Limited Liability Company (LLC)?


★ LLC is a form of legal organization that’s a hybrid between a partnership and a corporation.

Define Authority:
★ Authority is the rights inherent in a managerial position to tell people what to do and to expect
them to do it.
Define Chain of Command:
★ Chain of command is the line of authority extending from upper organizational levels to the lowest
levels, which clarifies who reports to whom.
Define Line authority:
★ Such authority that entitles a manager to direct the work of an employee.
What is Means-ends chain?
★ It is an integrated network of goals in which the accomplishment of goals at one level serves as the
means for achieving the goals, or ends, at the next level.
Goal vs Objective:
► Goal is long term whereas objective is mid or short term
► Goal gives a general statement firm's purpose, objectives are more concrete and specific in
how the goal will be achieved
► Goals are the agreed outcomes of a project whilst SMART (Specific, Measurable, Articulate,
Reasonable and Timely) performance objectives are the set of operations that need to take
place for achieving the project goal.
► "I want to achieve success in the field of genetic research and do what no one has ever done.
" This is a goal. "I want to complete the thesis on genetic research within this month. " This is
an objective.
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Business Digest 194 Management(Motivation)

Motivation:
★ Motivation is the reason for people's actions, willingness and goals. It can be defined from
three perspectives
√Enthusiasm for doing something
√The need or reason for doing something
√Willingness to do something.
 A) Maslow’s Need Hierarchy Theory:
★ According to this theory, once a given level of need is satisfied, it no longer serves to motivate
human being. Then, the next higher level of need has to be activated in order to motivate him.
Maslow identified five levels in his need hierarchy:

► Physiological Needs:Basic needs like food, clothing, shelter, air, water


► Safety Needs:Economic security and protection from physical dangers
► Social Needs:Social interaction, companionship, belongingness, etc.
► Esteem Needs: Self-confidence, achievement, competence, knowledge and
independence.
► Self-Actualization Needs:“musician must make music, an artist must paint, a poet must
write, if he is to be ultimately happy” (Maslow, 1943)”

Criticisms of the theory:


1. The needs may or may not follow a definite hierarchical order .
2. Maslow’s preposition that one need is satisfied at one time is also of doubtful validity .
 B) Herzberg’s Motivation Theory (Two-Factor theory):
► Herzberg argued that there are 2 group of factors named as hygiene factor and motivators
(intrinsic factor. )
► He emphasized that “not dissatisfied” does not mean the employee is motivated.
► The existence of hygiene factor removes job satisfaction but not necessarily motives the
employee.
► The assurance of intrinsic factor increases job satisfaction and motivation.

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Business Digest 195 Management(Motivation)

Internal Factors Hygiene factors


Recognition, achievement Salary, security, status, company policy
Advancement, growth, responsibility Supervision, supervisor, working condition

 C) McGregor’s Participation Theory:(X and Y theory)


★ Douglas McGregor formulated two distinct views of human being based on participation of
workers. The first one is basically negative, labeled Theory X, and the other is basically
positive, labeled Theory Y.
★ Theory X is based on the following assumptions:
√People are by nature indolent. That is, they like to work as little as possible.
√People lack ambition, dislike responsibility, and prefer to be directed by others.

★ On the contrary, Theory Y assumes that:


√People are not by nature passive or resistant to organizational goals.
√They want to assume responsibility.
√They want their organization to succeed.
Criticisms of the theory:
★ The fact remains that no organizational man would actually belong either to theory X or
theory Y. In reality, he/she shares the traits of both.
 D) Vroom’s Expectancy Theory:
★ It is a cognitive process theory of motivation. Vroom’s motivation can be expressed in the
form of an equation as follows: Motivation = Valence x Expectancy x Instrumentality.
√Valence:means the value or strength one places on a particular outcome or reward.
√Expectancy:It relates efforts to performance.
√Instrumentality:the belief that performance is related to rewards.
Non-monetary strategies to motivate people:
 Take your employees to lunch
 Offer leadership opportunities
 Give employees the recognition they deserve
 Get to know your employees
 Share management rewards
 Allow high performers a more flexible schedule
 Allowing them to participate in decision making process.

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Business Digest 196 Management (Communication)

★ Communication is the process of transmitting information from one person to another. It is the
act of sharing of ideas, facts, opinions, thoughts, messages or emotions to other people, in and
out the organisation, with the use of the channel to create mutual understanding and
confidence.
Modes of Communication:

Interpersonal Interpretive Presentational


★ Two-way ★ One-way communication ★ One-way
communication with with no recourse to the communication
active negotiation of active negotiation of intended for an
meaningamong meaning with the writer, audience of readers,
individuals speaker, or producer listeners, or viewers
 Spontaneous  Reader, listener or  Presentation of
 Usually involves
exchange of information viewer interprets what information; not
 Meaningful the author, speaker, or exchange
producer wants the  No direct
receiver of the opportunity for the
message to understand active negotiation of
meaning exists
Define Virtual team:
★ It is a team that uses technology to link physically dispersed members in order to achieve a
common goal.
Define Body language:
★ Body language refers to gestures, facial expressions, and other body movements that convey
meaning. A person frowning “says” something different from one who’s smiling. Hand
motions, facial expressions, and other gestures can communicate emotions or temperaments
such as aggression, fear, shyness, arrogance, joy and anger.
What is Jargon?
★ Jargon is a specialized terminology or technical language that members of a group use to
communicate among themselves.
What is Town-hall meetings?
★ Town hall meetings are informal public meeting where information is shared, issued, and
discussed or emotes are brought together to celebrate accomplishments.
Define Grapevine:
★ Grapevine is the informal organizational communication network. The grapevine is active in
almost every organization. One survey reported that 63 percent of employees say that they
hear about important matters first through rumours or gossip on the grapevine.

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Business Digest 197 Management(Quality Management)

Define Total Quality Management (TQM):


★ Total quality management consists of organization-wide efforts to "install and make permanent
climate where employees continuously improve their ability to provide on demand products and
services that customers will find of particular value. "
What is Lockout/Tagout rule?
★ Lockout-tagout (LOTO) or lock and tag is a safety procedure which is used in industry and
research settings to ensure that dangerous machines are properly shut off and not able to be started
up again prior to the completion of maintenance or repair work.
Experience curve:

★ The experience curve is a graphical representation to


demonstrate the effect that firms learn from doing,
which means that the higher the cumulative volume of
production (X), the lower the direct cost per new unit
produced (C). Therefore, the experience curve will be
convex and have a downward slope, as shown in the
adjacent diagram.
What is learning curve:
★ A learning curve is the graphical representation of the fact that “the more someone performs a task,
the better he gets at it’’.
Efficiency vs Effectiveness
★ Efficiency- Doing things right, or getting the most output from the least amount of inputs.
★ Effectiveness- Doing the right things, or completing activities so that organizational goals are
attained.
★ Whereas efficiency is concerned with the means of getting things done, effectiveness is concerned
with the ends, or attainment of organizational goals.
What is Feasibility study?
★ It is an analysis of the various aspects of a proposed entrepreneurial venture designed to determine
its feasibility.
Define Creativity:
★ Creativity is the ability to combine ideas in a unique way or to make unusual associations between
ideas.
Define Innovation:
★ Innovation is taking creative ideas and turning them into useful products or work methods.

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Business Digest 198 Management(Project Management)

What is project?
★ Project is a temporary, well-defined, one-time endeavour
undertaken to create a unique product or service.
★ Project is defined as a specific, finite activity that produces an
observable and measurable result under certain pre-set
requirements.
What is project management?
★ Project management is the discipline of initiating, planning, executing, controlling, and closing the
work of a team to achieve specific goals and meet specific success criteria
What is project Charter?
★ A project charter is the statement of scope, objectives and people who are participating in a project.
It begins the process of defining the roles and responsibilities of those participants and outlines the
objectives and goals of the project. The charter also identifies the main stakeholders and defines the
authority of the project manager.
Define project scope:
★ Project scope is the part of project planning that involves determining and documenting a list of
specific project goals, deliverables, features, functions, tasks, deadlines, and ultimately costs. In
other words, it is what needs to be achieved and the work that must be done to deliver a project.
Core project Objectives:
►Required performance/Goals
►Within Budget Limit /Budget
►Within scheduled time/Scope
Criteria to choose a project:
√Realistic goal, objectives, limitations and associated risk
√Capability of the firm internally and externally
√Flexible enough to modify if needed
√Ease of use in understanding, executing and measuring
√Economically profitable
What is Real Option?
★ A real option is a project choice made available to the managers of a company with respect to
business investment opportunities. It is referred as “real” because it typically refers projects
involving a tangible asset instead of a financial instrument.
★ Real options may be classified into different groups. The most common types are:option to expand,
option to abandon, option to wait, option to switch, and option to contract.

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Business Digest 199 Management(Project Management)

Major traits of project manager:


► Ability to resolve conflicts
► Creativity and flexibility
► Ability to adjust to change
► Good planning skills
► Negotiation skills.
What is Milestone?
★ Milestone is the scheduled event that indicates the completion of a major and highly significant
deliverable event of a project.
Some categories of project:
★ Derivative projects:Projects, that are only incrementally different in both product and process
from existing offerings.
★ Breakthrough project:This project involves introduction of a newer technology. Possibly a
“disruptive” technology which is revolutionary in the industry.
★ Turnkey project:A project under which a firm agrees to fully design, construct and equip a
manufacturing/business/service facility and turn the project over to the purchaser when it is ready
for operation.
Failure Modes and Effects Analysis (FMEA) Model :
★ Failure modes and effects analysis (FMEA) is a step-by-step approach for identifying all possible
failures. “Failure modes” means the ways, or modes, in which something might fail. “Effects
analysis” refers to studying the consequences of those failures.
What is Network/Path/Critical/Slack?
► Network:The arrangement of all activities in project arrayed in their logical sequences and
represented by arcs and nodes.
► Path:the series of connected activities between any two events in a network.
► Critical:Activities, events or paths which if delayed will delay the completion of the project.
► Slack denotes how much an activity can be delayed beyond its earliest start date, without causing
any problems in the completion of the project by its deadline.
Define Critical Path:
★ The critical path is the sequence of activities in a
project plan that connects the project’s start event to
its finish even which must be completed on time for
the project to complete on due date.
★ An activity on the critical path cannot be started until
its predecessor activity is complete
★ If it is delayed for a day, the entire project will be
delayed for a day unless the activity following the
delayed activity is completed a day earlier.

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Business Digest 200 Management(Project Management)

Define Critical Path Method (CPM):


★ The critical path method (CPM) is a step-by-step project management technique for process
planning that defines critical and non-critical tasks with the goal of preventing time-frame problems
and process bottlenecks. Steps in CPM:
Define the required tasks and put them down in an ordered list.
Create a flowchart or other diagram showing each task in relation to the others.
Identify the critical and non-critical relationships (paths) among tasks.
Determine the expected completion or execution time for each task.
Locate or devise alternatives (backups) for the most critical paths.
Benefits of CPM:
★ The method helps in assessing:
√ What tasks must be carried out.
√ Where parallel activity can be performed.
√ The shortest time in which you can complete a project.
√ Resources needed to execute a project.
√ The sequence of activities, scheduling and timings involved.
√ Task priorities.
√ The most efficient way of shortening time on urgent projects.
PERT (Program Evaluation Review Technique):
★ PERT stands for Program Evaluation Review Technique. PERT is a project management tool used
to schedule, organize, and coordinate tasks within a project.
★ It is a technique adopted by organizations to analyse and represent the activity, illustrate the flow of
events, evaluate and estimate the time required to complete a task within deadlines in a project
★ GERT is (Graphical Evaluation and Review Technique- more complicated version of CPM and
PERT.
What is the PERT following steps?
► Identifying Tasks and Milestones
► Placing the Tasks in a Proper Sequence
► Defining Network Diagram (Drawn activity sequence)
► Time Estimating:This is the time required to carry out each activity, in three parts:
√Optimistic timing:The shortest time to complete an activity
√Most likely timing:The completion time having the highest probability
√Pessimistic timing:The longest time to complete an activity
► Critical Path Estimating:This determines the total time required to complete a project.
Principles in cash flow estimation:
 Separation principle (project cash flow separates)
 Incremental principle (cash directly traceable from the project)
 Post-tax principle (after tax cash is relevant)
 Consistency principle (consisted with investors group and inflation).

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Business Digest 201 Management(Project Management)

PERT VS CPM:
PERT CPM
Used to manage uncertain activities of a project. Used to manage well defined activities of a project.

Three “time” estimates One “time” estimation


A technique of planning and control of time A method to control cost and time.

Research and Development Project Non-research projects like civil construction, ship
building etc.

What is Gantt chart?


★ Gantt chart provides a graphical illustration of a schedule that helps to plan, coordinate, and track
specific tasks in a project.
Key issues in project undertakings:
√Market analysis (potential market and share)
√Technical analysis (viability and sensibility)
√Financial analysis (Risk and return)
√Economic analysis (benefits, costs in shadow price)
√Ecological analysis (environmental damage, restoration measure).
What is feasibility study?
★ A feasibility study is an analysis used in measuring the ability and likelihood to complete a project
successfully including all relevant factors.
How to conduct a feasibility Study?
1.Conduct a preliminary analysis
2.Prepare a projected income statement
3.Conduct a market survey
4.Plan business organization and operations
5.Prepare an opening day balance sheet
6.Review and analyze all data
7.Make "Go/No Go" decision.
Define load chart:
 Load chart is a modified Gantt chart. Instead of listing activities on the vertical axis, load charts
list either entire departments or specific resources. This arrangement allows managers to plan and
control capacity utilization. In other words, load charts schedule capacity by work areas.
What is PERT network?
★ PERT network is a flowchart diagram that depicts the sequence of activities needed to complete a
project and the time or costs associated with each activity. With a PERT network, a manager must
think through what has to be done, determine which events depend on one another, and identify
potential trouble spots.

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Business Digest

Chapter Contents Page No.

Basic of Human Human Resource Management, Human Resource Planning or HRP, 202-204
Resource Human Resources Management System (HRMS), Why it is called Human
Management Resource, the main task of HR Manager, Objective of HR, Demonstrate
HR Model, Performance Management, Difference between PM and HRM,
Difference between Management and Administration, Group vs Team,
Blue-collar vs White collar vs Gold- Collar employee, Think Tank,
turnover rate, brain drain, Difference between salary and incentives and
wages
Recruitment and Recruitment And Selection, Difference between Recruitment and 205-207
Selection Selection Talent Management,
Resume vs CV vs Bio-data, job requisition, Job Design, Enlargement,
Specification and Evaluation, Job analysis vs Job description vs Job
rotation vs Job enlargement vs Job enrichment, Difference between Job
analysis and Job description, Difference Between Job description and Job
specification, Replacement charts, Job enlargement vs Job enrichment, Job
satisfaction vs Job involvement, Probationary Period, cognitive ability,
Succession Planning, Fringe benefits
Career and Job vs Career, Job Shadowing, on-boarding, Difference between Training 208
Training and Development, Different types of training method, internship
Appraisal and Performance Appraisal, How Do You Endow With Performance 209-210
Evaluation Appraisal, Types of performance evaluation method, Key Performance
Indicator (KPI), Some indicators of KPI
Employee Differentiate Personality, perception, beliefs and attitudes, values and 211-212
Behaviour and custom, Emotional Intelligence, Hawthorne effect, Aptitude Testing,
Relationship Prima facie, Johari Window, Intelligence Quotient (IQ)
Some Frequently If You Were Hiring A Person For The Job, what Would You Look For
Are You Willing To Show Interest Towards The Organization Ahead Of Your Own 213-215
Asked Interview Tell us your Ability To Work Under Pressure
Questions What is more Important To You, The Money Or The Work
What are your strengths and weaknesses
What are your strong points or What are your strengths
What are the difference between hard work and smart work
How Long Would You Expect To Work For Us If Hired
How do you work under pressure, Can you handle the pressure
Employee Retention
How much salary you expect
Your interview is more or less coming to an end when the interviewer asks you, “Do you
have any questions for me ”
Give me an example of your creativity
Why should I hire you
Why do you want to work at our company
What are the difference between confidence and over confidence
What are the three things that are most important for you in a job
Are You A Team Player
Why Did You Choose Hr
Why Do Want To Make Your Career In Hr
What are the Difference Between Job Role And Job Profile
Have You Ever Had To Fire Anyone
How Did You Feel About That
What will you do if the most performing employee in your team is leaving the organization

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Business Digest 202 HRM ( Basics of HRM )

What is HRM?
► Human Resource Management is the set of organizational activities directed at attracting,
developing and maintaining an effective workforce.
► Human Resource Management is the process of recruiting, selecting, inducting employees,
providing orientation, imparting training and development, appraising the performance of
employees.
What is Human Resource Planning or HRP?
★ It is the ongoing, continuous process of systematic planning to achieve optimum use of an
organization's most valuable asset, i,e; its human resources.

Define Human Resources Management System (HRMS):


★ It is a software application that combines many human resources functions such as benefits
administration, payroll, recruiting and training records , performance analysis; and finally
review the functions into one package.

Why it is called Human Resource?


★ People are considered as resource because, people can make the best use of nature to create
new resources.
What are the main task of HR Manager?
★ HR managers are the professionals responsible for attracting, motivating, and retaining the
most qualified talent by directing the administrative functions of the HR department.
Objective of HR:
★ It is concerned with the optimum utilization of the human resources within and outside
organization.
Demonstrate HR Model:

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Business Digest 203 HRM ( Basics of HRM )

What Is Performance Management?


★ Performance management is a system by which we can recognize and utilize the employee’s
skill, efficiency and as well as identify his/her drawbacks, negative points and try to remove
those.
Difference between PM and HRM :

Basis Personnel Management Human Resource Management


Meaning The aspect of management that is The branch of management that
concerned with the work force and focuses on the most effective use
their relationship with the entity is of the manpower of an entity, to
known as Personnel Management. achieve the organizational goals is
known as Human Resource
Management.
Approach Traditional Modern
Treatment of Machines or Tools Asset
manpower
Type of function Routine function Strategic function
Basis of Pay Job Evaluation Performance Evaluation

The main difference is that PM was reactive, focused on the immediate and short-term needs of
the labour force of an organization while HRM expanded into a proactive strategy of aligning
the needs of the workforce to the strategic objectives of the organization
Difference between Management and Administration:
Basis Management Administration
Meaning Management is an executive Administration is a decision-making
function. Management is focused function. The administration is focused
on "doing" because managers get on "thinking" because it is determining
work done under Administrative the plans and policies
supervision
Authority Middle and Lower Level Top level
Role Executive Decisive
Concerned with Policy Implementation Policy Formulation
Area of operation It works under administration. It has full control over the activities of
the organization.
Focus on Managing work Making best possible allocation of
limited resources.
Key person Manager Administrator
Represents Employees, who work for Owners, who get a return on the capital
remuneration invested by them.
Function Executive and Governing Legislative a

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Business Digest 204 HRM ( Basics of HRM )

Group vs Team:

Group Team
A group is a collection of mutually A team is an interdependent group of
independent individuals with separate individuals who share responsibility and are
goals who are brought together by focused on a common goal.
common interests and experience.
Individually Mutually
Blue-collar vs White collar vs Gold- Collar employee:
★ A "Blue-collar worker" is a member of the working class, who performs manual labour and
earns an hourly wage. It is the low-class Job.
★ White-Collar means a salaried professional, typically referring to general office workers and
management
★ Gold-collar employees are highly skilled professionals who may be in high demand, such as
engineers, doctors and lawyers.
Define Think Tank:
★ A think tank or think factory or policy institute is a research institute/centre or organization that
performs research and advocacy on concerning topics such as social policy, political strategy,
economics, military, technology, and culture.
What is turnover rate?
★ Turnover rate refers to the percentage of employees leaving a company within a certain period
of time.
Define brain drain:
★ Brain drain is the movement of skilled individuals from a less developed area to a more
developed area, by which a country or area loses it most talented and educated workers to other
countries or areas.
Difference between salary and incentives and wages:
Salary Incentive Wage
Salary is well-defined Incentives are given according Wage is the variable amount of
through the contract or the to extra work depending on the compensation which is paid on the basis of
agreement between two performance and quality. hours spent in finishing a certain amount of
parties. work

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Business Digest 205 HRM( Recruitment and selection)

Recruitment And Selection?


► Selection is selecting a candidate without conducting any technical test. Selection is based only on
personal interview.
► Recruitment is a process of selecting an employee through a chain of processes (Aptitude Test /
Technical Test >> Personal Interview >> Technical Interview >> HR Interview >> Finalizing the
Offer).
Difference between Recruitment and Selection:
Basis Recruitment Selection
Meaning It is an activity of establishing contact It is a process of picking up more
between employers and applicants. competent and suitable
employees.
Objective It encourages large number of Candidates It attempts at rejecting unsuitable
for a job. candidates.
Process It is a simple process. It is a complicated process.
Hurdles The candidates have not to cross over many Many hurdles have to be crossed.
hurdles.
Approach It is a positive approach. It is a negative approach.
Sequence It precedes selection. It follows recruitment.

What is Talent Management?


★ Talent management is an organization's commitment to recruit, hire, retain, and develop the
most talented and superior employees available in the job market.
Resume vs CV vs Bio-data:
► A resume is ideally a summary of one’s education, skills and employment when applying for a
new job. It thus, is usually 1 or at the max 2 pages long.
► Curriculum Vitae is a Latin word meaning “course of life”. It is more detailed than a resume,
consisting every skill, all the jobs and positions held, degrees, professional affiliations the
applicant has acquired.
► In a bio data, the focus is on personal particulars like date of birth, gender, religion, race,
nationality, residence, marital status, and the like.
What do you mean by job requisition?
★ A job requisition is a document created by employers to fill a position or positions. It is
transferred to Human Resources in order for approval for the recruitment process to begin.
★ The following should be included:
► Job Title
► Job Type/Field
► Job Description
► Benefits

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Business Digest 206 HRM( Recruitment and selection)

Job Design, Enlargement, Specification and Evaluation:


►Job Design: Job design is determining the specific task to be carried out by each member of an
organisation. The Job Design means outlining the task, duties, responsibilities, methods and
relationships required to perform the given set of a job.
►Job Enlargement: Job enlargement is expanding job duties.
►Job Specification: Job specification is the qualification needed to do a job. The statement which
explains the minimum eligibility requirements, for performing a particular job is known as Job
Specification.
►Job evaluation: A job evaluation is a systematic way of determining the relative value/worth of
a job in relation to other jobs in an organization for the purpose (in most cases) of establishing a
rational pay structure.
Job analysis vs Job description vs Job rotation vs Job enlargement vs Job enrichment:
► Job Analysis- a process to identify and determine in detail the particular job duties and requirements
► job description or JD– a document that describes the general tasks, or other related duties, and
responsibilities of a position.
► Job rotation is the systematic movement of employees from one job to another within the
organization to achieve various human resources objectives to train, to develop organisation
behaviour and to prevent job boredom.
Difference between Job analysis and Job description:
Basis Job Analysis Job Description
Meaning A deep research on a particular job A comprehensive job summary depicting the
to ascertain every small details job contents in short but in an exhaustive
about it. manner.
What is it? Process Statement
Mode Oral or Written Written

Difference Between Job description and Job specification:


Basis Job Description Job Specification
Meaning Job Description is a concise written The statement which explains the minimum
statement, explaining about what are eligibility requirements, for performing a
the major requirements of a particular particular job is known as Job Specification.

Prepared Job Analysis Job Description

What is Replacement charts?


★ Replacement charts are a forecasting technique used in succession planning to help
companies visualize key job roles, current employees and existing and future vacancies.
Positions are mapped alongside information such as potential replacements, gender and
promotion potential.

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Business Digest 207 HRM( Recruitment and selection)

Job enlargement vs Job enrichment:


Job Enrichment Job Enlargement
One type of horizontal expansion where scope One type of vertical expansion where
of a job is increased. range of activities of a job is increased.
Quantitatively expanding the scope of a job. Qualitatively extending the range of
activities performed by a job.
To motivate a bored employee who handles A human resource executive was initially
customer enquiries, queries and calls on the front responsible for maintaining the
desk. He kept on doing the same work for two employees’ record and calling the
years and got bored. Few more tasks were added candidates for interviews as directed by
to her job profile like interacting with the clients the HR manager. To add more value to the
and making outbound calls to create new HR executive’s job profile, the manager gave
customers for the company. These added tasks him some authority related to the work
reduced her monotony. already assigned to him.
Job satisfaction vs Job involvement:
★ Job satisfaction is an individual's general attitude toward his or her job.
★ Job involvement is the degree to which a person identifies with his or her job, actively
participates in it, and considers his or her performance important to self-worth.
What is Probationary Period:
★ A trial period of employment during which someone is employed only subject to satisfactorily
completing this period of time. They are mainly used with new employees and vary in length
but typically last between one and six months.
What is cognitive ability?
★ The ability of an individual to perform the various mental activities most closely associated
with learning and problem solving.
What is Succession Planning?
★ Succession planning is a process for identifying and developing new leaders, who can replace
old leaders when they leave, retire or die. In business, succession planning entails developing
internal people with the potential to fill key business leadership positions in the company.
Define Fringe benefits:
★ Fringe benefits are additional compensation provided to an employee or partner by an
employer, such as health insurance, paid time off, or a company car, housing allowance,
educational assistance, meals and employee discounts and sick pay.

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Business Digest 208 HRM (Career and Training )

Job vs Career:
JOB CAREER
A job is an activity or task performed by an A career can be defined as a journey of a
individual to earn livelihood. work life of an individual.
Short term Long term

Different types of training method:


►Technology-Based Learning.
►Simulators. Simulators are used to imitate real work experiences. ...
►On-The-Job Training. ...
►Coaching/Mentoring. ...
►Lectures. ...
►Group Discussions & Tutorials. ...
►Role Playing. ...
►Management Games.
What is internship?
★ An internship is a period of work experience offered by an organization for a limited period of
time.
What is Job Shadowing?
★ Job shadowing is an on-the-job learning, career development, and leadership development
program.
★ It involves working with another employee who might have a different job in hand, have something
to teach.
What is on-boarding?
★ On-boarding, also known as organizational socialization refers to the mechanism through which
new employees acquire the necessary knowledge, skills, and behaviours in order to become
effective organizational members and insiders.
★ It is the process of integrating a new employee into the organization and its culture.
Difference between Training and Development:
Basis Training Development
Meaning Training is a learning process in which Development is an educational
employees get an opportunity to develop process which is concerned with the
skill, competency and knowledge as per overall growth of the employees.
the job requirement.
Focus on Present Future
Objective To improve the work performances of the To prepare employees for future
employees. challenges.
Orientation Job oriented Career oriented

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Business Digest 209 HRM (Appraisal and Evaluation)

What Is Performance Appraisal?


★ It is a systematic evaluation of an individual with respect to performance on the job and
individual’s potential for development.
How Do You Endow With Performance Appraisal?
 There are many ways to do Performance Appraisal:
►90-degree appraisal-- Where the performance feedback is taken only from the Supervisor.
►180-degree appraisal- Where the performance feedback is taken from the peers.
►360-degree appraisal- Where the performance feedback is taken from the supervisor the
subordinates, the peers, and the self-appraiser.
Types of performance evaluation method:
☛ Management by Objectives (MBO) Method: This is one of the best methods for the
judgment of an employee's performance, where the managers and employees set a
particular objective for employees and evaluate their performance periodically.
☛ Critical Incident Method: In this method, the manager writes down the positive and
negative behavioural performance of the employees.
☛ 360 Degree Performance Appraisal Method: The definition of this performance
evaluation method is that, it is a system or process wherein the employees receive some
performance feedback examples, which are anonymous and confidential from co-workers.
☛ Checklist and Weighted Checklist Method
☛ Graphic Rating Scale Method: A simple printed form enlists the traits of the employees
required for completing the task efficiently. They are then rated based on the degree to
which an employee represents a particular trait that affects the quantity and quality of
work.
☛ Field Review Method: This type of evaluation is conducted by someone outside the
employee's department. In most cases, the human resources department undertakes the
evaluation. While the bias of the department head is eliminated in this form of appraisal,
there is a risk that it may not be accurate.
☛ Forced Choice Method: In this method, the appraiser is asked to choose from two pairing
statements which may appear equally positive and negative. However, the statements
dictate the performance of the employee. An excellent example of this can be "works
harder" and "works smarter". The appraiser selects a statement without having knowledge
of the favourable or the unfavourable one.
☛ Forced Distribution Method: In this method, the appraiser rates employees according to
a specific distribution. For example, out of a set of 5 employees, 2 will get evaluated as
high, 2 will get evaluated as average while 1 will be in the low category.

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☛ Essay Evaluation Method: In the essay method of evaluation the appraiser writes an
elaborate statement about the employee who is being evaluated.

What is Key Performance Indicator (KPI)?


★ Key performance indicator (KPI) is a type of performance measurement mechanism or tool.
★ KPIs evaluate the success of an organization or of a particular activity based on factors such
as :new customer acquisition, status of existing customers, customer attrition, turnover,
collection of bad debts within customer relationships, finance report error rate, average cycle
time of workflow.
Some indicators of KPI:

Financial Metrics Customer Metrics Process Metrics

 Profit: How successful • Customer Lifetime ► Customer Support


your organization is at Value (CLV): Tickets
generating a high return? • Customer Acquisition ► Percentage Of Product
 Cost: Find the best ways Cost (CAC) Defects
to reduce and manage • Customer Satisfaction
your costs? ► Efficiency Measure
& Retention
 Target Revenue: • Number Of Customers ► Employee Turnover
Compare between your Rate (ETR)
actual revenue and your •
► Percentage Of
projected revenue.
Response To Open
 Cost Of Goods Sold: Position
Low COGS is expected.
► Employee Satisfaction
 Day Sales Outstanding
(DSO):The lower the
number, the better your
organization is doing at
collecting accounts
receivable.
 Sales By Region:

How Do I Determine Which KPIs To Use?


★ The right KPIs for you might not be the right KPIs for another organization. KPIs should
match strategy, not just the industry.

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Business Digest 211 HRM( Employee Behaviour and Relationship))

Differentiate Personality, perception, beliefs and attitudes, values and custom:

√ Personality refers to individual differences in characteristic patterns of thinking, feeling and


behaving.
√ Perception is the organization, identification, and interpretation of sensory information in
order to represent and understand the presented information, or the environment.
√ Attitude:Tendency learnt to respond to something in a consistently favourable or
unfavourable way. Our attitude is shaped by our values and beliefs.
√ Beliefs:Consumers perceptions of how a product or brand performs.
√ Values:Socially preferable modes of conduct or states of existence that tend to persist over
time.
√ Customs:Norms and expectations about the way people do things in a specific country or
culture.
What is Emotional Intelligence?
★ Emotional intelligence refers to the ability to identify and manage one's own emotions, as well
as the emotions of others.
What is Hawthorne effect?
★ The Hawthorne effect is a type of reactivity in which individuals modify an aspect of their
behaviour in response to their awareness of being observed.
What is Aptitude Testing?
★ An aptitude test is a systematic means of testing a job candidate's abilities to perform specific
tasks and react to a range of different situations.
What is Prima facie?
★ Prima facie means something based on the first impression; accepted as correct until proved
otherwise.
What is Johari Window?
★ The Johari window is a technique that helps people better understand their relationship with
themselves and others.
What do mean by Intelligence Quotient (IQ)?
★ A person's reasoning ability measured through a total score derived from several standardized
tests.

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Biases in decision making:

★Heuristics are the rules of thumb that managers use to simplify decisions.
► Confirmation bias:Tendency to search for, interpret, favor, and recall information in a
way that confirms one's pre-existing beliefs or hypotheses.
► Availability heuristic:Mental shortcut that relies on immediate examples that come to a
given person's mind when evaluating a specific topic, concept, method or decision
► Anchoring:A cognitive bias for an individual to rely too heavily on an initial piece of
information offered (known as the "anchor") when making decisions.
► Availability heuristic:Mental shortcut that relies on immediate examples that come to a given
person's mind when evaluating a specific topic, concept, method or decision
► Anchoring:A cognitive bias for an individual to rely too heavily on an initial piece of
information offered (known as the "anchor") when making decisions.
► Halo effect:A consumer's bias toward a maker's products because of a favorable experience
with their other products. In another way, it means drawing a general impression about an
individual on the basis of a single characteristic.
► Sunk cost fallacy/Escalation of commitment:A human behavior pattern in which an
individual or group facing increasingly negative outcomes from a decision, action, or
investment nevertheless continues the behavior instead of altering course.
► Selective Perception:People selectively interpret what they see on the basis of their interest,
background, experience, and attitudes.
► Contrast Effects:Evaluations of a person’s characteristics that are affected by comparisons
with other people recently encountered who rank higher or lower on the same characteristics.
► Projection:Attributing one’s own characteristics to other people

► Stereotyping:Judging someone on the basis of one’s perception of the group to which that
person belongs.
Big five personality model:
★ The big five personality model identifies five types of personalities and every individual
fall into at least one of these types.
1.Openness to Experience:Intellectually curious, creativity and a preference for novelty and
variety within a person.
2.Conscientiousness:It is the tendency of being standardized, self-disciplined, and prioritizing
planned instead of spontaneous behaviour.
3.Extraversion:Positive energy, positive emotions, confidence, sociability and the tendency to
explore stimulation in the organization with others.
4.Agreeableness:Agreeableness is the tendency of being compassionate and cooperative instead
of suspicious and antagonistic towards each other.
5.Emotional Stability:It contradicts sensitive or nervous nature with secure or confident
one.

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Business Digest 213 HRM( FAQ)

If You Were Hiring A Person For This Job, What Would You Look For?
★ In my point of view, I would recommend the following things:
►Required skills for the role
►Team player
►Pro-activeness
►Loyalty to the work.
Are You Willing To Show Interest Towards The Organization Ahead Of Your Own?
★ Yes, but in return I would expect the organization to take care of my needs as an individual.
What Is Your Ability To Work Under Pressure?
★ I have always enjoyed working under pressure. It is like a tonic, which boosts me, but I always
keep it under control so it does not take a toll on me.
What Is More Important To You: The Money Or The Work?
★ Money and work both are like siblings. However, I believe that when you work hard, you
could earn more. Therefore, work is more important than money. It is the hard work that can
help you put another feather in your success cap.
What are your strengths and weaknesses?
★ Possible Answer: “I have several strengths namely – I am patient, committed, honest and
self-motivated. I am the biggest dreamer I have ever come across! I forgive easily and hate to
keep grudges in my heart. My greatest weakness is that I don't like getting interrupted when I
am seriously into something. Another one of my weaknesses is that I trust people very easily.
As I already said, I am a very patient person, so I am actively working on this lacuna.”
“I am a perfectionist and that is my main weakness, which I also think is my strength.”
What are your strong points? or What are your strengths?
★ “I’ve been told that I’m a very good manager. My team tells me that I give them a lot of
freedom in how to do their work, which they really appreciate. They also say that I’m really
enthusiastic, so when we’re faced with too much work, they tell me that my manner really
helps to keep them motivated and calm. My boss also tells me that I’m very innovative in
terms of finding new ways of working that cut out inefficiency.”
What is the difference between hard work and smart work?
★ Hard work is delivering work on time with more effort and smart work is delivering work on
time, with lesser effort. I feel that is the basic difference. Most of the times, in the corporate
world, I feel a combination of both is needed to attain excellence.” good people. When
there's no other way, I’ve found its better for all concerned to act decisively in getting
rid of offenders who won't change their ways."
How Long Would You Expect To Work For Us If Hired?
★ I will be satisfied until the time I am able to learn and contribute and my contribution's are
recognized.

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How do you work under pressure? Can you handle the pressure?
★ Possible Answer #1: “Working under pressure is what I have done a lot during my college
days. I have realized that I can actually work well under pressure. It is the pressure factor that
brings out maximum efficiency in me.”
What Is Employee Retention?

★ Keeping your key, quality employees happily so that, the company would not lose them to the
peer, competitive companies.
How much salary you expect?

★ Sir as a fresher, my priority is to gain knowledge and experience. I will accept the salary which
is stated according to the company's norms.
Your interview is more or less coming to an end when the interviewer asks
you, “Do you have any questions for me?”

★ Never say “no” as this is perhaps the worst response ever given by any interview candidate!
Remember that interviews are not integrations but are business conversations where both the
parties should ask and respond to questions. Coming back to the situation, the best answer for a
fresher is as follows:
★ Possible Answer #1: “Yes, I do!” This is probably your very first chance during the interview,
to ask a question. Questioning will indicate that as a fresher, you came well-prepared for the
interview and you are still absorbed in the conversation. It will also show that you do take
interest in the organization. Make a general list of five questions (such as the secret of success
of the company, what they want from the employees etc) about the company and ask them to
your interviewer, after all other HR interview questions and answers are over.
Give me an example of your creativity:

★ Possible Answer #1: “I can’t exactly recollect. Since I am hoping to become a software
developer, I have to be creative at all times. Writing code not only requires technical expertise
and logic but also creativity to a great extent. Only then the solutions developed will be
flexible and be accommodating.”
★ Possible Answer #2: “Recently, the company that I work for, inaugurated a new store. On the
day of the opening, the air conditioning of the outlet failed. In order to keep all the new
customers comfortable, I immediately cracked the idea of organizing a sidewalk open-air sale!
It was a life saver as the shop was super-hot inside. This is an example of how resourceful and
creative I can be when the situation demands!”
Why should I hire you?

★ Sir, as I'm fresher I need the best platform to improve myself and you need hard work and
dedicated person. So, I hope this company deserves me. As it was my 1st platform I never quit
because my motto is :to never give up in any difficulties.
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Why do you want to work at our company?


★ I always wanted to work in such an atmosphere, that encourages leadership and is fearless to
take up challenges to develop innovative solutions. I have researched to find that your industry
believes and practices such as great values in work culture. And I will be grateful, to work with
you. I believe that my skills and attitude will not disappoint you.
What is the difference between confidence and over confidence?
★ There is a thin line between confidence and overconfidence. When you think that you have
such potential to do that work, that's your confidence.
★ And if you think that You are the only one who can do that work easily and nobody can do that
as you can, then that's your overconfidence.
What are the three things that are most important for you in a job?
Possible Answer #1: “Honesty, loyalty, and determination to achieve my team’s target.”
Possible Answer #2: “Professionalism, growth and a healthy work-life balance are important.”
★ Confidence is that you have believe in yourself that you can do it.
★ Over confidence is you underestimate other people and you think you can do that particular
work very easily and quickly. How much salary do you expect?
Are You A Team Player?
★ While answering this question, try to keep yourself on both sides. For example, if the
interviewer asks if you prefer to work alone or on a team, he may be trying to get you to say
you are one way or the other. However, you do not have to play this game. The reality is that
most jobs require us to work both independently and in teams. Your response to this question
should show that you have been successful in both situations.
Why Did You Choose Hr? Why Do Want To Make Your Career In Hr?
★ HR is the backbone in an organization. Right from recruiting the suitable candidate to training
and then performance appraisal, compensation, until exit interview, all these steps involves an
HR. Therefore, if you want to be a soul of an organization not just a part of it, you should be
an HR.
What Is The Difference Between Job Role And Job Profile?
★ Job role defines your exact position in a company like Manager, HR, and Job profile explains
different responsibilities, which you have in a company.
Have You Ever Had To Fire Anyone? How Did You Feel About That?
★ "So with me, firing is a last resort. However, when it has to be done, it has to be done. A poor
employee can wreak terrible damage in undermining the morale of an entire team of
What will you do if the most performing employee in your team is leaving the organization?
★ This is a tricky situational question asked during your interview. Here the recruiter is interested to
know two things. One that what measures can you take to retain a good resource and other how
will you manage the loss, will you get panic. So the perfect answer could be:
★ I would talk to the employee and understand the root cause of such a decision. If the reason is quite
genuine and personal, I will ask him to take an extended leave, and if it makes no sense to the
employee, I won’t force him/her to stay back. But if the reason is something related to growth/
dissatisfaction; I will speak to the HR and try to retain the employee in all possible ways. By any
chance, if nothing works, I will look for the next available resource and help him/her with the right
training
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Business Digest

Chapter Contents Page


No.
Economics, microeconomics, Macroeconomics:(3 pillars of macroeconomics), Positive vs 216-221
normative economies, Welfare economics, First fundamental theorem of welfare economics,
Second Fundamental Theorem of Welfare Economics, Structuralist Economics, Heterodox
Basics of Economics, market economy, Laissez-faire Economy, Barter Economy, Mixed Economy,
Economics: Demand and law of demand, supply and Law of supply, Normal Good, Inferior goods, Neutral
Micro and Macro goods, Giffen goods, Public vs private goods, Merit goods, Poverty, primary vs absolute vs
relative poverty, Poverty Trap and poverty gap, Endogenous vs exogenous variable, utility,
opportunity cost, scarcit/deficit, Decision at the margin, Marginal product of labour and capital,
Market, Multiplier, Deadweight Loss, Rent-seeking, X Inefficiency, Monopoly, Duopoly, Price
taker, Resource Allocative Efficiency, Stock vs Flow, Business cycle, Recession vs Depression
vs Depreciation, Blue Economy Initiatives, LDC (Least Developed Country).
Market, price mechanism, price discrimination, shadow price, Equilibrium; Equilibrium price 222-225
Market and quantity, partial equilibrium, Elasticity and related terms, Elasticity and related terms,
Negative Income Elasticity of Demand, Price taker, Monopoly, Duopoly, price ceiling and price
floor, price ceiling and price floor, price ceiling and price floor, Open Market vs Free Market,
Perfect competition, Oligopolistic competition, Oligopolistic competition, Monopolistic
competition
Inflation, deflation, Types/Reason of Inflation, Types of Inflation (Based on extent), Types of 226-230
Inflation (Based on calculation method) The causes of Inflation, Methods of Calculating
Inflation, Consumer price Index (CPI), The problems with CPI, Producer Price Indexes (PPI),
Inflation CPI VS WPI (wholesale Price Index), GDP Deflator, CPI vs GDP deflator, inflation tax, Fisher
equation, the social costs of expected Inflation, Other costs of inflation, the cost of unexpected
inflation, The benefits of Inflation, the costs of deflation, hyper-Inflation, stagflation, the cause of
Hyperinflation, Shoe-Leather Cost, fiscal drag, Market-Power Theory of Inflation, Loanable
funds theory, interest and pure rate of interest.
Unemployment Types of unemployment, disguised unemployment, Natural Rate of Unemployment, Full 231
employment, NAIRU (non-accelerating inflation rate of unemployment)
Aggregate Demand and Aggregate Supply, the factors of production, National income (NI), the
Four broad categories of National Income, Net export (NX), The Problems of measuring national 232-236
income, The Methods of Calculating National Income, Gross domestic product (GDP), Real and
Domestic/ nominal GDP, Gross national product (GNP) and Net Domestic Product (NNP), Natural GDP
Level, Alternative indicators, How GDP affects the money supply, How the Money Supply
National Affects GDP, Can GDP become higher than GNP, Equilibrium level of output, Inflationary vs
Production deflationary gaps, Per Capita income (PCI), productive efficiency or inefficiency, Theory of
Secular stagnation, The main sectors of GDP of Bangladesh, Remittances in GDP, Consumption
Function, saving functions and Investment function, Demand/Supply Shock, Imputed Value,
Accelerator vs Multiplier
Monetary policy, Accommodative Monetary Policy, Contractionary Monetary Policy, Which 237-244
monetary policy Bangladesh Bank has announced, Dear money/cheap money policy, Hot Money,
the Instruments of monetary policy, Other tools of Monetary Policy, The objectives of monetary
policy, Why Central Banks Keep Foreign Exchange Reserves, Money and its functions, Money
Supply, Quasi Money, Fiat money, The Measures of Money, Plastic Money, Speed Money
Monetary Policy (Bribe), Commemorative Coin, Monetary (Money) Base, Money-creating power, Black Money,
velocity of money, Real money balance, How does Bangladesh Bank attempt to achieve
economic stability, How Bangladesh Bank inject money into the economy (03 methods),
Seigniorage, Cash Ratio Reserve (CRR) vs Statutory Liquidity Ratio (SLR), Bank Rate, Call
Money and market, money laundering, currency Policy, The sources of Black Money, The
different Sources of Black IncomeEffects/Consequences of Black Economy, Methods to convert
black money into money, Hundi.
Fiscal Policy Fiscal Policy, the types of fiscal policy, Discretionary Fiscal Policy, The objectives of fiscal
Policy, The tools of Fiscal policy, The 3 ways govt. can raise funds, Transfer, deficit budget, 245-246
Balanced budget, development Budget, Why does Bangladesh always have a deficit budget,
Other reasons of having deficit budget.
The reasons for International Trade, International Finance, Common Market, Open 247-255
International Market, economic Integration, Balance of payment and Balance of trade, Trade Union,
Components of Balance of Payments, Custom Union, Bank for International
Trade Settlements (BIS), Theory of Comparative Advantage /Ricardian Model, The
assumptions of The Ricardian Model of Trade, The Heckscher-Ohlin Theorem of
Trade, Assumptions of The Heckscher-Ohlin Theorem, absolute advantage, Leontief
Paradox, comparative advantage,

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Chapter Contents Page No.

“The invisible hand”, External Economies of Scale, Transfer Price, dumping, Types of 247-255
Trade Barriers, Protective Tariff, Import Quota, Local Content Requirement, Trade
Embargoes, Voluntary Export Restraints, Anti-dumping Measures, Countervailing
Measures, Safeguard Measure, Subsidies, Export Subsidies, Free Trade Agreements,
SAARC Preferential Trading Arrangement (SAPTA) (In force-1995), North American
International Trade Free Trade Agreement (NAFTA), Trade-Related Aspects of Intellectual Property
Rights (TRIPS), Foreign Aid vs foreign Loan, Purchasing and purchasing power
parity (PPP), FDI (Foreign Direct Investment), Some incentives that Bangladesh offer
to the foreign investors, Soft Loan, Cartel, Gresham Law, SDR (Special Drawing
Rights), The Bretton woods system, Why Bretton- System failed.
Foreign exchange, The objectives of Regulating Foreign Exchange Transactions, 256-258
Direct vs indirect quotation, the types of exchange rate, Foreign Exchange Market in
Foreign Exchange Bangladesh, Appreciation vs Depreciation vs Devaluation, Why devaluation sometime
pursued, Gold Standard, influence the variations and fluctuations in exchange rates,
Foreign exchange reserve and its components (Composition of foreign exchange
reserves), Three categoriesreserve currency, Advantages of holding a large amount of
foreign exchange reserves, Disadvantages of holding a large amount of foreign
exchange reserves, How does Bangladesh Bank create foreign exchange reserves
when it has a trade deficit always
Optimum theory of Population, Solow Growth model for long run, Endogenous 259-263
Theories of Growth Theory, The general theory (Keynes):Keynesian Theory:, IS-LM (Investment
Economics Savings- Liquidity-money) (Short-run), Classical vs Keynesian theory, Baumol-Tobin
model, Fisher’s Quantity theory of money, Modern Quantity Theory of Money
(Friedman), Permanent income hypothes(Friedman), Classical Theory (Adam smith,
David Ricardo, Thomas Malthus, Jean-Baptiste Say), Game Theory, Game theory and
prisonner’s dilemma
Normal and Economic profit,Cobb-Douglas production function,Production 264-270
Possibilities Frontier (PPF)? ,productive efficiency or inefficiency ,productive
efficiency or inefficiency ,Law of Diminishing Marginal Utility,Pareto
Efficiency,Indifference Curve,Indifference Curve,Properties of Indifference
Curves,Properties of Indifference Curves,Law of Increasing Opportunity
Costs,Increasing Returns to Scale,Law of Increasing Return,Law of Constant
Various Concepts Returns,Marginal Rate of Transformation ,Marginal Rate of Substitution ,Marginal
Rate of Substitution ,Marginal Propensity to Consume ,Marginal Propensity to
Consume ,Economies of Scale, Diseconomies of Scale, Economies of
Scope,Economies of Scale, Diseconomies of Scale, Economies of Scope,Keynesian
model,Keynesian model,Pigoue Effect,Income Effect,Substitution Effect,Contract
Curve,Contract Curve,Laffer Curve,Ratchet Effect ,Demonstration Effect,Okun's
Law,Supply creates its own demand,Assumptions of Say’s Law,Short vs long vs very
long run,Inside vs Outside Lag,Accounting vs Economic
profit,Hoarding,Capitalism,Mortgage,Vicious Cycle,Collective bargaining
agent ,Permanent-income-Hypothesis, Hypothesis, Absolute,Income,Hypothesis,
Mercantilism, Mercantilism, Monetarism , price/budget,line/constraints,price/budget
line/constraints,Lorenz Curve,Lorenz Curve,Diamond-Water Paradox,Kaldor-Hicks
CriterionPositive externalities,Phillips curve,Phillips curve,Paradox of Thrift,Kaldor-
Hicks Criterion, Permanent-income.
Tax return, Tax holiday, Tax holiday, Financial Year, Financial Year, Assessment 271-278
Year, Tax Base, Tax Bracken, Tax Break, Tax Burden, Direct Tax, Direct Tax,
Electronic Filing, Tax heaven, Tax heaven, Double Taxation, Estate ,Tax Deducted at
Source ,Classification of taxes, Other types tax, Regressive Tax, Tariff, Progressive
Taxation tax ,main causes of tax evasion and the creation of black money, Surcharge,
Collection of indirect tax in Bangladesh, Collection of direct Tax in Bangladesh, Sin
Tax, Carbon Tax, Carbon Tax, Wealth tax,Flat Tax (unit tax),Negative income tax,
National Board of Revenue and its structure, Functions of Introflection in 2017-
2018 ,Tax not collected by NBR,Tax not collected by NBR, Different tax rates in
Bangladesh ,Different tax rates in Bangladesh ,Individual Income Tax, Other tax rates
in Bangladesh ,Country Comparison for corporate taxation
Economics and Economic Growth, Growth vs Development, Sustainable Economic Growth. 279-280
development Sustainable Development, 3 Pillars of Sustainable Development, Big-Push Theory,
Human Development Index HDI, four divisions of the Ministry of Finance, economic
development models, Bail-out vs Bail-in, Nationalization vs Privatization,
Nationalization vs Privatization. Public- Private Partnership, financial inclusion,
Challenges for the economy of Bangladesh

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Business Digest 216 Economics (Basics of Economics)

What is Economics?
★ Economics is the study of the allocation of limited resources to satisfy unlimited human wants.
★ Economics is the science which studies human behaviour as a relationship between ends and scarce
means, which have alternative uses.
What is Microeconomics?
★ Microeconomics is a branch of economics that studies individuals, households and firms' behaviour
in decision making and allocation of scarce resources. It generally applies to markets of goods and
services and deals with individual and economic issues.
Macroeconomics: (3 pillars of macroeconomics)
► Macroeconomics is the branch of economics that studies the behaviour and performance of
economic indicators, especially gross domestic product, the inflation and the unemployment rate.
► It is the study of how these variables are determined, why they change over time and how they
interact with each other.
► Macroeconomics looks at the economy as a whole.
Positive vs Normative economies:
√ Positive economics is a stream of economics that focuses on the description, quantification and
explanation of economic developments based on objective data analysis, relevant facts and
associated figures.
√ Normative economics looks at how the economy should be or should have been rather than how it
actually is or was–it suggests policies for improving economic welfare based on ideological, opinion
-oriented, prescriptive, value judgments and "what should be" statements.
√ Positive economics is objective and fact based, while normative economics is subjective and value
based.
√ Positive economics explains how economy works or predicts some future trends by examining cause
-effect relationship.
√ Normative economics deals with social welfare and policy recommendations. It is concerned with
what should be.
Welfare Economics:
★ Welfare economics is a branch of economics that focuses not only on efficiency, but also improving
human welfare and social conditions. Often known as economics with a heart, it is done principally
through the optimum distribution of wealth – the best allocation of resources.
First Fundamental Theorem of Welfare Economics:
★ The first fundamental theorem of welfare economics (also known as the “Invisible Hand Theorem”)
states that any competitive equilibrium leads to a pareto efficient allocation of resources. Pareto
efficiency can be defined as efficiency where society would not find another allocation that is
unanimously better.
★ The main idea here is that markets lead to social optimum. Thus, no intervention of the government
is required, and it should adopt only “laissez faire” policies.

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Second Fundamental Theorem of Welfare Economics:


► The Second Fundamental Theorem of Welfare Economics states that if every consumer has convex
preferences and every firm has a convex production set then any Pareto-efficient allocation can be
achieved.
► In other words, second fundamental theorem of welfare economics state that any efficient
allocation can be attained by a competitive equilibrium.
► In economics, the theorem states that any allocation that is pareto efficient can be the outcome of
an anonymous market, provided that the initial endowment is chosen in a certain way.
Structuralist Economics:
★ A form of heterodox economics which emphasizes the relationships between effective demand,
income distribution, and political and economic power.
What is Heterodox Economics?
★ Various schools of thought (including post-Keynesian, structuralist, Marxian, and institutionalist
economics) which reject the precepts of dominant neoclassical theory.
★ They emphasize on the importance of institutional development and evolution (as opposed to
“pure” market forces) in explaining economic and social development.
Define market economy:
★ A market economy is an economy where most resources are owned and controlled by individuals
and are allocated through voluntary market transactions governed by the interaction of supply and
demand.
★ A market economy is a system where the laws of supply and demand direct the production of
goods and services. Supply includes natural resources, capital, and labour. Demand includes
purchases by consumers, businesses, and the government.
Laissez-faire Economy:
► Laissez-faire economy is an economy of complete non-intervention by the governments in the
economy leaving all decisions to the market.
► The theory (given by Scottish economist Adam Smith) is that the less the government is involved
in free market mechanism, the better the business will be.
Barter Economy:
★ Barter Economy is an economy where people exchange goods and services directly with another
without any payment of money.
Mixed Economy:
★ Mixed Economy is an economic system of a country in which some companies are owned by the
state and some are private; that means both public and private sectors have an important role in
national-building.
What is Utility?
★ In economics, utility is the capacity of a commodity to satisfy human wants. It is the want
satisfying power of any commodity or capacity of a commodity to give satisfaction. Utility is
measured in “Utils”.
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Business Digest 218 Economics (Basics of Economics)

What is demand and law of demand?


★ Demand is the quantity of goods that consumers are
willing and able to purchase at various prices during a
given period of time.
★ It's the underlying force that drives economic growth
and expansion.
★ The law of demand: The law of demand states that
[other factors being constant (ceteris paribus)] price
and quantity demanded of any good are inversely
related to each other. When the price of a product
increases, the demand for the same product falls .And
when the price of good decreases, quantity demanded increases.
What is supply and Law of supply?
► Supply is the total amount of a specific good or service that is
available to consumers.
► It is the producer's willingness and ability to supply a given
good at various prices, holding all other things constant.
► Law of supply states that [other factors remaining constant]
price and quantity supplied of a good are positively related to
each other. In other words, as the price of a good or service
increases, the quantity of goods or services that suppliers
offer increases, and vice versa.
Normal Good; Inferior goods; Neutral goods:
► A normal good is any good for which demand increases when income increases, i. e. with a
positive income elasticity of demand. Examples include, LCD and plasma television, demand for
more expensive cars, branded clothes, expensive houses, diamonds etc.
► An inferior good is a type of good whose demand declines when income rises. In other words,
demand of inferior goods is inversely related to the income of the consumer. Inter-city bus service
is an example of an inferior good
► Neutral goods are goods whose demand is independent of income such as prescribed medicines
for people with medical conditions. Examples: Rice, Salt.
Giffen goods:
★ Giffen goods are products whose demand increases when prices rise, thus reversing the typical law
of prices and demand.
★ There is very limited evidence demonstrating the existence of Giffen goods. Many people say that
they are a myth. But some believe that cheaper goods such as potatoes, salt etc. come
under Giffen goods.
Public vs Private goods:
► Economists define a public good as being non-rival and non-excludable.The non-rival part of this
definition means that my consumption does not affect your consumption of a good such as
national defence.
► A private good is rival and excludable. A good is rival if consumption of one unit by one person
decreases available units for consumption to another person such as foods, cars, house etc.

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Merit goods:
★ Merit Goods are socially desirable goods which are either under-produced or under-consumed due
to positive externalities and market. For example; education, vaccination, museum, health care.
Main 2 characteristics of merit goods are:
√ People underestimate true personal benefit. For example, people underestimate the benefit of
education or getting vaccination.
√ Merit goods have a positive externality.
Poverty, Primary vs Absolute vs Relative poverty:
√ Poverty is not having enough money or access to resources to enjoy a decent standard of living
such as lack of access to healthcare, education or water and sanitation facilities etc.
√ Primary poverty means not having enough money to meet basic needs. It can also be considered
as ‘living below the poverty line.’
√ Someone is absolutely poor if his income does not allow him to consume enough to purchase a
minimum bundle of consumer goods and services.
√ On the other hand, a person/household is in relative poverty if his income is considerably lower
than the median level of income within a country or society.
Poverty Trap and Poverty Gap:
► Poverty trap is a mechanism which makes it very difficult for people to escape poverty. A poverty
trap is created when an economic system requires a significant amount of various forms of capital
in order to earn enough to escape poverty.
► When individuals lack this capital, they may also find it difficult to acquire it, creating a self-
reinforcing cycle of poverty.
► Poverty Gap is the average shortfall of the total population from the poverty line. This
measurement is used to reflect the intensity of poverty.
Endogenous vs Exogenous variable:
★ Endogenous variable are those variables that a model tries to explain and exogenous variables are
those variables that a model takes as given.
What is opportunity Cost?
★ Opportunity cost is the value of the next best alternative that is forfeited when a choice is made. It
is the price of the next best thing one could have done if he had not made his first choice.
What is scarcity?
★ It is the condition in which our wants are greater than the limited resources available to satisfy
those wants.
What is deficit?
★ When a government, business, or household spends more in a given period of time than they
generate in income, the situation is called deficit.
What is Multiplier?
► Multiplier refers to an economic factor that, when increased or changed, causes increases or
changes in many other related economic variables.
► It’s a factor, the change of which, causes chain reaction of activities that stimulate the economy.

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Decision at the margin:


√ It is a mechanism of decision making characterized by comparing marginal benefits and marginal
costs of consuming goods or services.
√ Marginal benefit:Marginal benefit is the benefit received from consuming one additional unit of
good or service.
√ Marginal cost:Marginal cost is the costs connected to consuming one additional unit of goods or
service.
What is Deadweight Loss?
► Deadweight loss refers to the loss of economic
efficiency when the equilibrium outcome is
not achievable or not achieved.
► In other words, it is the cost born by society
due to market inefficiency. Deadweight loss
can be applied to any deficiency caused by an
inefficient allocation of resources.
What is Rent-seeking?
★ Rent-seeking refers to attempting to increase
one’s share of current wealth without
producing or creating any additional wealth.
★ Rent-seeking activities aim to obtain financial gains and benefits through the manipulation of the
distribution of economic resources.
What is X Inefficiency?
★ X Inefficiency refers to the inefficiency that occurs due to a lack of effective /real competition in a
market or industry.
★ It occurs when a firm lacks the incentive to control costs. This causes the average cost of
production to be higher than necessary.
What is Marginal Product of Labour and Capital?
★ Marginal product of capital (MPK) is the additional output resulting, ceteris paribus ("all things
being equal"), from the use of an additional unit of physical capital.
★ Marginal product of labour is the additional production a company experiences by adding one unit
of labour.
Recession vs Depression vs Depreciation:
► Recession is a condition in which the total real GDP of an economy shrinks (usually, for at least
two consecutive quarters) associated with high unemployment rate.
► A depression is a very deep, long, and painful recession, in which unemployment rises to very
high levels, and economic output does not bounce back.
► Depreciation represents the loss of value from an existing stock of real capital.
What is Resource Allocative Efficiency?
★ Allocative efficiency is the level of output where the price of a good or service is equal to
the marginal cost of production. It can be achieved when goods and/or services have been
distributed in an optimal manner, and when their marginal cost and marginal utility are equal.

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Business Digest 221 Economics (Basics of Economics)

Business Cycle:
★ The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle
is a useful tool for analysing the economy.
★ It is the fluctuations in economic activity, such as employment and production.
Consumer Surplus; Producer Surplus; Total Surplus:
★ Consumer surplus is defined as the
difference between the total amount that
consumers are willing and able to pay for a
good or service and the total amount that
they actually pay.
★ The Producer Surplus is the area under
the supply curve that represents the
positive difference between the price at
which a producer is willing and able to
sell a product and the price at which
producer sells it.
★ Total surplus, also known as economic
surplus or economic welfare, is the sum of producer surplus and consumer surplus.
Blue Economy Initiative:
★ It involves integrated development strategy for fisheries, aquaculture, marine tourism and
ecosystem preserving local system of production and consumption, using the ocean resources,
without harming the interest of future generation.
★ Sustainable development of blue economy is possible through utilization of the existing natural and
mineral resources in the Bay of Bengal and its adjoining oceans.
Stock vs Flow:
★ Stock is a quantity which is measurable at a particular point of time. It is the stock of accumulated
capital. Like a balance-sheet
★ Flow is a quantity which is measured with reference to a period of time. Examples of flow variables
are national income, expenditure, savings, depreciation, interest, exports, imports, change in
inventories.
LDC (Least Developed Country):
► LDC (Least Developed Country) are the countries whose 80% population depends on
agriculture, more than half of population are unemployed, most of the people are the
victim of malnutrition & the illiteracy rate is high.
► Bangladesh got listed as a member of LDC in 1975 and expectedly is going to get out
in 1924.
► Five countries have already got out of the list and Equatorial Gini is the latest one.

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Business Digest 222 Economics(Market)

Market:
★ Market is a mechanism through which buyers and sellers interact to set prices and exchange goods
and services.
What is price mechanism?
★ Price mechanism refers to the system where the forces of demand and supply determine and change
the prices of commodities.
★ It is the buyers and sellers who actually determine the price of a commodity. A price mechanism
affects both buyers and sellers who negotiate prices.
What is price discrimination?
★ Price discrimination refers to the charging of different prices by the monopolist for the same
product, for reasons not associated with cost or supply.
★ In pure price discrimination, the seller charges each customer the maximum price he or she will
pay.
What is shadow price?
★ Shadow price is the price indicating the intrinsic or true value or real economic price of a factor/
product/projects/activities/goods, or services that sometimes may have no market price or may
deviate from market price. These prices may be different for different time periods and
geographically different areas (in the case of labour).
★ Shadow price is sometimes represented as the proxy value of a good or project.

Equilibrium; Equilibrium price and quantity:


√ Equilibrium refers to the economic situation where supply and demand for a certain good or service
in the market is equal. At equilibrium state, economic forces such as supply and demand are
balanced.
√ Consumers Equilibrium is the point at which a consumer reaches optimum utility, or satisfaction,
from the goods and services purchased, given the constraints of income and prices.
√ Equilibrium is reached when the consumer purchases the assortment of goods which best meets his
satisfaction requirements, given his financial constraints.
√ An equilibrium price, also known as a market-clearing price, is the open market price at which the
market supply equals market demand. The manufacturer can sell all the units they want to sell and
the customer can access all the units they want at equilibrium price.
√ The equilibrium quantity is the quantity of a good or service bought at the equilibrium price. It is
the situation when the quantity demanded and quantity supplied are equal . It exists when a market
is in equilibrium.

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What is partial equilibrium?


★ Partial equilibrium models consider only one market at a time, ignoring potential interactions
across markets. It is strictly valid only under some limited circumstances which may not always
hold in practice, but may be reasonable approximations.
★ These types of models allow us to predict changes in key economic variables, such as interest,
prices, volume of trade, revenue, and measures of economic efficiency.
Elasticity and related terms:
★ Elasticity is a measure of sensitivity on a variable to a change in another variable. In economics,
elasticity is the measurement of how an economic variable responds to a change in another.
► Price Elasticity of Demand:Price elasticity of demand measures the responsiveness of
demand of a product for a change in its own price.
► Perfectly Elastic Demand (Ep=∞): It is a situation when a slight change in the price of a
commodity causes a major change in its quantity demanded. In perfectly elastic demand, the
demand curve is a straight horizontal line.
► Perfectly Inelastic Demand (Ep=0):It is a situation when there is no change in the demand
for a product due to the change in the price, then the demand is said to be perfectly inelastic.
Here, the demand curve is a straight vertical line.
► Relatively Elastic Demand (EP>1):The demand is said to be relatively elastic if the
percentage change in demand is greater than the percentage change in price. It is also called
highly elastic demand or simply elastic demand. The demand curve of relatively elastic
demand is gradually sloping.
► Relatively Inelastic Demand (Ep< 1):The demand is said to be relatively inelastic if the
percentage change in quantity demanded is less than the percentage change in price. It is
also called less elastic or simply inelastic demand. The demand curve of relatively inelastic
demand is rapidly sloping.

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► Unitary Elastic Demand (Ep=1):The demand is said to be unitary elastic if the percentage
change in quantity demanded is equal to the percentage change in price. The numerical value
for unitary elastic demand is equal to one (ep=1). The demand curve for unitary elastic
demand is represented as a rectangular hyperbola.
► Cross Elasticity of Demand:The cross elasticity of demand or cross-price elasticity of
demand measures the responsiveness of the quantity demanded for a good to a change in the
price of another good (e. g. Good Y) keeping other things unchanged.
► Income Elasticity of Demand:Income elasticity of demand measures the responsiveness of
the quantity demanded for a good or service to a change in real income of consumers who
buy this good, keeping all other things constant.
► Positive Income Elasticity of Demand:It refers to a situation when the demand for a product
increases with increase in consumer’s income and decreases with decrease in consumer’s
income. The income elasticity of demand is positive for normal goods.
Negative Income Elasticity of Demand:(Giffen Goods) :
√ Negative income elasticity refers to a kind of income elasticity of demand in which the
demand for a product decreases with increase in consumer’s income. The income elasticity of
demand is negative for inferior goods, also known as Giffen goods.
√ Zero Income Elasticity of Demand:In this case there is no effect of change in consumer’s
income on the demand of product. The income elasticity of demand is zero (ey = 0) in case of
essential goods.
√ Price Elasticity of Supply:Price elasticity of supply is a measure of responsiveness of the
quantity supplied of a good or service to a change in its price.
Who is a Price taker?
or company that has no control to dictate prices for a good or service.
★ A price taker is a person
All economic participants are considered to be price-takers in a market of perfect
competition.
What is Monopoly?
★ Monopoly is a market structure characterized by a single seller, selling a unique product in the
market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods
with no close substitute. In this market producer enjoys the power of setting the price for his
goods.
What is Duopoly?

★ Duopoly is a form of oligopoly. In its purest form two firms control all of the market, but in reality,
the term duopoly is used to describe any market where two firms dominate.

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What is price ceiling and price floor?

★ A price ceiling is the government mandated maximum price a seller is allowed to charge for a
product or service.
★ A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the
government to prevent prices from being too low. A price floor must be higher than the
equilibrium price in order to be effective.
Open Market vs Free Market:
 Open market is an economic system with no trade barriers between countries. The term ‘open
market’ is used in international trade.
 Free market is an economic system where price level is determined by the interaction of demand
and supply. The term ‘free market’ is used in capitalism.
What is Perfect competition?
★ Perfect competition describes a market structure where competition is at its greatest possible level.
To make it clearer, a market which exhibits the following characteristics in its structure is said to
show perfect competition:
Large number of buyers and sellers
Homogenous product is produced by every firm
Free entry and exit of firms
Zero advertising & transportation cost
Absence of Government and artificial restrictions
Every firm is a price taker.
What is Oligopolistic competition?

★ Oligopoly refers to a market structure in which a few firms control the supply of a commodity.
The competing firms are few in number but each one is large enough so as to be able to affect
the total industry output and none of which can keep the others from having significant
influence.
What is Monopolistic competition?
► Monopolistic competition is a market structure which combines elements of monopoly and
competitive markets.
► In Monopolistic Competition, there are many small firms who all have minimal shares of the
market. Firms have many competitors, but each one sells a slightly different product. Firms are
neither price takers (perfect competition) nor price makers (monopolies).
► There are no barriers to entry. It ensures that there are neither supernormal profits nor any
supernormal losses to a firm in the long run. (Nike, Adidas, New Balance, ASICS, etc. ).

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Business Digest 226 Economics( Inflation)

‘Inflation is a disease that can wreck a society’— US economist Milton Friedman (received the Nobel
Prize in Economics in 1976)
What is inflation?
►Inflation is the overall rise in the price level that reduces the purchasing power of that country’s
currency.
►It refers to the measure or rate by which the cost of goods and services rises and purchasing
power declines.
►Inflation might take place due to the increases in the money supply or excess demand or supplu
shortage or rises in public expenditure etc.
What is deflation?
★ Deflation is defined as the decrease in the average price level of goods and services. It means a
general decrease in consumer prices and assets, but the increase in the value of money. If the
inflation rate is negative, i.e., below 0%, then the economy is experiencing deflation.
Types/Reason of Inflation:
★ Cost-push inflation: Inflation caused by persistent rises in costs of production.
★ Demand-pull inflation: Inflation caused by persistent rises in aggregate demand.
Types of inflation (Based on mode):
√Mild inflation: When price level increase slowly.
√Galloping inflation: When price level increases rapidly.
Types of Inflation (Based on extent):
㊣ Creeping Inflation: A sustained rise in price level generally less than 3% per year.
㊣ Walking Inflation:3% to 6% per year
㊣ Running Inflation: around 10% per year
㊣ Hyperinflation:20% to 30% or more (Inflation in Argentina and Brazil during 1970-80 was 50% to
700%; Zimbabwe also experienced hyperinflation recently).
Types of Inflation (Based on calculation method):
► Point to Point Inflation: Point to point inflation is the percentage change in the CPI during the last
12 months (e. g. 1 march 2017 to 1 march 2018). The general point-to-point inflation rate of
Bangladesh was recorded to be 5. 54 percentage point in June, 2018.
► Average Inflation (12 months moving average): It is the percentage difference, between the
average Price Index of last 12 months and the average Price Index of previous 12 months.
► In the 2017-2018 financial year, the average general inflation of Bangladesh was 5. 78%. [As per
the Bangladesh Bureau].
Methods of calculating inflation:
㊣Consumer Price Index (from consumers’ point of view)
㊣Wholesale price Index (used by Government, banks, industry)
㊣GDP deflator.
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What are the causes of inflation?

Demand side causes of inflation Supply side causes of inflation:

 Increase of money supply  Wage price spiral (increased cost of


 Deficit budget production)
 War cost  Decrease of production
 Increase of disposable income  Supply shock
(increased demand)
 Anxiety about price inflation.

What is Fisher Equation?


★ Fisher equation states that the nominal interest rate is a function of real interest rate and inflation
rate and thus changes in nominal interest is caused by either real interest rate change or inflation
rate change or both.
★ It states that nominal interest rate equal to the sum of the real interest rate and inflation.
What is Consumer Price Index (CPI)?
√ CPI is a measure to determine the changes in the retail prices of selected goods and services, over
a period of time , on which consumers of a defined group spend their incomes.
√ CPI data is gathered by sampling prices and using a ‘basket’ of goods as weights.
√ Most used methods are
1. Laspeyres Index (highly used)
2. Paasche Index
3. Fisher Index.
What are the problems with CPI?
► It does not include consumer’s ability to substitute towards relatively low-priced goods.
► It does not include the cost of public goods and services.
► CPI takes logistical time lag between switching between old and new goods in the basket.
► It can not take into account quality improvements of a product and how it positively affects the
consumer's lifestyle.
Producer Price Indexes (PPI):
★ A family of indexes that measure the average change of selling price of goods and services over
definite time. PPIs measure price change from the perspective of the seller.
CPI VS WPI (Wholesale Price Index):

CPI WPI
 Considers commodities, at retail level. Considers commodities at wholesale level
 Measured at final stage of transaction Measured at first stage of transaction
 Covers Goods and Services Goods only
 Focuses on prices of goods purchased Focuses on prices of goods traded between
by consumers. business houses.

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Business Digest 228 Economics( Inflation)

GDP Deflator:
★ It is the ratio of nominal GDP to real GDP. It reflects what’s happening to the overall price levels in
the economy.
★ It is a measure of the impact of inflation on the gross domestic product during a specified period,
usually a year.
What is inflation tax?
★ Inflation tax is not an actual legal tax paid to a government; instead "inflation tax" refers to the
penalty for holding cash at a time of high inflation. When the government prints more money or
reduces interest rates cash held in hand is worth less after inflation has risen. The decrease in the
value of cash is termed as inflation tax.
What are the social costs of expected Inflation?
► Epected inflation causes inflation tax on the amount of money people hold by someone.
► High inflation induces firms to change their prices more often. Changing prices is sometimes
costly
► Firms facing menu costs change prices infrequently: thus, the can not adjust the higher the rate
of inflation with high variability in relative price.
► Inflation can alter individual’s tax liability, often in the ways that lawmakers did not intend.
► Finally, it is inconvenient to live in a world with a changing price level.
Other costs of inflation:
★ Due to inflation, the purchasing power of the people decreases. So, the cost of living and the
cost of production increases.
★ Inflation tends to discourage investment & long-term economic growth.
★ It also reduces the value of savings.
CPI vs GDP deflator:
CPI GDP Deflator
 Considers only goods and services bought  Considers all the goods and services
by consumers produced
 CPI includes anything bought by consumers  GDP Deflator includes only domestic
including foreign goods. goods
 CPI assigns fixed weights to the prices of  GDP deflator frequently changes weights
goods
What are the benefits of inflation?
㊣ Moderate level of inflation allows economic growth and higher employment.
㊣ It helps in labour market since nominal wages can’t be cut and inflation causes the real wages fall
resulting the labour market in equilibrium. Without inflation real wage would be stuck above
equilibrium resulting higher unemployment.
㊣ Moderate inflation enables adjustment of prices and wages.

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Business Digest 229 Economics( Inflation)

What are the costs of deflation?

√ It discourages consumer spending, leading to reduced output


√ Real value of debt increases if interest rate is fixed
√ Loss of employment as employer cuts employee to adjust with new price
√ Loss of government tax as tax is charged based on nominal incomes.
What is Hyper-Inflation?
★ A situation of extremely rapid inflation often resulting from a condition of economic or political
breakdown.
What is Stagflation?
★ Stagflation is a situation in which the inflation rate is high, the economic growth rate slows down,
and unemployment remains steadily high.
What is the cause of Hyperinflation?
★ Both Monetarism and Classical Economics agreed that hyperinflation is born out of the
irresponsibility of the financial authorities to borrow and print excess money to make payments to
its war cost, unusual spendings.
★ Hypeninflation might also take place when printing money is highly required because the govt has
some prefixed spending patterns
★ It might happen when tax collection is highly concentrated on couple of sector and the collapse of
those sectors lead to less tax and subsequently leading to print new currency.
Does inflation favour lenders (banks) or borrowers?
★ Inflation can benefit either the lenders (banks) or the borrowers depending on the circumstances.

★ If return form investment increase with inflation and if the borrower already owed the money
before the inflation occurred, the inflation benefits the borrower.
★ However, if wages/return do not increase with inflation, it benefits lenders (banks) because people
need more time to pay off their previous debts, allowing the lender to charge more interest on the
money. However, this could backfire if it results in higher default rates.
Define Shoe-Leather Cost:
★ Essentially, shoe-leather costs refer to the time and effort people take to minimize the effect of
inflation on the eroding purchasing power of money. People wear out their shoes on the way back
and forth to the bank, so to speak, trying to protect the value of their assets.
Define Fiscal Drag:

★ Fiscal drag occurs when earnings growth and inflation push more earners into higher tax brackets.
Consequently, the government’s tax revenue rises without any increases in tax rates. In other
words, fiscal drag is the automatic restraint applied to a fast-expanding economy under a
progressive tax system
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Business Digest 230 Economics( Inflation)

How does Bangladesh Bank control inflation?

By controlling currency issue Increasing CRR and SLR requirements


By increasing bank rate By running open market operations
By controlling loanable funds
Market-Power Theory of Inflation :
★ In an economy, when a single or a group of sellers together decide a new price that is different
from the competitive price, then the price is termed as market-power price. They do so to earn
maximum profit without any concern for the purchasing power of consumers.
Loanable Funds Theory:
★ The loanable funds theory sates that interest rate is determined in terms of demand and supply of
loanable funds or credit.
★ Both the supply of money available for borrowing and demand for money to be borrowed depend
upon interest rates.
When does money cease to function?
★ Money ceases to perform its functions properly and satisfactorily in a highly inflationary situation
when money is losing its value rapidly .
★ All the functions of money are interdependent or interconnected. In hyperinflation, money ceases
to function as a standard of deferred payment and ceases to act as a store of value.
What is interest and pure rate of interest?

√ Interest refers to the payment made by the borrower to the lender of the capital for its use.
√ It is 'the premium which has to be offered to induce people to hold their wealth in some form
other than hoarded money.
√ The exchange rate between future consumption (future dollar) and current consumption (current
dollar) is the pure rate of interest.
√ In pure interest rate, there exists no inflation, no risk and no inconvenience.
Can Interest rate be below zero?

㊣ Negative interest rates can occur in high inflation environments particularly if inflation is growing
higher than interest being received on investment.
㊣ A negative interest rate means the lender is paying the individual or business to borrow money
from them, which means that borrowers get paid and savers are penalized. This strategy
stimulates borrowing and lending. During harsh economic times the central bank ensures
negative interest rate in order to stimulate investment, economic growth or infrastructural
development resulting in employment and growth.
㊣ Japan experienced negative interest rate 2 years ago to encourage investment.

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Business Digest 231 Economics(Unemployment )

Unemployment:
★ Unemployment is a situation when individuals who are employable (aged 15 to 64) and seeking a
job but are unable to find a job.
Types of unemployment:
√ Cyclical unemployment:It exists when individuals lose their jobs as a result of a downturn in
aggregate demand (AD).
√ Structural unemployment: It exists when certain industries closes/ changes their operation
procedure to adapt with changes in market infrastructure. This structural changes causes some job
cuts resulting unemployment.
√ Regional unemployment:When structural unemployment affects local areas of an economy, it is
called ‘regional’ unemployment.
√ Classical unemployment:when wages are ‘too’ high and employer cannot afford many employees
to be profitable
√ Seasonal unemployment:when certain industries only produce or distribute their products at
certain times of the year
√ Frictional unemployment:when workers lose their current job and are in the process of finding
another one.
√ Voluntary unemployment:when workers choose not to work at the current equilibrium wage rate.
What is disguised unemployment?
★ Disguised unemployment or hidden unemployment is a kind of unemployment where some people
seem to be employed but are actually not. For example, when 10 members of a farmer family
employed on small farm plot when 5 are enough. Those extra 5 members are actually unemployed
rather than being employed.
Natural Rate of Unemployment:
★ The natural rate of unemployment is the rate of unemployment when the labour market is in
equilibrium. It is the unemployment caused by frictional, structural, and surplus unemployment.
Full employment:
★ The economy is considered to be at full employment when the actual unemployment rate is equal
to the natural rate. When the economy is at full employment, real GDP is equal to potential real
GDP.
NAIRU (Non-Accelerating Inflation Rate of Unemployment)
★ The non-accelerating inflation rate of unemployment (NAIRU) is the specific unemployment rate
at which the rate of inflation stabilises. It refers to the level of unemployment at which the
economy settles if monetary policy is held stable.
★ According to Phillipe curve, unemployment rate has negative relation with inflation. Thus, NAIRU
helps in gauging the state of the business cycle, the outlook for future inflation, and the appropriate
stance of monetary policy.

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Business Digest 232 Economics(Domestic Production)

What is Aggregate Demand and Aggregate Supply?


★ The total amount of goods and services demanded in the economy at a given overall price level in a
given time period.
★ The total supply of goods and services produced within an economy at a given overall price level in
a given time period.
What are the factors of production?
★ Factors of production are the resources people use to produce goods and services; they are the
building blocks of the economy.
√ Land:Land includes all-natural physical resources used to produce goods and services such
as water, land, river, sunlight, trees, sunlight etc.
√ Labour:Labour is the human input into production. It is the effort that people contribute to
the production of goods and services e. g. the supply of workers available and their
productivity.
√ Capital:Capital refers to produced goods (including all man-made resources) that can be
used as inputs for further production. Capital includes machinery, equipment, new
technology, factories, other buildings etc.
√ Entrepreneurship:Entrepreneurship is the secret sauce that combines all the other factors of
production into a product or service. It is a specialised form of labour input.
√ An entrepreneur is a person who combines the other factors of production - land, labour, and
capital - to earn a profit.
What is National income (NI)?
★ National income is the sum of the incomes that all individuals in the country earn in the forms of
wages, interest, rents, and profits.
★ It includes indirect business taxes, but excludes transfer payments and makes no deduction for income
taxes.
What are the four broad categories of national income?
 Consumption (C)
 Investment (I)
 Government purchase (G)
 Net Export (NX)
Y=C+I+G+NX
What is Net Export (NX)?
★ Net export is the value of a country's total exports minus the value of its total imports
★ It is used to calculate the GDP in an open economy.
What are the problems of measuring national income?
►Exclusion of non-monitory-real transactions such as barter, home-made service.
►Problems of double counting

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►Excluded market transactions such as transfer payment, capital gains, illegal activities, second
hand sales.
►Practical difficulties in calculating imputed values
►Cost of environmental damage is excluded.
What are the methods of calculating national income?
★ Product method:Sum of total value of final goods and services produced in a country
★ Income method:Sum of net income payments received by all citizens of a country
★ Expenditure method:Sum of total expenditure incurred in a country in a particular year.
What is Gross domestic product (GDP), Real and nominal GDP?
★ Gross domestic product (GDP) is the value of all final goods and services produced in the
domestic economy during a specified period of time, usually a year. It includes domestic
production by foreigners and excludes foreign production by its citizen.
★ Real GDP is calculated by valuing outputs of different years at common prices.
★ Nominal GDP is calculated by valuing product in a particular year measured in that year’s prices
★ Net domestic product (NDP)= GDP minus the value of the depreciation of the country’s capital goods.
What is Gross National Product (GNP) and Net National Product (NNP)?
★ GNP is the sum of market value of all final goods and services produced by citizens of a country
during the year. GNP includes foreign production by citizens and excludes domestic production by
foreigners.
★ Net national product (NNP)= GNP minus the value of the depreciation of the country’s capital
goods.
Natural GDP Level:
★ Natural GDP is the optimum level of production of goods and services in an economy in a year,
given the existence of natural rate of unemployment, no supply/demand shocks and pre-existing
various natural and institutional constraints.
Limitation of GDP:
It can’t measure the quality of life
Exclusion of non-market transaction (babysitting, lawn mowing, illegal drug sales)
The failure to incorporate the degree of inequality in income
Failure to indicate whether the growth is sustainable or not
Failure to incorporate the cost on human health and environment
Alternative indicators:
★Human development index

★Genuine progress indicator

★Happy planet index.

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How GDP affects the money supply?

★ Economic growth (GDP growth) has a natural deflationary effect, even if the supply of money
does not actually shrink.
★ GDP is an imperfect representation of economic productivity. Rising economic productivity/
growth increases the value of money in circulation since each unit of currency can
subsequently be traded for more valuable goods and services.
★ In summary, when GDP increases , the money supply although remained unchgaed, results in
deflationary effect as the value of money increases
How the money supply affects GDP?

★ According to standard macroeconomic theory, an increase in the supply of money should


lower the interest rates in the economy, leading to more consumption and lending/borrowing.
This means in the short run, money supply increases total output and spending and,
presumably, GDP.

★ The long-run effects of an increase in the money supply are much more difficult to predict.
There is a strong historical tendency for asset prices, such as housing, stocks, etc. , to
artificially rise after too much money enters the economy. This means, the misallocation of
capital after large money supply leads to waste and speculative investments which often
results in burst bubbles and recession in the long run.
Can GDP become higher than GNP?

★ GDP can be higher than GNP if more foreigner/foreign investment come to the home country
and produce products and services worthier than the value of product and services produced
by domestic citizen residing in a foreign country.
What is Equilibrium level of output?

★ The equilibrium level of output is that level of output at which the total amount of planned
spending is just equal to the amount produced.
★ Equilibrium Level of Output is the level of output at which quantity of output produced (AS)
is equal to quantity demanded (AD).
What is Demand/Supply Shock?

An unexpected event that changes the demand or supply of a product or commodity due to
sudden change in its price is called demand shock or supply shock. The followings are some
examples of demand and supply shocks:
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Inflationary vs deflationary gaps:

★ If planned aggregate demand exceeds full employment output, the gap is called inflationary
gap and there will be upward pressure on prices (demand pull inflation). Govt. uses monetary
& fiscal policy to reduce aggregate demand in such situation.
★ If planned aggregate demand falls below the full employment output, the gap is called
deflationary gap and there will be downward pressure on prices. Government should use
monetary & fiscal policy to increase aggregate demand (as in the Great Depression).
Theory of Secular Stagnation:

★ Secular stagnation is a condition of negligible or no economic growth in a market-based


economy. When per capita income stays at relatively low levels, the percentage of savings is
likely to fall. With the reduced savings rate investment rate shrinks significantly. Thus,
economic growth comes to a standstill – i. e. it stagnates.

What are the main sectors of GDP of Bangladesh?

1.Agriculture (14.10%)

2.Manufacturing and industry (52.66%)

3.Services (33.24%)

Why remittances are not included in GDP?

★ Gross domestic product (GDP) is the total value of output in an economy. Though, remittances
can be a source of GDP growth by increasing household consumption, it does not directly add
to GDP because the definition does not allow non-domestic production to include in GDP, but
it does affect GNP .
Define Consumption Function, Saving Functions and Investment function:

★ Consumption function is the formula laid out by famed economist John Keynes and it was

designed to show the relationship between real disposable income and consumer spending.
★ The saving function is a function which shows the relationship between savings and income

★ Investment function is a function that shows relationship between income and investment on

business.

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Business Digest 236 Economics(Domestic Production)

Accelerator vs Multiplier :

► Accelerator effect states that planned capital investment is linked positively to the past and
expected growth of national income
► Multiplier effect states that If there is an initial injection in input(e. g. a rise in exports), then the
final increase in aggregate demand and real GDP will be greater.
► While multiplier shows the effect of changes in investment on changes in income (and
employment), the accelerator shows the effect of a change in consumption on private investment.
What do you mean by Per Capita Income (PCI)?

★ PCI is the national income divided by total population of a country.

What is Imputed Value?

★ In calculation of national Income, it must include some goods and services that are not traded in

the market place. Imputed value is an assumed value given to this untraded goods and services
such as
Value-added of meals cooked at home.

Housing services enjoyed by homeowners.

Services of automobiles to their owners.

Value of illegal drugs sold.

What is Demand/Supply Shock?

An unexpected event that changes the demand or supply of a product or commodity due to
sudden change in its price is called demand shock or supply shock. The followings are some
examples of demand and supply shocks:

Demand shocks Supply shocks


√ Economic downturn in a major trading partner √ Steep rise in oil and gas prices or other
√ Unexpected tax increases or cuts to welfare commodities
benefits √ Political turmoil /strikes
√ Financial crisis causing bank lending /credit √ Natural disasters causing sharp fall in
to fall production
√ Bigger than expected rise in unemployment √ Unexpected breakthroughs in production
rates. technology.

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Business Digest 237 Economics( Monetary Policy )

What is Monetary policy?


★ Monetary policy refers to any conscious action undertaken by the central bank of a country to
change the quantity, availability and cost of money. Major aspects of monetary policy in
Bangladesh are money supply, expected credit growth rate and Interest rate. It is a powerful tool to
regulate macroeconomic variables such as inflation and unemployment.
Accommodative monetary policy:
★ In accommodative monetary policy, money supply and short-term interest rates are simultaneously
lowered to stimulate and encourage economic growth. This, in turn, makes money less expensive
for consumers and businesses to borrow. Thailand's central bank use accommodative monetary
policy to aid the country's economic recovery.
Contractionary monetary policy:
★ Contractionary monetary policy is a form of economic policy used to fight inflation which involves
decreasing the money supply in order to increase the cost of borrowing which in turn decreases
GDP and dampens inflation.
★ Contractionary monetary policy has some side effects too. It results in an increase in the
unemployment rate and a decrease in the growth rate of the GDP.
Which monetary policy Bangladesh Bank has announced?

★ Keeping balance with the fiscal policy, Bangladesh Bank has recently announced a contractionary
monetary policy statement for the second half (Jan-June) of the current fiscal year (2018-2019) to
control the supply of credits and inflation in a bid to maintain economic stability.
What happens if the government takes loan from BB/Private Bank?

★ From Bangladesh Bank: Money supply will increase, the country’s rate of inflation will increase.

★ From Private Bank: The individual or private investment in the country will decrease or fall
because the private entrepreneurs will be unable to avail loan facilities from the private banks.
With the downfall in the investment, the rate of unemployment increases. So, it becomes difficult
to continue the economic growth flow.
What is Dear money/Cheap money policy?
★ Dear money is the money that is expensive to borrow, because the rate of interest is high.

★ Cheap money is money that has been borrowed at a very low interest rate.

★ Cheap money policy is that monetary policy in which loans and advances are made available on
low interest rate and on easy terms. Reducing the CRR and Bank Rate are one of the main function
under cheap money policy when an economy is struggling

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Business Digest 238 Economics( Monetary Policy )

★ Dear money policy is the set of actions to restrict the volume of credit available in the economy
coupled with increasing the rate of interest. Increasing the CRR and Bank rate are the main
components of dear money policy. The objective of dear money policy is to counter inflation,
when an economy is running too hot.
Hot Money:
★ Hot Money is the regular and quick flow of funds (or capital) from one country to another country
in order to earn a short-term profit on interest rate differences between the countries, if prevails.
★ These financial transfers affect the exchange rate if the transfer is significant in sum and it might
negatively impact a country ‘s balance of payments (BoP).
What are the objectives of monetary policy?
► Stability in Price level

► Stability in Exchange Rate

► Full employment of resources

► Ensure sustainable economic growth.


What are the Instruments of monetary policy?
 Change in Reserve Ratio
 Open Market Operation
 Bank Rate policy
Other tools of monetary policy:

㊣ Interest rate ㊣ CRR


㊣ Reverse repo ㊣ SLR
㊣ Bank rate ㊣ Yield of treasury bills
㊣ Interest rate of saving scheme ㊣ Repo

What is Money and its functions?


★ Money is any object that is generally accepted as medium of exchanges or payment for goods and
services and repayment of debts in a given country or socio-economic context. Money has four
main functions:
1.Medium of exchange.
2.As unit of account.
3.As a store of value
4.Standard of deferred payment.
Why central banks keep foreign exchange reserves?
★ They've got two main functions: providing security and influencing exchange rates. In the first
case, they help to prove that the central bank has enough money to pay international debts and
meet other costs in tricky economic times. In the second, the central bank buys domestic currency
using the foreign reserve.

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Money Supply:
► Money supply is the entire stock of currency and other liquid instruments circulating in a
country's economy as of a particular time.
► Narrow Money (M1):A category of money supply that includes all physical money like coins
and currency along with demand deposits and other liquid assets held by the central bank.
► Broad Money (M2):Broad money refers to the most inclusive definition of the money supply. It
is defined as narrow money plus time deposits accepted by other depository institutions. Interbank
deposits and Government deposits are excluded from monetary measures in this case.
What is Quasi Money?
★ Quasi-money is highly liquid assets which are not cash but can easily be converted into cash.
Examples of quasi money include gold certificates, Savings accounts, Money funds, Government
treasury securities (such as T-bills) etc.
What is Fiat Money?
★ Modern-day monetary systems are primarily based on fiat money. It does not have any intrinsic
value, but governments declare it as legal tender through regulation.
★ Fiat money is not backed by any commodity, such as gold, but only by the faith of the bearer.
What is Money-creating Power?
★ Banks can create money through the accounting they use when they make loans. For example, by
using customer’s debit card or internet banking, He can spend these IOUs as though they were the
same as 100Tk. notes. By creating these electronic IOUs, banks can effectively create a substitute
for money.
★ Most of the money we use, in fact more than 95% of the money supply is electronic money
created with accounting entries when loans are issued by the private banking sector.
What are the Measures of Money?

M1 (Narrow money-typically covers the All currency (i. e. Cash) in circulation traveller’s
most liquid forms of money checks,
Demand deposits at commercial banks (or other
depository institutions) held by the public,
other checkable deposits
M2 (intermediate money) M1 +
Savings deposits
Money market mutual funds
Small time deposits
M3 (Broad money) M2+
Large time deposits
Repurchase agreements
institutional money market funds
Eurodollars

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What is Plastic Money?


★ Plastic Money is the generic term for all types of bank cards, credit cards, debit cards & smart
cards. Credit cards & debit cards are considered plastic money because, like money, they can
enable us to get goods and services.
What is Speed Money (Bribe)?
★ Speed Money (Bribe):In Bangladesh, general people willingly or unwillingly give bribe to the
government officials to have their works done (in securing approval or license from the
government). The money given in the form of bribe is usually called 'speed money'.
What is Commemorative Coin?
★Commemorative coins are coins that are issued to commemorate some particular events or
issues. Bangladesh Bank issued a number of commemorative coins marking important
historical events which included Bangladesh ‘s 20th Anniversary of Victory Day, the 1992
Summer Olympic Games, the Silver Jubilee of Independence, the 25th Anniversary of
Bangladesh Bank, the Inauguration of Jamuna Bridge and the International Mother Language
Day.
What is Monetary (Money) Base?
★ Monetary base is the sum of total currency in circulation and the amount held by banks as
reserves.
★ In other words, the monetary base refers to that part of the money supply which is highly liquid (i.
e. easy to use). The monetary base includes notes and coins and commercial banks’ deposits with
the Central Bank.
Money supply= Monetary base × money multiplier.
How does Bangladesh Bank attempt to achieve economic stability?
★ Bangladesh Bank attempts to achieve economic stability by varying the quantity of money in
circulation, the cost and availability of credit, and the composition of the country's national debt.
Why should Bangladesh Bank look into the share market besides BSEC, DSE and CSE?

★ Most of the participants in money market are also participants of capital market. So,
Bangladesh Bank as the regulator of money market should look into the matter. In addition If
the general investors incur loss in share market, they will indirectly blame Bangladesh Bank
for this.
How does Bangladesh Bank inject money into the economy (03 methods)?

1.By modifying reserve requirements — the amount of funds that banks must hold against deposits
in the bank accounts.
2.By lowering (or raising) the discount rate—the rates banks pay on short-term loans from
Bangladesh Bank,
3.By conducting open market operations.

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What is velocity of money?


► It measures the rate at which money circulates in the economy. It tells us how many times a unit
of currency flows through the economy.
► Velocity tells us the number of times a Ten Taka note changes hands in a given period of time.
► Higher velocity means the same quantity of money is used for a greater number of transactions.
What is real money balance?
★ Real money balance is the quantity of goods and services which can be purchased from a given
stock of money held by individuals.
★ Real money balances measure the purchasing power of the stock of the money.
Define money demand function:
★ Money demand function states that quantity demanded for real money balances is proportional to
real income.
★ It is an equation that shows the determinants of the quantity of real money balances people wish to
hold.
The function is Md = P·Ld(Y, i)
Md = demand for nominal money balances (demand for M1)
Ld = demand for liquidity function
P = aggregate price level (CPI or GDP deflator)
Y = real income (real GDP)
i = nominal interest rate on non-money assets
Cash Ratio Reserve (CRR) vs Statutory Liquidity Ratio (SLR):

√ Cash Ratio Reserve (CRR) refers to a portion of bank deposits (as cash) which banks are
supposed to keep or maintain with the central bank.
√ Statutory Liquidity Ratio (SLR) is a part of bank deposits that the commercial banks are
supposed to maintain with themselves in liquid form. Liquid form means cash, gold or
government bonds. SLR is mandatory to ensure that sufficient liquidity with the banks is kept.
√ CRR has to be maintained in cash while SLR can be maintained either in cash or in assets that
Bangladesh Bank suggests.
√ Banks do not earn any returns from the money parked in the form of CRR. However, banks can
earn returns from SLR.
√ CRR controls liquidity in economy while SLR regulates credit growth in the country.
Bank Rate:

★ Bank Rate is the rate at which the central bank lends money to other domestic commercial banks
or financial institutions. The bank rate signals the central bank ‘s long-term outlook on interest
rates. If the bank rate moves up, long-term interest rates also tend to move up.

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Repo Rate:
★ Repo Rate is the rate at which banks borrow funds from the central bank (Bangladesh Bank)
against collateral on the event of a deficiency of funds to meet the gap between the demands they
are facing for money (loans) and how much they have on hand to lend.
★ It acts as a source of short-term borrowing in which the banks sell securities to the central bank in
return for credit.
Reverse Repo Rate :

★ The rate at which the central bank borrows money from the banks is termed as the reverse repo
rate. The central bank uses this tool when it feels there is too much money floating in the banking
system.
Why is reverse repo rate lower than repo rate?

★ Reverse repo is always less than repo rate as Bangladesh Bank cannot give more interest on
deposits and charge lesser interest on loans. It is unusual to pay more than what has been received.
★ In order to ensure that there is no multiplicity of the two major policy rates (repo rate and reverse
repo rate), Bangladesh Bank has decided to maintain a fixed spread between the two rates so that
there is only one policy rate and a clear message goes out to the market in terms of Bangladesh
Bank's policy.
Call money and market :

► Call Money is the money loaned by a bank from another bank that must be repaid on demand.

► Call Money Market is a short-term money market — which allows for large financial institutions
(such as banks, mutual funds and corporations) to borrow and lend money at inter-bank rates. The
loans in the call money market are very short, usually lasting no longer than a week and are often
used to help banks meet reserve requirements.
What is money laundering?

► The act of disguising the source or true nature, identity, original ownership, and destination of
money obtained through illegal means.
► The laundering is done with the intention of making it seem that the proceeds have come from a
legitimate source.
► .Money Laundering Prevention Act-2012 aims at tackling the illegal money transfer to different
countries. A huge amount of money is being transferred outside the country illegally as a good
number of Bangladeshis are building their second home in 8-10 countries globally.
► Financial Action Task Force (FATF) is an inter-governmental policymaking body established in
1989 by the ministers of its member jurisdictions to combat money laundering and terrorist
financing.

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What is Hundi?

★ Hundi is a traditional system of transferring money used in South Asia whereby the money is paid
to an agent who then instructs an associate in the relevant country or area to pay the final
recipient. The Hawala is simply understood as manual transportation of huge amounts of money at
once. Hundi is a controversial, informal and unrecognized fund (money/remittance) transfer
channel which basically prevails in India and Bangladesh.
What is Black Money?

► Black Money is the money earned but not shown in the accounts for the purpose of tax evasion.

► Black money is the money which is earned through illegal activities beyond the rules and
regulations of a country.
Effects/Consequences of Black Economy:

㊣False information about the economy

㊣Impact on fiscal system:

㊣Imbalanced inequalities in society

㊣Misguidance on resource allocation

㊣Keeping national resources (black money) idle.


Methods to convert black money into white money

㊣ By declaring black money (and paying tax on this money)

㊣ Sale of gold and diamonds

㊣ Showing income as agriculture income

㊣ Showing cash income from profession

㊣ Sale of personal belonging like Jewellery

㊣ Converting black money by investment

㊣ Getting Black money as gifts from relatives and friends on different occasions.
What is Seigniorage?

★ The revenue raised by the govt by printing of money is called seigniorage.

★ It is the difference between the face value of coins/currencies and their production costs.

Bank Rate:

★ Bank Rate is the rate at which the central bank lends money to other domestic commercial banks
or financial institutions. The bank rate signals the central bank ‘s long-term outlook on interest
rates. If the bank rate moves up, long-term interest rates also tend to move up.
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What are the different Sources of Black Income?

★ Income-tax evasion ★ Goods supply to black market

★ Corporation tax evasion ★ Unaccounted stock-market profit

★ Excise duty evasion ★ Interest earned from unorganised credit markets

★ Customs duty evasion ★ Bribes

★ Black income from exports. ★ Illegally earned commissions

Other sources of Black Money?

√ Under-invoiced inventories: Sometimes the amount of inventory is under-invoiced so as


to keep extra amount to sale in the black market. The amount of sale is never reported in
the account book.

√ Over-invoiced plant and equipment: The fixed costs on plant and inventories are
reported higher than the actual amount so as to generate black money.

√ Illegal activities like smuggling, drugs and crime


How to hide black money:
√ Illegal holding of precious metals and jewellery
√ Flight of capital for investments abroad
√ Elections in a democratic system and political funding
√ Transfer activities (like investing in secondary share market and real estate)
√ Informal sector activities including trade, films and production: All the film industries in
Bangladesh are doing dreadfully bad, but still they continue to produce flop after flop.
Perhaps it is because movies are being made simply to hide excess black money.
What is currency policy?
★ The currency policy involves the central bank’s reserve of a certain amount of gold
equivalent to the value of the currency that will be printed.
What is Fiat Money?
★ Modern-day monetary systems are primarily based on fiat money. It does not have any intrinsic
value, but governments declare it as legal tender through regulation.
★ Fiat money is not backed by any commodity, such as gold, but only by the faith of the bearer.

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Business Digest 245 Economics(Fiscal Policy)

What is Fiscal Policy?


★ One of the factors that shapes the country's economic direction is fiscal policy.
★ Fiscal policy involves the government’s conscious and prudent action to change the levels of
taxation and its spending in order to influence Aggregate Demand (AD) and the level of economic
activity.
★ It’s the government’s stand on revenue collections through taxation and spending levels.
What are the types of fiscal policy?
 Expansionary (or loose) Fiscal Policy:
√ Results in increasing Aggregate demand/spending
√ Government will increase spending (G) and cut taxes (T).
√ Lower taxes will increase disposable income (C) and consumer spending will rise.
√ will worsen the government budget deficit, and thus govt will need to increase borrowing.
√ Objective is to accelerate economic growth.
 Deflationary (or tight) Fiscal Policy
㊣ It involves decreasing AD.
㊣ government will cut government spending (G) and/or increase taxes.
㊣ Higher taxes will reduce consumer spending (C)
㊣ Will lead to an improvement in the government budget deficit.
㊣ Objective is to slow down economic growth.
What is Discretionary Fiscal Policy?
★ In this system, some government taxing and spending programs can be adjusted by government in
response to change in economic circumstance.
What are the objectives of fiscal Policy?
√ To maintain full employment, economic stability
√ To stabilize the rate of growth
√ To stimulate economic growth in a period of a recession.
√ To keep inflation low
√ To accelerate the rate of capital formation and investment
√ To optimum allocation of resources.
What are the tools of fiscal policy?
 Government spending
 Tax.
What is a Transfer Payment?
★ Transfer Payment is a one-way payment of money for which no money, good, or service is
received in exchange. Governments use such payments as means of income redistribution by
giving out money under social welfare programs such as social security, old age pensions etc.

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What are the 3 ways govt can raise funds?


√Increase in tax/tax collection
√Sell government bonds/securities
√Seignories/printing money.
How government finance deficit budget?
★ Government usually financed the budget deficit by selling bonds to the private sector & by taking
loans. Main ways of financing deficit budget are as follows:
√ Borrowing from the central bank (Inflationary financing).
√ Borrowing from international money markets
√ Borrowing from capital markets by selling bonds.
√ Borrowing from domestic money markets such as commercial banks.
√ By printing new money.
What is Finance Bill?
★ Finance bill is a bill proposed in the parliament that contains provisions relating to revenue and
expenses.
★ It is the proposal of the government for levy of new taxes, modification of the existing tax
structure or continuance of the existing tax structure beyond the period approved by the
Parliament.
What is balanced budget?
★ Balanced budget (particularly that of a government) is a budget with revenues equal to
expenditures. In such neither a budget deficit nor a budget surplus exist.
What is development budget?
★ Development Budget is the budget where the expected income and expected expenditure are
presented for the development projects and works of the government.
Why does Bangladesh always have a deficit budget?
★ To ensure future sustainable development (education or infrastructure).
★ It helps to ensure a persistent growth of the GDP.
Other reasons of having deficit budget:
√ Misuse of tax supports provided to weaker sections by Govt
√ Emergency situations like natural calamities as above the estimation
√ Tax evasion with political support
√ Swiz savings
★ Example of countries with budget surplus regions (with very high per capita GDP) include Qatar,

Kuwait, United Arab Emirates (UAE), Saudi Arabia, Libya, Singapore, Macau, Tuvalu, Norway,
Ireland and Russia. These countries mostly have budget surpluses every year. China achieved a
record growth of 12% in 2007 — the only year it had a small surplus and another record growth of
6. 7% in 2016 when it had a record deficit.

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Business Digest 247 Economics(International Trade)

What are the reasons for international trade?


★ The main reasons for which international trade takes place are differences in technology,
differences in resource endowments, differences in demand, the presence of economies of scale,
and the presence of government policies.
What is International Finance?
★ International finance is the branch of financial economics broadly concerned with monetary and
macroeconomic interrelations between two or more countries. It focuses on the interrelationships
among aggregate economic variables such as GDP, unemployment, inflation, trade balances,
exchange rates, and so on.
What is Common Market?
★ When two or more countries form a customs union and free movement of all factors of production
among them, then it is called common market. European community has been working as a
common market since 1992.
What is Open Market?
★ It is a situation in which countries can trade without restriction and price depends on the amount of
goods and the number of people buying them.
★ An open market is characterized by the absence of tariffs, taxes, licensing requirements, subsidies,
unionization and any other regulations or practices that interfere with the natural functioning of the
free market.
What is economic Integration?
★ Economic Integration is the process of uniting the economics of a group of countries. It can be
achieved through abolition of trade barriers and single set of monetary, fiscal and other government
economic policies.
What is Balance of Payment and Balance of Trade?
► Balance of Payment (BoP) of a country is defined as the record of all economic transactions
between the residents of a country and the rest of the world in a given period of time. These
transactions are made by individuals, firms and government bodies.
► Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should
balance, but in practice this is rarely the case. BOP tells the observer if a country has a deficit or a
surplus economy.
► Balance of Trade (BoT) is the difference in value between a country's imports & its exports over a
period of time. BoT is the largest component of a country's balance of payments. Debit items
include imports, foreign aid, domestic spending abroad & domestic investments abroad. Credit
items include exports, foreign spending in the domestic economy & foreign investments in the
domestic economy. A country has a trade deficit if it imports more than it exports; the opposite
scenario is a trade surplus.

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What is Trade Union?


★ Trade Union is an organization of employees formed for the purpose of collective bargaining with
employers over wages, hours, condition of service, job security and managing levels.
Components of Balance of Payments:
Component # 1. Current Account:
★ Current account refers to an account which records all the transactions relating to export and
import of goods and services and unilateral transfers during a given period of time.
The main components of Current Account are:
 Export and Import of Goods (Merchandise Transactions or Visible Trade)
 Export and Import of Services (Invisible Trade) (Hospitality, tourism, insurance, shipping etc)
 Unilateral or Unrequited Transfers to and from abroad (One sided Transactions) such as gifts,
donations, personal remittances and other ‘one-way’ transactions.
Component # 2. Capital Account:
★ This account includes investment and other capital movements.
The main components of capital account are
√ Borrowings and lending to and from abroad (Corporate loans)
√ Investments to and from abroad (FDI, portfolio investment)
√ Change in Foreign Exchange Reserves
Component # 3. Official Financing:
 This account is maintained to balance the balance of payment. To ensure both debit and credit side
equals.
 When there is a negative figure, the amount has to be paid for either by borrowing from other
central banks and international organisations, or using up reserves which have been saved over the
years.
 When there is a positive figure, the amount has to be used for loan payment or kept as reserve.
What is Custom Union?
★ Custom Union is a trade agreement by which a group of companies and countries charges a
common set of tariffs and allows free trade among them.
★ Custom Union is a group of countries with free trade agreement between members and a common
external tariff on trade with non-members.
Bank for International Settlements (BIS):
★ An international financial regulatory organization based in Berne, Switzerland, which designs
international regulations regarding capital adequacy and other banking practices.
What is comparative advantage?
★ A country has a comparative advantage if it can produce a good at a lower opportunity cost than
another country can. A lower opportunity cost means it has to forego less of other goods in order
to produce it.

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Theory of Comparative Advantage /Ricardian Model:


★ The principle of comparative advantage holds that under free trade, a country will produce more of
and consume less of a good for which they have a comparative advantage.
★ By specializing in each country’s comparative advantage good and by choosing appropriate terms
of trade, both countries can consume more of both goods.
What are the assumptions of The Ricardian Model of Trade?
► Perfectly competitive market.
► Two countries producing two goods and using one factor of production.
► The goods are assumed to be identical, or homogeneous, within and across countries.
► Workers are identical in the productive capacities within, but not across, countries.
► Workers can move freely & costless between industries but cannot move to another country.
The Heckscher-Ohlin Theorem of Trade:
★ The Heckscher-Ohlin theorem states that a country will export the good that is intensive in the
country’s abundant factor. It means that a capital-abundant country will export the capital-intensive
good and import the labour-intensive good. On the other hand, a labour-abundant country will
export the labour-intensive good and import the capital-intensive good.
Assumptions of The Heckscher-Ohlin Theorem:
★ The model is a two-country, two-good, two-factor model that assumes production processes differ
in their factor intensities, while countries differ in their factor abundances.
What is Absolute Advantage?
★ A country has an absolute advantage in the production of a good relative to another country if it can
produce the good at lower cost or with higher productivity. Absolute advantage compares industry
productivities across countries. (See page 39: for Absolute vs comparative)
What is Leontief Paradox?
★ The Heckscher-Ohlin theorem gave a generalisation that the capital-abundant counties tend to
export capital-intensive goods while labour- abundant countries tend to export the labour- intensive
goods. W. W. Leontief put this generalisation to empirical test in 1953 and found the results that
were contrary – to the generalisation provided by the H-O theory.
★ In brief, capital-abundant countries export labour- intensive goods and labour-abundant countries
export capital-intensive goods. This reflects what is called as ‘Leontief Paradox’ as this conclusion
goes against H-O theory.
What is Term of Trade?
★ Terms of trade refers to terms or rates at which the products of one country are exchanged for the
products of the other.
★ The terms of trade measures the rate of exchange of one product for another when two countries
trade.
★ It expresses the amount of imported products/commodities that an economy can purchase, with per
unit of exported products/commodities. Any improvement that occurs in a country's TOT is
beneficial to the economy because it means that the country can purchase more imports for the
particular level of exports.
★ Terms of Trade (TOT) = Index of Export Prices / Index of Import Prices X 100.

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What is “The invisible hand”?


★ The invisible hand is a economic concept that tries to explain that without any observable
intervention – free markets will determine equilibrium in the supply and demand for goods. In a
free market economy, self-interested individuals operate through a system of mutual
interdependence to promote the general benefit of society at large known as invisible hand.
What do you mean by External Economies of Scale?
★ External economies of scale imply that as the size of an industry grows larger, the average costs
of doing business within the industry fall. These occur outside of a firm but within an industry.
All the businesses enjoy these economies equally.
What is Transfer Price?
★ Transfer price is the price at which divisions of a company transact with other departments or
parents transact with subsidiary. Transfer prices are used when individual entities of a larger
multi-entity firm are treated and measured as separately run entities. It is the price at which
parents sell or transact with subsidiary.
What is dumping?
★ Dumping is, in general, a situation of international price discrimination, where the price of a
product when sold in the importing country is less than the price of that product in the market of
the exporting country to gain unfair market share in the importing country.
Types of Trade Barriers:
★ Many countries restrict imports in order to shield domestic markets from foreign competition.
Such behaviour is known as protectionism. There are many types of trade barriers. The four
main types are protective tariffs, import quotas, trade embargoes, and voluntary export
restraints. Four main types of trade barriers are as follows:
Protective Tariffs:
► The most common type of trade barrier is the protective tariff. It is a tax imposed on imported
goods.
► Countries use tariffs to raise revenue and to protect domestic industries from competition from
cheaper foreign goods.
► Specific tariffs are assessed based on the unit the imported good.
► Ad valorem tariffs are assessed as a percentage of the value of the imported good.
Import Quotas:
★ While tariffs make foreign goods more expensive, they do not limit the quantity of goods that
can be imported. An import quota, on the other hand, places a limit on the quantity of a good
that can be imported during a specified period of time.
Local Content Requirement:
★ Instead of placing a quota on the number of goods that can be imported, the government can
require that a certain percentage of a good be made domestically. The restriction can be a
percentage of the good itself or a percentage of the value of the good.
Local Content Requirement:
★ Instead of placing a quota on the number of goods that can be imported, the government can
require that a certain percentage of a good be made domestically. The restriction can be a
percentage of the good itself or a percentage of the value of the good.

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Trade Embargoes:
★ A trade embargo imposes a ban on trade with a country or group of countries. This typically
stems from political differences between the two nations or economic circumstances that make
commercial trade undesirable.
Voluntary Export Restraints:
★ The fourth type of trade barrier is known as a voluntary export restraint. This type of barrier
limits the quantity of a good that can be exported from a country during a specific time period. In
effect, it is an export quota, self-imposed by the exporting country.
Anti-dumping measures:
★ When dumping is practiced in a foreign country, special duties are levied on imported goods that
allegedly are sold at too low prices (dumping price). These duties are called anti-dumping duty.
Countervailing measures:
★ Special duties levied on imported goods to counter subsidies granted in the exporting country
unless it takes place according to a previous procedure.
Safeguard measure:
► Special duty (may be combined with a tariff quota) levied on imported goods to protect an
industry in the importing country against a sudden and heavy increase in the country.
Subsidies:
► Subsidies are the state aid or incentive granted either directly or indirectly (for example tax
breaks) to local producers, to give them market advantage over imported products.
Export Subsidies:
► It is the business support or state aid granted to a producer on condition that the goods produced
is exported.
Free Trade Agreements:
► An agreement between two or more countries which eliminates tariffs on trade between the
countries, reduces non-tariff barriers to trade, cements rights and protections for investors and
corporations, and promises liberalized, pro-business economic environment.
SAARC Preferential Trading Arrangement (SAPTA) (In force-1995):
★ An inter-government group (IGG) formed by South Asian Association for Regional Cooperation
(SAARC) members to negotiate incremental tariff reforms between member countries.
★ The goal is to increase trade between Asian countries and to assist less economically advantaged
members through preferential treatment.
South Asian Free Trade Area (SAFTA) (In force-2006):
★ South Asian Free Trade Area (SAFTA) is a trade agreement to promote trade and economic
growth in South Asia by reducing tariffs for intra-regional exports. It includes the eight members
of the South Asian Area for Regional Cooperation (SAARC).

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North American Free Trade Agreement (NAFTA):


★ North American Free Trade Agreement (NAFTA) is an agreement between the United States,
Canada and Mexico to keep trading costs low and bolster the North American market. The
agreement came into force on January 1, 1994.
Trade-Related Aspects of Intellectual Property Rights (TRIPS):

√ TRIPS is arguably the most important and comprehensive international agreement on intellectual
property rights. Intellectual Property Rights are the rights given to persons/agencies for their
creativity/innovations. Such as patents, copyright, trademarks, geographical indications,
industrial designs, trade secrets, or exclusionary rights over new plant varieties.
√ The TRIPS Agreement provides minimum term of protection of 20 years to the creator or
innovator over the use of such innovation counted from the date of filing.

World Trade Organization (WTO):


★ The World Trade Organization (WTO) is an intergovernmental organization that regulates
international trade. It is the only international organization dealing with the rules of trade between
nations. The WTO officially commenced on 1 January 1995 replacing the General Agreement on
Tariffs and Trade (GAAT).
Foreign Aid vs Foreign Loan:
★ Foreign aid is the money that one country voluntarily transfers to another, which can take the
form of a gift, a grant or a loan. Foreign aids fall into two different, broad categories: loans and
gifts. So, we can say that foreign loan is a subset of foreign aid.
What is Purchasing Power and Purchasing Power Parity (PPP)?
► Purchasing power is the value of a currency expressed in terms of the amount of goods or
services that one unit of money can buy.
► Purchasing Power Parity (PPP) is an economic theory and a technique that estimates the amount
of adjustment needed on the exchange rate between countries in order to ensure that the exchange
to be equivalent to each currency's purchasing power.
What is FDI (Foreign Direct Investment)?
★ Foreign direct investment (FDI) is an investment made by a firm or individual of one country into

business interests located in another country. Generally, FDI takes place when an investor
establishes foreign business operations or acquires foreign business assets, including establishing
ownership or controlling interest in a foreign company. Foreign direct investments are
distinguished from portfolio investments in which an investor merely purchases equities of
foreign-based companies. Example: An Indian company having a stake in a Bangladeshi
company.
.
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Some incentives that Bangladesh offer to the foreign investors:


Tax Holiday for 5 to 10 years
 Duty-free machinery import facility
 One Stop Services for the foreign investors.
What is Soft Loan?
★ Soft Loan is a loan with an artificially low rate of interest with few restrictions and such loans are
sometimes given to the developing nations by the industrialized nations and multinational
development banks (such as the Asian Development Bank).
What is Cartel?
★ Cartel is an organization created from a formal agreement between a group of producers of a good
or service to regulate supply in an effort to regulate or manipulate prices. An example of cartel is
the OPEC (Organisation of Petroleum Exporting Countries).
What is Gresham Law?
★ It is a monetary principle stating that "bad money drives out good. "
★ The law holds that bad money drives out good money in circulation. Bad money is then the
currency that is considered to have equal or less value compared to its face value. Meanwhile,
good money is currency that is believed to have greater value or more potential for greater value
than its face value.
★ Logically, consumers will choose to use bad money over good money because good money has the
potential to be worth more than its face value. Thus, good money will be hoarded or exported and
therefore tend to disappear from circulation.
Functions of IMF:
㊣Foreign exchange stability
㊣Eliminating BOP disequilibrium:
㊣Maintaining balance between demand and supply of currencies
㊣Providing expertise and technical assistance
㊣Credit facilities to correct BOP disequilibrium
㊣To assist in the establishment of a multila­teral system of payments
Functions of World Bank:
√To provide sustainable loan for infrastructural development to middle income countries (IBRD)
√To provide low cost development credit to developing countries (IDA)
√To Provide guarantee in case of FDI in multilateral countries (MIGA)
√To settle long term investment dispute (ICSID)
√To promote private sector investment (IFC)
√To provide technical expertise.

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What is SDR?

► SDR (Special Drawing Rights) is a form of imaginary international money created by the IMF in
1969. It is designed to augment international liquidity by supplementing the standard reserve
currencies. IMF provides loans to its members in case of exchange rate instability in SDRs.
► SDR basket now consists of the following five currencies: U. S. dollar 41.73%, Euro 30.93%,
Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%
► 1 SDR= Taka 116.11 (till 21 August, 2019).

The Bretton woods system:

√ Bretton Woods system had all of the world’s currencies pegged to the dollar and the dollar pegged
to gold. Through Bretton woods system the leaders decided to tie world currencies to the dollar,
which, in turn, they agreed should be convertible into gold at $35 per ounce.

√ Central banks of countries other than the United States were given the task of maintaining fixed
exchange rates between their currencies and the dollar.

√ The exchange rate between other currencies and dollars can only fluctuate within 1% on the basic of
legal exchange rate.

√ If a country's currency value became too weak relative to the dollar, the bank would buy up its
currency in foreign exchange markets. That would lower the currency's supply and raise its price. If
its currency became too high, the bank would print more. That would increase the supply and lower
its price.
Why Bretton-wood System failed?

★ The system failed because of the increased deficit in trade balance and a surge in imports in US
economy due to Vietnam War. The US experienced depreciation of dollar caused by its huge
debt accumulated through war expense. Britain violated the agreement by depreciating its
currency. France had suspicious feelings that US could not afford continue to spend and borrow
at their current rate and guarantee delivery of gold.

★ Since Bretton Woods put an effective limit on how much money you could borrow, and the
United States wanted to spend more money than they could spend under those constraints. So,
the Americans simply announced that their currency would float against other currencies
instead of being fixed. So, Bretton wood system failed.

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Business Digest 256 Economics (Foreign Exchange )

What is Foreign Exchange?


► Foreign exchange means any currency other than Bangladesh currency which includes all coins,
currency notes, bank notes, postal notes, money orders, cheques, drafts, letters of credit, bills of
exchange, promissory notes, all deposits, credits and balances payable in any foreign currency.
► Foreign exchange can also be defined as the exchange or conversion of one currency into another
currency.
► It also refers to the global market where currencies are traded.
► Exchange Rate is the price of a nation ‘s currency in terms of another currency.
► Exchange rate thus has two components, the domestic currency and a foreign currency and can be
quoted either directly or indirectly.
What are the objectives of regulating foreign exchange transactions?
√Protecting Balance of Payment
√Ensuring repatriation of export proceeds
√Ensuring the use of hard-earned foreign exchange in accordance with priorities
√ Preventing capital flight
√Stabilising exchange rate
√Planning economic development
Direct vs Indirect quotation:
★ In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic
currency ($1=Tk80). In an indirect quotation, the price of a unit of domestic currency is expressed
in terms of the foreign currency (Tk 1=$0.13).
What are the types of exchange rate?
★ Floating exchange rate:When the exchange rate of a currency is determined by the demand and
supply of that currency, then it is called floating exchange rate.
★ Fixed exchange rate is the rate which is officially fixed by the monetary authority and not
determined by market forces. Only a very small deviation from this fixed value is possible.
Foreign Exchange Market in Bangladesh:
★ In 1976, Bangladesh adopted a regime of managed float, which continued up to August 1979, when
a currency-weighted basket method of exchange rate was introduced. Bangladesh adopted Floating
Exchange Rate regime since 31 May 2003. Under the regime, Bangladesh Bank does not interfere
in the determination of exchange rate, but operates the monetary policy prudently for minimizing
extreme swings in exchange rate to avoid adverse repercussion on the domestic economy.
★ The exchange rate is being determined in the market on the basis of market demand and supply
forces of the respective currencies. In the foreign exchange market, banks are free to buy and sale
foreign currency in the spot and also in the forward markets. However, to avoid any unusual
volatility in the exchange rate, Bangladesh Bank (the regulator of foreign exchange market)
remains vigilant over the developments in the foreign exchange market and intervenes by buying
and selling foreign currencies whenever it deems necessary to maintain stability in the foreign
exchange market.

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Appreciation vs Depreciation vs Devaluation:


► Currency appreciation is an increase in the value of one currency regarding another currency.
► Currency depreciation is the decrease in the value of a country's currency with respect to another
currency
► Devaluation is a deliberate downward adjustment of the value of a country's currency relative to
another currency, group of currencies or standards, under fixed or semi-fixed exchange rate
system.
Why devaluation is sometime pursued?
★ It results in boost of exports (as value of local currency falls making local goods cheaper to
foreigners) and thereby shrink trade deficits. Moreover, devaluation results in reduction in the cost
of interest payments.
★ But continuous devaluation will lead to higher instability in the local market and cost of import
will significantly increase, thereby local firms might face difficulties in importing raw materials
and machinery from the foreign market. It also might lead to trade war between countries.
What is Gold Standard?
► Gold Standard is a monetary system in which a country's government allows its currency unit to be
freely converted into fixed amounts of gold. The exchange rate under the gold standard monetary
system is determined by the economic difference for an ounce of gold between two currencies.
► The use of the gold standard would mark the first use of formalised exchange rates in history.
However, the system was flawed because countries needed to hold large gold reserves in order to
keep up with the volatile nature of supply and demand for currency.
► After World War II, a modified version of the gold standard monetary system, the Bretton Woods
monetary system was created as its successor. This successor system was initially successful, but
because it being depended heavily on gold reserves, it was abandoned in 1971 when US President
Nixon closed the gold window.
Why foreign exchange reserve is important?
★ Building adequate foreign exchange reserves is very critical for any country — mostly for an
emerging economy like Bangladesh where a currency is not fully convertible. How much foreign
currency reserves are required is always a subject matter of debate as foreign exchange reserves
are mostly maintained in USD and it cannot be kept idle in foreign banks. So, foreign exchange
reserves are necessarily invested in US treasuries — which yield only 2% for 10-year treasuries.
So, if Bangladesh maintains very high balances, it will get return of just 2% whereas Bangladesh
pays around 5-8% on its debt. If the reserves are too low, it will send weak signals to the financial
markets — especially currency markets. So, a country needs a very fine balance on deciding what
is adequate. Bangladesh Bank is able to increase the nation ‘s foreign exchange reserves and also
prevent the currency from appreciating in value in the same time.
How does Bangladesh Bank create foreign exchange reserves when it has a trade
deficit always?

► Trade alone does not result in foreign exchange inflows. Bangladesh gets enormous amount of
capital inflows (investments) that more than compensates for the export deficit. The sources
include:
√ Foreign inward remittances sent by Bangladeshis living abroad
√ Foreign exchange inflows come through portfolio investments in stocks and capital inflows
(FDI) Investments inflows from FDI also constitute a volume of inflows.
√ Corporate organizations are allowed to borrow in foreign currencies from abroad.
√ The reduction in value of oil imports and gold imports have also resulted in foreign exchange
savings.
√ Thus, Bangladesh Bank maintains a fine balance between foreign exchange reserves.

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The leading factors that influence the variations and fluctuations in exchange rates are:

⊙Inflation rates Political stability & economic performance


⊙Interest rates Economic growth and recession
⊙Government debt Change in competitiveness
⊙Terms of trade Relative strength of other currencies
⊙ Speculation Occurrence of sudden natural calamities
⊙Government intervention
⊙ Country ‘s Current Account/Balance of
Payments

Foreign exchange reserve and its components (Composition of foreign exchange reserves):

★ Foreign exchange reserves are the stocks/deposits of foreign currency denominated assets plus gold
held by the central banks and monetary authorities of a country. However, the term in popular usage
generally includes foreign currency, gold and IMF reserve positions.
The foreign exchange reserves of Bangladesh consist of three categories:
 Foreign Currency Assets
 Gold and
 Special Drawing Rights (SDRs)

What is reserve currency?

★ A reserve currency is a currency that is held in significant quantities by numerous governments and
central banks as part of their foreign exchange reserves. These currencies are used to transact global
business and trade — particularly in commodities such as gold and oil. The primary reserve
currencies used worldwide are the US dollar, followed by the Euro, the British pound, the Japanese
Yen and the Swiss Franc.
Advantages of holding a large amount of foreign exchange reserves:
√ It enables to solve short-term external financial debt without affecting the exchange rate.
√ The bigger the reserve held, the more a country can spend (investments and embark on new
projects).
√ Reserves allow countries to adopt slower speeds of adjustment when tackling balance of payments
crisis.
√ It contributes to the perceived creditworthiness of countries, lessening the occurrences of crises .
Disadvantages of holding a large amount of foreign exchange reserves:
★ Holding international reserves would cause a contemporary output loss (opportunity cost).
★ Balance of payment surpluses could reflect undervalued currencies, low levels of domestic
consumption and high levels of saving.
★ The more international reserves a country holds, the more exposed it is to fluctuations of foreign
asset (currency) prices, and susceptible to financial crises.

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Optimum Theory of Population:

★ The theory states that (given the stock of capital, technology, natural resources, etc. ) at a given
time in an economy, there exists that number of populations, just sufficient to exploit fully the
resources of the economy and to obtain the highest possible output.

Solow Growth Model for Long Run:

★ The Solow Growth Model is a standard neoclassical model of long-run economic growth. It shows
that savings determines the size of capital stock and thereby level of production. Thus, positive
relationship exists between them but high savings cannot ensure persistent economic growth since
new steady state is reached. The country should pursue Golden rule steady state level of savings at
which consumption is maximum and benefits the future generation.

★ The single point of capital stock at which the amount of investment equals the amount of
depreciation is called steady state capital stock. Steady state represents the long-run equilibrium of
economy.

★ Golden rule level of capital:The steady state value of capital that maximizes consumption is called
golden rule level of capital. At this golden rule level marginal product of capital equals the
depreciation rate. There is only one saving rate that produces golden rule level of capital.

★ According to this model, only technological progress can explain sustainable growth and
persistently rising level of standards.

Endogenous Growth Theory:

► The endogenous growth theory is an economic theory which argues that economic growth is
generated from within a system as a direct result of internal processes.

► More specifically, the theory notes that the enhancement of a nation's human capital will lead to
economic growth by means of the development of new forms of technology and efficient and
effective means of production.

► This view contrasts with neoclassical economics, which contends that technological progress and
other external factors are the main sources of economic growth.

► As such, they advocate for government and private sector institutions to nurture innovation
initiatives while offering incentives for individuals and businesses to be more creative.

► Under this theory, knowledge-based industries play a particularly important role — especially
telecommunications, software and other high-tech industries — as they are becoming ever more
influential in developed and emerging economies.

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IS-LM (Investment Savings- Liquidity-money) (Short-run):


√ IS-LM model shows what determines national income for a given price level.
√ IS curve shows the negative relationship between interest rate and level of income consistent with
equilibrium in the market for goods and services. It shows the points that satisfy equilibrium in the
goods market.
√ Expansionary fiscal policy causes demand to increase and IS curve shifts rightward
√ Contractionary fiscal policy causes demand to fall and IS curve shifts leftward.
√ LM curve shows the positive relationship between interest rate and level of income in the market for
real money balances. The higher the income is, the higher the demand for real money balances.
√ Expansionary monetary policy causes increase in money supply and thus LM curve shifts
downward
√ Contractionary monetary policy causes decrease in money supply and thus LM curve shifts
upward.

** The economy is at equilibrium at the point where


IS curve and LM curve cross. At this point, interest
satisfies both goods market and money market. In
other words, at this point actual and planned
expenditure equals and the demand for real money
balances and money supply equals.
Classical vs Keynesian theory:

Classical Keynesian
Market works best when it is left alone Market is flawed, real market is unstable and full of
disturbances
Any intervention or too much regulation or Interventions are needed to correct its oscillations
anything government does above the scope of what and to keep it as smooth as possible. (Active
is necessary to keep the market free, fair and monetary policies of central banks, government
lawfully just is harmful. spending even on short term loans in bad times repaid
in good times, government financial incentives,
active tax policies)
Classical economics assumes that people are Keynesian economics suggests that in difficult times,
rational and not subject to large swings in the confidence of businessmen and consumers can
confidence. collapse – causing a much larger fall in demand and
investment.
The classical model is often termed ‘laissez-faire’ The Keynesian supports government intervention,
because there is little need for the government to especially in a recession when there is a need for
intervene in managing the economy. government spending to offset the fall in private
sector investment.
In the classical model, there is an assumption that Keynesians argue that in the real world, wages are
prices and wages are flexible, and in the long-term often inflexible. In particular, wages are ‘sticky
markets will be efficient and clear downwards’. Workers resist nominal wage cuts.
A classical view would reject the long-run trade- Keynesians support the idea that there can be a trade-
off between unemployment, suggested by the off between unemployment and inflation.
Phillips Curve.

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The General Theory (Keynes):


★ This theory argues that an economy’s total income is (in short run) determined largely by spending
plans of household, business and government. He argued that recession and depressions are the
result of inadequate spending.
Keynesian Theory:
★ Keynesian economists believe that in the short run, productive activity is influenced by aggregate
demand (total spending in the economy)
★ It also believes that aggregate demand does not necessarily equal aggregate supply (the total
productive capacity of the economy).
Baumol-Tobin model:

★ The Baumol-Tobin model argues that there is trade-off between the liquidity provided by holding
money (the ability to carry out transactions) and the interest foregone by holding one’s assets in the
form of non-interest-bearing money.
Fisher’s Quantity theory of money:

★ Other things remaining unchanged, as the quantity of money in circulation is increased, the price
level is also increased in direct proportion and thereby value of money decreases and vice versa.
★ MV=PY (here M is Money supply, V is velocity, P is price level, Y is total output in a economy).
If V and Y is constant, then M and V is direct proportional..
Bottleneck Problem:

★ In production and project management, a bottleneck is one process within a chain of


processes, such that its limited capacity reduces the capacity of the whole chain. Example:
when a machine is not efficient enough and as a result, there is a long queue.
Modern Quantity Theory of Money (Friedman):

★ According to this theory, money is a type of durable consumer good held for the services it
renders. In other words, money is demanded as an asset or capital and the theory of demand
for money is a part of the capital or wealth theory.
Permanent income hypothesis (Friedman):

★ The hypothesis states that the choices made by consumers regarding their consumption
patterns are largely determined by a change in permanent income, rather than change in
temporary income.
★ The key conclusion of this theory is that transitory, temporary changes in income have little
effect on consumer spending behaviour, whereas permanent changes can have large effects on
consumer spending behaviour.

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Classical Theory (Adam smith, David Ricardo, Thomas Malthus, Jean-Baptiste Say)

► Classical economists maintain that the economy is always capable of achieving the natural
level of real GDP or output
► It stressed economic freedom and promoted ideas such as laissez-faire and free
competition.
► Aggregate demand will adjust to full potential GDP, assisted by flexible wages and prices.
► Natural output is the level of real GDP that is obtained when the economy's resources are
fully employed.
Game Theory:

★ Game theory is the study of rational behaviour in situations involving interdependence.


Interdependence means that any player is affected by what others do and his actions must
depend on the prediction of others’ responses. For an individual to decide what to do, they
must determine how others are going to act. This determination requires knowledge of
other’s aims as well as the options available to them. Game theory is used to find the
optimal outcome from a set of choices by analysing the costs and benefits to each
independent party as they compete with each other. What the opponent does also depends
upon what the first player will do. Game theory tries to find out the actions that a “player”
should perform which would maximize his chances of success mathematically and
logically. Originally, it addressed zero-sum games, in which one person’s gains result in
losses for the other participants. Economists use game theory to understand the behaviour
of firms in an oligopoly (think OPEC and other cartels) -- specifically in regards to price
fixing, price wars, collusion, etc. Game theory gives economists a way to predict outcomes
when firms engage in these kinds of behaviour.
Game theory and prisoner's dilemma

★ Game theory is best exemplified by a classic hypothetical situation called the Prisoners'
Dilemma. In this scenario, two people are arrested for stealing a car. They will each serve 2
years in prison for their crime.
★ The case is air-tight, but the police have reason to suspect that the two prisoners are also
responsible for a recent string of high-profile bank robberies. Each prisoner is placed in a
separate cell. Each is told he is suspected of being a bank robber and questioned separately
regarding the robberies. The prisoners cannot communicate with each other.

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★ The prisoners are told that a) if they both confess to the robberies, they'll each serve 3 years for the
robberies and the car theft, and b) if only one confesses to the robbery and the other does not, the
one who confesses will be rewarded with a 1 year sentence while the other will be punished with a
10 year sentence.
★ In the game, the prisoners have only two possible actions: confess to the bank robbery, or deny
having participated in the bank robbery.
★ Since there are two players, each with two different strategies, there are four outcomes that are
possible:

The best option for both prisoners is to deny committing the robberies and face 2 years in prison for
the car theft. But because neither can be guaranteed that the other won't confess, the most likely
outcome is that both prisoners will hedge their bets and confess to the robberies -- effectively
taking the 10 year sentence off the table and replacing it with the 3 year sentence.

Absolute Advantage vs Comparative Advantage:

★ When a nation can produce a product at a higher quality or at a faster rate than another country
can, the country is said to have absolute advantage over the other country. It is related with
efficiency. This concept was developed by Adam Smith. Simply, it means ability to produce
higher amount of output by using same amount of input than the second country does.

★ Comparative advantage refers to a Country's ability to produce goods and services at a lower
opportunity cost than that of another country. This concept was developed by David Ricardo.

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What is disposable income?


★ Disposable income is the portion of total earnings over which the individual/household has full
discretion after required expenditure and taxes have been paid.
Fisher’s Time Preference Theory:
★ Fisher’s time preference theory state that people have preference for present income over future
income of an equal amount and equal certainty.
Normal and Economic profit:
► Normal profit is a situation where a firm makes sufficient revenue to cover its total costs and
remain competitive in an industry. In measuring normal profit, we include the opportunity cost of
working elsewhere.
► Normal profit is an economic condition that occurs when the difference between a firm's total
revenue and total cost is equal to zero.
► Economic profit is any profit above the level of normal profit. It is also referred to as supernormal
profit. In monopoly, firms are able to make greater than normal profits.
Cobb-Douglas production function:
★ It is a simplified view of the economy in which production output is determined by the amount of
labour involved and the amount of capital invested.
What is Production Possibilities Frontier (PPF)?
★ Production possibilities frontier or production
possibilities curve is a curve which shows various
maximum possible output combinations of set of
two goods which can be produced with the given
resources and technology.
What is Pareto Efficiency?
★ An economic state where resources are allocated in
the most efficient manner. Pareto efficiency is
obtained when a distribution strategy exists where
one party's situation cannot be improved without
making another party's situation worse. In other
words, it is not possible to make someone better off
without making some one worse off.
What is Law of Diminishing Marginal Utility?
★ The Law of Diminishing Marginal Utility states that, all else equal, as consumption increases the
marginal utility derived from each additional unit declines, although the total utility increases.
What are the example of Positive externalities?
► A large retail organisation attracts numerous extra customers to its store, some of whom spend
money in other shops in the vicinity.
► Most merit goods generate positive consumption externalities
► Individuals who benefit from positive externalities without paying are considered to be free-riders.

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When productive efficiency or inefficiency is reached?


► Productive efficiency is an economic level at which the economy can no longer produce
additional amounts of a good without lowering the production level of another product.
► Efficient production is achieved when a product is created at its lowest average total cost.
► To be productively efficient means the economy is producing on its production possibility frontier
(Production Possibility Curve- PPC)
► Productive inefficiency is a condition where the economy operating below its production
possibilities curve (point within and not on the PPC).
What is Indifference Curve?
★ An indifference curve is a graph that shows a combination of two goods consumption that gives a
consumer equal satisfaction and utility, thereby making the
consumer indifferent. Each point on an indifference curve
indicates that a consumer is indifferent between the two and
all points give him the same utility.
Properties of Indifference Curves:
★ They Slope Negatively or Slope Downwards from the Left to
the Right;
★ They are Convex to the Origin of Axes;
★ Every Indifference Curve to the right represents Higher Level of Satisfaction;
★ Indifference Curves can neither touch nor intersect each other;
What is Law of Increasing Opportunity Costs?
★ The law of increasing opportunity costs is a principle that states that as you increase production of
one good, the opportunity cost to produce an additional unit of the good will increase.
What is Increasing Returns to Scale?
★ Increasing returns to scale refers to the feature of many production processes in which productivity
per unit of labour rises as the scale of production rises. It occurs when the output increases by a
larger proportion than the increase in inputs during the production process.
Law of Increasing Return:
★ Law of increasing return argues that an increase of labour and capital leads generally to improved
organization, which increases the efficiency of the labour and capital. Therefore, an increase of
labour and capital generally gives returns more than expected previous proportion.
Law of Constant Returns:
★ The Law of Constant Returns is said to exist when the additional investment of labour and capital
yields the same return as before.
★ It means the return from investment remains the same as the business is expanded or contracted.
What is Marginal Rate of Transformation (MRT)?
★ Marginal rate of transformation (MRT) can be defined as how many units of good x have to stop
being produced in order to produce an extra unit of good y.
What is Marginal Rate of Transformation (MRT)?
★ Marginal rate of transformation (MRT) can be defined as how many units of good x have to stop
being produced in order to produce an extra unit of good y.

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What is Marginal Rate of Substitution (MRS)?


★ Marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of
one good in exchange for another good while maintaining the same level of utility
What is Marginal Propensity to Consume (MPC)?
The change in consumption resulting from increasing income by one unit.
Define Economies of Scale, Diseconomies of Scale, Economies of Scope.
► Economies of Scale refer to the cost advantage experienced by a firm when it increases its level
of output. It refers to reduced costs per unit that arise from increased total output of a product.
► Diseconomies of scale are the cost disadvantages that firms accrue due to an increase in firm size
or output, resulting in production of goods and services at increased per-unit costs. The concept
of diseconomies of scale is the opposite of economies of scale.
► Economies of scope are economic factors that make the simultaneous manufacturing of different
products more cost-effective than manufacturing them on their own. That is, the more different-
but-similar goods you produce, the lower the total cost to produce each one.
What is price/budget line/constraints?
★ The budget line shows all the different combinations of the two commodities that a consumer can
purchase, given his or her income and the price of the two commodities.
What is Phillips curve?
★ The Phillips curve demonstrates inverse relationship
between the rate of unemployment and the rate of
inflation in an economy.
★ According to the Phillips curve, the lower an
economy's rate of unemployment, the more rapidly
wages paid to labour increase in that economy.
★ Stated simply, the lower the unemployment in an
economy, the higher the rate of inflation.

Define Paradox of Thrift:


★ An individual household, business, or government may attempt to save money by reducing their
current expenditures to boost investments which may eventually reduce aggregate spending
levels and hence output and employment, thus undermining overall growth or even causing a
recession causing fall in income and thereby less money to save.
★ Because of this paradox, it is not usually possible to improve economic performance by boosting
saving.
Define Kaldor-Hicks Criterion:
★ The Hicks-Kaldor criterion is used for whether a cost-benefit analysis supports a public project.
The Hicks-Kaldor criterion is that the gainers from the project could in principle compensate the
losers. That is, that total gains from the project exceed the losses.

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Define Diamond-Water Paradox:


★ Water, which is demanded by everyone, is extremely cheap. But diamonds, which are demanded
only by the very few, are incredibly expensive. The paradox is, “how can something for which
there is so little demand be so expensive?” The solution to this riddle is that the value of something
is based not only on the demand for it, but also on its supply.
★ Water has greater utility and use than diamond in human life. But diamond is more costly than
water. This is because the scarcity of diamond and abundance of water in nature.
What is Lorenz Curve?
√ The Lorenz curve is the graphical /visual representation of income or wealth distribution.
√ It shows the proportion of income earned by any given percentage of the population.
√ The line at the 45º angle shows perfectly equal
income distribution, while the other line shows
the actual distribution of income.
√ The further away from the diagonal, the more
unequal the size of distribution of income.
What is Gini Coefficient?
★ A statistical measure of inequality.
★ A Gini score of 0 implies perfect equality (in
which every individual receives the same
income).
★ A Gini score of 1 implies perfect inequality (in
which one individual receives all of the income)
What is Credit Squeeze?
★ A situation when private banks become reluctant to issue new loans and credit, often because they
are worried about the risk of default by borrowers. This is common during times of recession or
financial instability.
What is Crowding Out effect?
★ The crowding out effect describes the idea that large volumes of government borrowing push up
the real interest rate and shortage of loanable funds, making it difficult or close to impossible for
individuals and small companies to obtain loans resulting in low private investment.
What is Liquidity Trap?

√ A liquidity trap occurs when low/zero interest rates fail to stimulate consumer spending and
monetary policy becomes ineffective and it fails to stimulate aggregate demand.
√ It is a situation in which the general public is prepared to hold on to whatever amount of money is
supplied, at a given rate of interest. They do so because of the fear of adverse events like deflation,
war.
What is Capital Flight?
★ Capital flight is the uncertain and rapid movement of large sums of money out of a country.
★ It is a destructive process in which investors (both foreigners and domestic residents) withdraw
their financial capital from a country and might transfer to another country as a result of non-
favourable changes in economic policies, political conditions, or other factors.

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What is Ricardian Equivalence?


★ The theory according to which forward looking consumers fully anticipate the future taxes implied
by govt debt, so that govt borrowing today coupled with a tax increase in the future to repay the
debt, has the same effect on the economy as a tax increase today.
★ Any attempts by the government to boost the economy by rising public spending or reducing taxes
will not trigger a private-sector reaction.
What is Keynesian Cross?
★ Keynesian cross is the point at which Income (actual expenditure) equals planned expenditure.
★ A simple model of income determination based on Keynes’s general theory which shows how
changes in spending can have multiple effects on aggregate income .
Classical Model:
★ It is a model based on the assumptions that prices and wages adjust to clear the market and thereby
monetary policy does not influence real variable (aggregate demand, real income)
Keynesian model:
★ A model based on the assumptions that prices and wages do not adjust to clear the market and
thereby aggregate demand determines the economy’s output and employment.
Pigoue Effect:
★ The increase in the consumer’s spending that results when a fall in the price level raises real money
balances and thereby consumers wealth.
Income Effect:
★ The changes in the cost of good resulting from a movement to a higher or lower indifference curve,
holding the relative price constant.
Substitution Effect:
★ The changes in the cost of good resulting from movement along the indifference curve because of
change in relative price.
What is Laffer Curve?
★ A curved graph that illustrates the theory that, if tax rates rise beyond a certain level, they
discourage economic growth, thereby reducing government revenues.
What is Contract Curve?
★ Contract curve is the set of tangency points between the indifference curves of the two consumers
where a contract takes place.
★ It is termed as the contract curve since the outcome of negotiation about trade between two
consumers should result in an agreement (a ‘contract’) that has an outcome on the contract curve.
What is Hoarding?
★ A situation in which financial investors/companies/individual consumers choose to hold cash or
other liquid assets, rather than spending and re-spending that money.
★ Hoarding often results from intense fears about future economic and financial turbulence – yet
★ Hoarding can create the very recession which hoarders fear!
Accounting vs Economic Profit:
★ Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs
whereas accounting profit consists of revenue minus explicit costs, it doesn’t not include implicit
cost.
★ Accounting profit is bookkeeping profit, and it is higher than economic profit.

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What is Ratchet Effect?


★ It argues that even in periods of depression the consumer wants to retain the level of consumption
which was maintained by him at his highest level of income in the past.
What is Demonstration Effect?
★ It implies that consumer has a tendency to follow the consumption pattern of his neighbours or
related ones.
What is Okun's Law?
★ Okun's Law establishes a negative relationship between the rate of growth (GDP) and the
variation in the rate of unemployment. It determines that a GDP growth of higher than 3% is
needed to lower the unemployment.
“Supply creates its own demand”-Explain:
★ Jean-Baptiste Say argued that supply always creates its own demand. Say argued that there can
never be a problem of general overproduction. If there is a surplus for one good there must be
unmet demand for another. If certain goods remain unsold it is because other goods are not
produced.
Assumptions of Say’s Law:
The Say ‘s law takes the following assumptions:
► All markets are perfectly competitive so that agents decide how much to buy and sell on the basis
of a given set of prices which are perfectly flexible.
► The required amount of labour and capital can be raised from the market on prevailing prices.
► Firms are free to enter or exist without affecting the equilibrium output and prices in the market.
► The market is capable of expansion. It expands with the increase in the volume offered for sale in
the market.
► All savings are automatically invested and this equality is brought about by the changes in the rate
of interest.
► Full employment is guaranteed because of free play of market forces.
Short vs long vs very long run:
★ In Short run, factor of production (e.g. capital) is fixed and thereby prices are sticky at some
predetermined level. This is a time period of fewer than six months.
★ In Long run, factors of production of a firm are variable and thus prices are flexible. A time
period of greater than six months/one year
★ In very long run all factors of production are variable, and additional factors outside the control of
firm can change, e. g. technology, government policy.
Inside vs Outside Lag:
★ The inside lag is the time it takes for policymakers to recognize that a shock has hit the economy
and to put the appropriate policies into effect. Once a policy is in place, the outside lag is the
amount of time it takes for the policy action to influence the economy. This lag arises because it
takes time for spending, income, and employment to respond to the change in policy.

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What is Capitalism?
★ An economic system in which privately-owned companies and businesses undertake most
economic activity.
Mortgage:
★ A mortgage is a special kind of credit, usually longer-term in duration, used to finance the
construction or purchase of property or a long-lasting structure (such as a home or building).
What is Vicious Cycle?
★ Vicious cycle is a self-propagating disadvantageous situation in which a solution leads to another
problem whose solution, in turn, leads back to the first problem in a more severe form. For
example, “Economic inequality feeds into inequalities of political power, leading to still more
economic inequality”.
What is Collective bargaining agent (CBA)?
★ Collective bargaining agent means the workers’ trade union or a trade union federation which, is the
agent of the workers in the establishment, or group of establishments, for collective bargaining
matters regarding wage, safety, benefits and other working conditions, such as health and safety
provisions, and retirement or pension contributions.
What is Permanent-income Hypothesis?
★ Permanent-income hypothesis argues people base their consumption on what they consider their
"normal" income. In doing this, they attempt to maintain a fairly constant standard of living even
though their incomes may vary considerably.
★ Consumption would not respond to transitory changes in income in the same way as permanent
changes in income seems intuitively reasonable.
What is Absolute Income Hypothesis?
★ The theory shows that with the increase in absolute income, consumption also increases but the rate
of increase of consumption is smaller than the rate of increase of income.
What is Mercantilism?
★ An economic theory based on the belief that a country’s prosperity depended on its ability to
generate large and persistent surpluses in its foreign trade with other countries.
What is Monetarism?
★ Belief that inflation is a major danger to economic performance, and should be controlled through
disciplined policies
★ It argues that inflation could be controlled or eliminated by strictly controlling supply of money

What is Socialism?
★ An economic system in which most wealth is owned or controlled collectively through the state,
other public institutions, or non-profit organizations and the operation of market is influenced or
managed through regulation and planning.
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★ Tax is the non-penal but compulsory and unrequited transfer of resources from private sector
to the public sector (state owned fund) in order to ensure equitable welfare throughout the
community and country.

Cannons/principles of Taxation:

★ The canons of taxation were first presented by Adam Smith in his famous book “The Wealth
of Nations.” These canons of taxation define numerous rules and principles upon which a good
taxation system should be built. Although these canons of taxation were presented a good
while back, they are still used as the foundation of discussion on the principles of taxation.
★ Adam Smith presented 4 canons of taxation, which are also commonly referred to as the Main
Canons of Taxation:
1. Canon of Equality: he canon of equality or equity implies that taxation must ensure
justice. the burden of taxation must be distributed equally or equitably
2. Canon of Certainty: The tax which each individual is bound to pay ought to be certain
and not arbitrary. The time of payment, the manner of payment, the amount to be paid
ought to be clear and plain to the contributor and to every other person.
3. Canon of Convenience: This canon recommended that unnecessary trouble to the tax
payer should be avoided.
4. Canon of Economy: Every tax has a cost of collection. It is important that the cost of
collection should be as minimum as possible.
Characteristics of good tax system:
► Tax should be levied based on the fundamental principles of taxation
► The taxes should be imposed that are equitable, convenient, certain, elastic and
economical
► System should ensure balance between direct and indirect tax
► Tax system should be supported by sufficient laws, manpower and efficient
administrative tools
► Tax payer can easily find information about the tax system and how tax money is used.
► A good tax system should follow the principle of diversity. This implies that there should
not be a single or a few taxes from which Government seeks to raise large revenue.

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Salient tax features in Bangladesh:


►Multiple tax system

►Inadequate tax to GDP ratio

►High ratio of indirect tax to direct tax

►Dominance of VAT and import duty

►Tax avoidance behaviour of the taxpayer.

►Narrow tax base, full of exemption and allowance.

Multiple tax system:

 Taxes on Income and profit:


㊣Income tax (Company)

㊣Income tax ( other than company)

 Taxes on property and capital transfer


► Estate duty
► Land revenue
► Gift tax
► Registration
► Non-Judicial Stamp duty

 Taxes on Goods and services:


► Customs Duty

► Excise duty

► Value Added tax

► Supplementary duty

Tax return:

★ Tax return is the standard official form provided by the tax authorities on which a taxpayer reports
taxable income with permitted deductions and exemptions to compute his or her tax liability.
★ An income tax (IT) return is the tax form in a predefined worksheet format where the income
figures of the assessee are used to calculate the tax liability are written into the documents
themselves.
★ A tax return is an official form that one fills in with details about his income and personal
situation, so that the tax he owes can be calculated.

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What is Tax holiday?


► Tax holiday is the period of time over which newly established undertakings are given exemption
from tax liability in order to encourage rapid industrialisation upon the fulfilment of some
conditions.
► A tax holiday is a period of exemption from income tax for new industries in order to develop or
diversify domestic industries.
► It is a period during which tax concessions are made for some reason; examples include an
export incentive or an incentive to start a new business given by some governments, in which a
company is excused all or part of its tax liability
► The government has offered tax exemption benefit on income from investment in infrastructure
and industries in lagging regions for five years to encourage private investment and job creation.
► Under the existing law, 21 industrial sectors and 19 physical infrastructure development
sectors have been enjoying tax holidays on the basis of geographical locations at
different rates for different periods of time.
► In the face of infrastructure deficit, the government in 2011 offered the tax-break for five years to
10 years to investors on condition that infrastructures and industries should be established
between July 2011 and June 2019.
► For physical infrastructure, namely deep seaport, elevated expressway, export processing zone,
flyover, gas pipeline, hi-tech park, ICT village and LNG (liquefied natural gas) terminal,
renewable energy (energy-saving bulb and solar plant), toll or bridge, the tax exemption was
granted for 10 years.
What is Financial Year?
★ A Financial Year (FY) is the period between 1 July and 31 June – the year in which one earns
income.
What is Assessment Year?
★ The assessment year (AY) is the year that comes after the FY. This is the time in which the income
earned during FY is assessed and taxed.
Tax Base, Tax Bracket, Tax Break, Tax Burden:
► Tax base is the all resources available to the government for taxation. All of the nation's taxable
income added together
► Tax Bracket is the range of incomes that is taxed at a specified tax rate.
► Tax Break is a general term for exemptions, credits, deductions, or any legal way to reduce your
taxes.
► Tax Burden is the total amount of taxes owed by the people, or by a particular segment of the
population.
Direct Tax:
★ A tax paid directly to the government, or to state or local governments, such as income tax and
property tax.

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Electronic Filing:
★ Filing One’s tax return online, also known as efiling or e-filing. This is generally more secure, more
accurate, and faster than filing taxes by paper through the mail.
Double Taxation:
★ Double taxation is a tax principle referring to income taxes paid twice on the same source of
income. It can occur when income is taxed at both the corporate level and personal level.
Tax heaven:
► Tax heaven is a country or island or state that has a low tax liability compared to other countries or
no taxes at all. Some countries deliberately set themselves up as tax havens in order to encourage
international corporations to register themselves there. Some countries that are not tax havens have
loopholes in their tax codes in order to allow certain persons and companies to place some of their
assets in an account in a tax haven.
► Examples: Bermuda, Netherlands, Luxembourg, Cayman Islands, Singapore, The Channel Islands,
Isle of Man , Mauritius, Switzerland, Ireland etc.
Estate:
★ A tax entity that receives and reports a person's income and pays taxes after that person's death.
Tax Deducted at Source (TDS):
★ Tax Deducted at Source or TDS is a type of indirect tax that is deducted from an individual’s
income on a periodic or occasional basis at the very source of income by the employer and
submitted to the tax authority.
★ This is the tax that is deducted from one’s income at the source of that particular income by
employer on salary, or by the bank on deposits .
Classification of taxes:
Based on number of taxes
 Single tax:tax system comprises of only one type of tax
Multiple tax:tax system comprises of more than one type of tax

Based on impact and incidence:


★Direct tax:entirely paid by the persons to whom tax is imposed. The burden cannot be
shifted to others. It is imposed on income.
★Indirect tax:taxes which are imposed on sales or purchase of goods or services other
personal services. In indirect tax, burden is shifted to others. It is imposed on goods and
services.
Based on the structure
 Proportional tax:Irrespective of the size of income, rates of taxation is fixed for everyone
 Progressive tax:Rate of taxation increases as the size of income increases
 Regressive tax:Rate of taxation decreases as the size of income increases.
 Degressive tax:This is the mild version of progressive tax hence not very steep like progressive.

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Other types of tax:


√ In Rem tax:tax is levied on some activities or objects such as sales tax, wealth tax
√ Income tax:tax is levied on the income of a person or institution
√ Wealth tax:levied on value of financial assets such as shares, securities, or non-financial assets
such as building, premises.
√ Value added tax:tax levied on the basis of value addition in a commodity or service.
√ Excise duty:charged on goods produced within the country (as opposed to customs duties,
charged on goods from outside the country) such as alcoholic drinks or tobacco products.
Regressive Tax:
★ A tax in which lower-income individuals or households bear a proportionately greater burden of the
tax.
★ Sales taxes are generally considered regressive (since lower-income households do not generally
save, and hence must pay the sales tax on a larger proportion of their total income).
Progressive tax:
★ A progressive tax is defined as a tax whose rate increases as the payer's income increases.
★ Progressive tax is a type of taxation in which individuals or groups with high incomes pay a larger
percentage than those with lower incomes. For example, tax rate is 10% if income is 10 Lakh, but
rate is 15% when income is 20 Lakh.
Surcharge:
★ Surcharge is introduced by the government to combat the risk of increasing inequalities resulting
from the continuous economic growth of country.
★ Besides the risk of inequalities, surcharge also implemented for the hazardous products which are
harmful for health like tobacco products.
Tariff:
★ A tariff is a tax on imports or exports. Money collected under a tariff is called a duty or customs
duty. Tariffs are used by governments to generate revenue or to protect domestic industries from
competition.
★ Ad-valorem Duty:Tax is levied on the basis of the value of a commodity or property. irrespective
of the weight and size of the commodity, tax is charged purely accord­ing to its value. Such as
import and export duty.
★ Specific duty:tax is imposed on a commodity as per its weight, not value. Sometimes a fixed
amount is charged on product irrespective of value and weight.
Wealth tax:
★ Wealth tax is a tax based on the market value of assets that are owned. Although many developed
countries choose to tax wealth, Bangladesh have recently introduced such tax.
What is tax evasion?
★ Tax Evasion is an illegal action in which individuals or corporations deliberately avoid paying a
true tax liability. Tax evasion often entails taxpayers deliberately misrepresenting the true state of
their affairs to the tax authorities to reduce their tax liability.

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Tax evasion Tax Avoidance


► Tax evasion can be termed as a crime in which ► Tax Avoidance in a legal manner way of
a business entity or individual intentionally reducing the assessee taxes
hides or underpays a huge amount of taxes.
► It is undertaken by using the unfair means. ► This is undertaken by taking advantage of
the loopholes in the local laws
► The defaulter may be liable for punishment. ► This is not performed through wrongful
intention but only after studying and by
complying through the provision of law.
► Examples: ► Examples:
√ Hiding your true income by understating the √ Opening Public Provident Fund (PPF)
same account and investing in same regularly to
√ Overstating expenses in your return reduce taxes.
√ Using offshore accounts to hide interest √ Creating other legal entities and splitting
income. revenue between them to be eligible for tax
slab benefits.
The main causes of tax evasion and the creation of black money:
√ High rates of taxation
√ Economy of shortages and complex licensing system
√ Donations to political parties
√ Corruption
√ Ineffective enforcement of tax laws
√ Corruption in business practices.
Sin Tax:
► A sin tax is an excise tax levied on goods and services deemed harmful to society, such as tobacco,
alcohol, and gambling.
Carbon Tax:
★ Carbon tax is a fee that a government imposes on any company that burns fossil fuels. The most
widely-discussed are coal, oil, gasoline, and natural gas.
Collection of indirect tax in Bangladesh:
★ Indirect taxes are collected by intermediaries from the person who bears the ultimate economic
burden of the tax. The intermediary later files a tax return and forwards the tax proceeds to the
government with the return. The major indirect taxes in Bangladesh include: value added tax
(VAT), excise duty, trade tax and turnover tax. Nevertheless, the tax structure of Bangladesh is
perceived to be regressive as it is heavily dependent on indirect taxes (about 64% in 2017).
Collection of direct Tax in Bangladesh:
★ In Bangladesh, direct taxes consist of taxes from income tax and other taxes. The sources of
income tax can be classified in 7 categories namely — 1. Salaries 2. Interest on securities 3.
Income from house property 4. Income from agriculture 5. Income from business or profession 6.
Capital gains 7. Income from other sources.
Flat Tax (unit tax):
★ A tax based on the same percentage of income for all taxpayers, regardless of income level.

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Negative income tax?


★ The negative income tax is a way to provide people living below median income level with money
or benefits in the form of social scheme, gratuity, pension etc.
National Board of Revenue and its structure:
★ The NBR was established in 1972 through the Presidential Order No 76 (The National Board of
Revenue Order, 1972) after repealing the Central Revenue Board Act 1924 (Act No 4 of 1924).
Later, amendments were made to the structure of the NBR through Act No 12 of 2009. The NBR is
constituted with 1 chairman and 8 members, including 4 for direct tax and 4 for indirect tax. The
secretary of internal resources division is the ex-officio chairman of NBR. The status of members is
equivalent to that of additional secretary. The total number of departments/directorates under the
NBR is 45. Offices related to direct tax total 25; of these, those involved in collection of direct taxes
number 18. The remaining offices include 5 involved in the appeal process, 1 training academy, 1
engaged in inspection and 1 in survey work. The number of offices involved in collection of
indirect taxes total 20. Of these, 14 are engaged in collection of indirect tax revenue. The remaining
offices include 1 involved in the appeal process, 1 engaged in intelligence and investigation work, 1
in inspection, 1 in tax exemption and refund, 1 training institute and 1 engaged in valuation of
commodities.
Functions of NBR:
► Imposition, examination, monitoring and collection of direct and indirect taxes;
► Formulation of laws, rules, regulations on collection of direct and indirect taxes, and providing
clarifications and explanations regarding their application;
► Monitoring and controlling the activities of organisations engaged in collecting import and export
duties, value added tax, supplementary duties, excise and income taxes in a knowledge-based, just
and customer-friendly environment;
► Providing assistance in the formulation process of tax policy and laws, signing of general
cooperation agreements with international organisations and foreign countries, agreements on
grants and loans and tax-related agreements;
Different tax rates in Bangladesh :
★ As per direction of the current budget, a company doing business in Bangladesh has to pay 35%
corporate tax, which is 25% for a publicly traded company while the maximum rate extends up to
45% for some sectors.
★ 40% for bank, insurance, and financial institutions like previous year, said the proposed budget.
★ Besides, there is a uniform duty of 45% on both publicly traded and non-publicly traded for
cigarette manufacturers and 10-12% for RMG sectors.
Collection in 2017-2018 (FY) through NBR:
Total 202 Thousand crore
VAT: 75 thousand crores
Income tax:61 thousand crores
Tax not collected by NBR:
√ Narcotics tax
√ Land tax
√ Transportation tax

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Individual Income Tax:

Income tax Progressive rates from 0% to 25%


First income tax bracket up to BDT 250, 000 0%
Next BDT 400, 000 10%
Next BDT 500, 000 15%
Next BDT 600, 000 20%
Next BDT 3, 000, 000 25%
Any excess amount 30%

Other tax rates in Bangladesh:


㊣ Bangladesh provides for tax incentives for foreign companies investing in special economic zones
and hi-tech park zones (in the form of gradually decreasing tax discounts). Qualifying industrial
undertaking set up between 1 July 2011 and 30 June 2019 are also entitled to gradual tax discounts,
with rates varying from one region to another. Capital gains arising from the disposal of listed
shares are subject to a 10% tax whereas those arising from the transfer of other types securities are
taxed at 15%. Goodwill cannot be amortized for tax purposes. Interest charges, including profit
shares distributed to an Islamic bank, as well as bad debts are also tax deductible. Service
companies exporting at least 50% of their services, scientific research firms, companies investing in
strategic sectors (outside the Grand Dhaka region) and suppliers of companies operating in a free
trade area (at least 40% of their total sale) may be eligible for the free-trade area regime, benefiting
from total or partial tax exemptions (corporation tax, VAT, stamp duty, capital gains). Tax losses
can be carried forward in full up to six years. The carry back of losses is not permitted.
㊣ No property tax is levied on real estate or land. Nevertheless, real estate transactions (sale, rent,
transfer) are subject to stamp duty. Other types of stamp duty apply to most financial transactions.
Rental income on plant and machinery paid to non-residents is subject to a 15% withholding tax.
Employers are not required to pay social security contributions and no salary tax is payable. All
enterprises with a gross income above BDT 5 million (with the exception of mobile operators,
producers of cigarettes and tobacco products) are subject to an alternative minimum tax of 0.6% on
gross receipts, if the amount due is higher than corporation tax. This rate is reduced to 0.1% for
manufacturing companies in their first three years of operation.
㊣ Non-residents are taxed at a flat rate of 30%. Salaries and allowances for expatriate
employees in foreign aid projects based on an agreement between the government of Bangladesh
and a foreign government are exempt from tax.
Country Comparison for corporate taxation:

Bangladesh South Asia USA


Number of payment of taxes per year 33.0 31.8 10.6
Time taken for administrative Formalities (hours) 435.0 283. 9 175.0
Total share of taxes (% of Profit) 34.5 40.9 44.0
Source:Doing Business, 2019

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Business Digest 279 Economics( Economics and Development)

What is Economic Growth?


★ Economic Growth is an increase in the capacity of an economy to produce goods and services,
compared from one period of time to another.
★ Economic growth is the growth of the Gross National Product (GNP) of a country in a certain
period of time.
Growth vs Development:
► Generally, growth means increases in the GNP while development means growth plus structural
change in the economy.
► Growth generally means increasing in size or extent. But development means positive change.
► Growth is quantitative while development is both quantitative and qualitative.
► They both have different indicators for their measurement. Economic Growth can be measured
through an increase in the GDP, per capita income, etc. However, Economic Development can be
measured through Improvement in the life expectancy rate, infant mortality rate, literacy rate, and
poverty rates.
What is Sustainable Economic Growth?
★ Sustainable Economic Growth (in operational terms) is the upward trend in environmentally
adjusted net domestic product (EDP) under certain conditions and assumptions.
What is Sustainable Development?
★ As per the World Commission on Environment and Development, presented in 1987, sustainable
development is the development that meets the needs of the present without compromising the
ability of future generations to meet their own needs.
3 Pillars of Sustainable Development:
★ Three pillars are economic, social and environmental pillars. If any pillar is weak then the system
as a whole is unsustainable.
Big-Push Theory of economic development:
★ The theory suggests that in the presence of (given by Professor Paul N. Rosenstein-Rodan)
economies of scale and oligopolistic market structure, the underdeveloped countries can overcome
obstacles to development through industrialization .
What is Human Development Index (HDI):
★ Human Development Index (HDI) is a tool developed by the United Nations Development
Programme to measure and rank levels of social and economic development of different countries
based on some criteria. The HDI makes it possible to track changes in development levels over
time and to compare development levels in different countries. A country scores higher HDI when
the lifespan is higher, the education level is higher and the GDP per capita is higher. The HDI was
developed by Indian economist Amartya Sen and Pakistani economist Mahbub ul Haq which was
further used to measure the country's development by the United Nations Development
Programme (UNDP).
Name of the four divisions of the Ministry of Finance:
1. Finance Division
2. Economic Relations Division
3. Internal Resources Division
4. Financial Institutions Division

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1.
Mention some economic development models:
 Walt Whitman Rostow's Stages of Economic Growth
 Harrod-Domar Growth Model
 Lewis Structural Change (dual-sector) Model.
What is financial inclusion?
★ Financial Inclusion is the availability of banking services at an affordable cost in order to include
the weaker section of the society in the banking system and financial network.
Bail-out vs Bail-in :
 Bail-in and Bail-out are two alternative ways of giving another chance to a financial
institution (such as bank) which is suffering from poor financial health and survival challenge.
 In Bail-out the government usually provides the much-needed financial support to the poor
financial health of an institution (such as state-owned BASIC Bank Limited). The government
pays it from the government fund or taxpayer's money).
 In Bail-in internal parties take part in rescue of the institution. It does not involve taxpayer ‘s
money and instead involves restructuring of liabilities of the distressed financial institution. It
might happen by making its creditors and depositors take a loss on their holdings or
cancellation of debts owed to creditors and depositors.
Nationalization vs Privatization:
★ Nationalization is the process of a government taking control of a company or industry which can
occur for a variety of reasons. When nationalization occurs, the former owners of the companies
may or may not be compensated for their loss in net worth and potential income.
★ Privatization is the transfer of ownership of property or businesses from a government to a
privately-owned entity in a bid to maximize the profit. Privatization is considered to bring more
efficiency and objectivity to the company.
What is Public-Private Partnership (PPP)?
Þ Public-Private Partnership (PPP) is a mechanism for the government to procure and implement
public infrastructure and/or services using the resources and expertise of the private sector. Where
governments are facing lack of infrastructure and require more efficient services, a partnership with
the private sector can help foster new solutions and bring finance. PPP combines the skills and
resources of both the public and private sectors through sharing of risks and responsibilities.
Þ PPPs have contract periods of 25 to 30 years or longer. Financing comes partly from the private
sector but requires payments from the public sector and/or users over the project's lifetime.
Þ PPPs have contract periods of 25 to 30 years or longer. Financing comes partly from the private
sector but requires payments from the public sector and/or users over the project's lifetime.
Challenges for the economy of Bangladesh are —
► Slow growth pace in private investment
► Downfall in manpower exports in foreign countries
► Slow growth pace in exports
► Negative influence in remittance inflow
► Capital shortfalls in the banking sector and structural and institutional inefficiency of the
government.

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References
㊣ Armstrong, G., Kotler, P. and Opresnik, M. (2010). Marketing.
㊣ Desler, G. (2004). Human resource management. New York: Prentice
Hall.
㊣ Dornbusch, R., Fischer, S. and Startz, R. (2012). Macroeconomics.
㊣ Garrison, R., Noreen, E. and Brewer, P. (2012). Managerial accounting.
㊣ Hull, J. and Hull, J. (2012). Options, futures and other derivatives. Upper
Saddle River, NJ: Pearson Education/Prentice Hall.
㊣ Jones, G. and Hill, C. (2013). Theory of strategic management.
Australia: United Kingdom.
㊣ Madura, J. (2014). Financial institutions and markets. Mason, Ohio:
Thomson South-Western.
㊣ Mankiw, N. (2010). Macroeconomics. New York, NY: Worth Publishers.
㊣ Reilly, F., Brown, K. and Leeds, S. (2014). Investment analysis &
portfolio management.
㊣ Ross, S., Westerfield, R. and Jaffe, J. (2015). Corporate finance.
㊣ Södersten, B. and Reed, G. (2012). International economics.
Basingstoke: Macmillan.
㊣ Gitman, L. and Zutter, C. (2014). Principles of managerial finance.
㊣ Gup, B. and Kolari, J. (2013). Commercial banking. Hoboken, NJ:
Wiley.
㊣ Income tax manual. (2018). Dhaka: Deputy Controller, Bangladesh
Govt. Press.
㊣ Larson, K. (2008). Essentials of accounting. Burr Ridge, IL: Irwin/
McGraw-Hill.
㊣ Larson, K. (2008). Essentials of financial accounting. Boston: Irwin/
McGraw-Hill.
㊣ Mankiw, N., Taylor, M. and Ncwadi, R. (2014). Microeconomics.
㊣ Rose, P. (2009). Commercial bank management. London: McGraw-Hill.
㊣ Weygandt, J., Kimmel, P. and Kieso, D. (2015). Accounting principles.

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Business Digest 1 Previos Exam’s Math and solution

Part two ( Quantative problems and Solutions)

Contents Page Number


37th BCS Finance Question 02
37th BCS Finance Solution 03
40th BCS Finance Question 04
40th BCS Finance Solution 05
37th BCS Accounting Question 08
37th BCS Accounting Solution 12
Bangladesh Power Development Board Question 17
Bangladesh Power Development Board Solution 20
Power Grid Company of Bangladesh Question 22
Power Grid company of Bangladesh Solution 25
Question and Solution of EGCB Recruitment Test 29
Question and Solution of DPDC Recruitment Test 31
Question and Solution of DPDC Recruitment Test 33
Agrani Bank Recruitment Test: Question and Solution 36
Sample Managerial Accounting Practice 38
Sample Bank Reconcilliation Statement 41
Sample Rectification entries 42
Sample adjusting entries 43
Sample bad debt recording practice 46
Depreciation related practice 49
38th BCS Management question 50
40th BCS Management question 51
38th BCS Marketing question 52
40th BCS Marketing question 53

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Business Digest 2 Previos Exam’s Math and solution

৩৭ তম বিবিএি (বিন্যান্স)
বিষয় ক াডঃ ৭১১
বিভাগ
(কেক ান ৪টি প্রকের উত্তর বিকত হকি)
মানঃ ২৫*৪=১০০
১। ) আবথ ি ব্যিস্থাপনা ব ? আবথ ি ব্যিস্থাপক র াে িািলী িংকেকপ বলখুন।
খ) মুনািা িি িাবি রকের চাইকত িম্পি িি িাবি রে লেয ক ন ব্যিিাবয় প্রবতষ্ঠাকনর জন্য কিবি মঙ্গলজন ? ব্যাখ্যা রুন।
২। ) িীর্ িকময়ািী বিবনকয়াগ প্র ল্প মূল্যায়ন ক ৌিলিমূহ বলখুন।
খ) িাংলাকিকির কপ্রবেকত মূলিন িাকজকের িীমািদ্ধতািমূহ বলখুন।
গ) এ টি ক াম্পাবনর আবথ ি বিকেষ গে বিবনকয়াকগর জন্য বনকনাক্ত বতনটি বিবনকয়াগ প্র ল্প বচবিত করকেন কেগুকলার নগিপ্রিাহ বনকচ
কিয়া হকলা। ঐ ক াম্পাবনর বিবনকয়াগ মূলিন খরচ ১০% এিং বিবনকয়াগ মূলিন ১ ক াটি ো া হকল মূলিন িরাদ্দ রকের নীবত অনুোয়ী
ক ান প্র ল্প গ্রহে রা উবচৎ?

প্র ল্প প্রাথবম মূলিন (ো ায়) িাৎিবর নীে আন্তঃপ্রিাহ (ো ায়)
১ম িের ২য় িের ৩য় িের ৪থ ি িের
১ ৬০,০০,০০০ ১২,০০,০০০ ২০,০০,০০০ ২৪,০০,০০০ ৩২,০০,০০০
২ ৩৬,০০,০০০ ১৪,০০,০০০ ১৪,০০,০০০ ১৪,০০,০০০ ১৪,০০,০০০
৩ ২০,০০,০০০ ৫,৬০,০০০ ৬,০০,০০০ ৮,৫০,০০০ ৮,৫০,০০০

৩। ) আবথ ি বিিরেী বিকেষে িলকত ব বুঝায়? আবথ ি বিিরেী বিকেষকের ক ৌিলিমূহ িংকেকপ বলখুন।
খ) অনুপাত বিকেষকের সুবিিা-অসুবিিা িমূহ বলখুন।
গ) বনকনাক্ত পেিমূহ ক ন আবথ ি বিিরেী বিকেষে কর তা বুবঝকয় বলখুনঃ
i) বিবনকয়াগ ারী
ii) পাওনািার
iii) ির ার
৪। ) িীমা চুবক্ত ও িাবজ চুবক্তর মকে পাথ ি য ব ?
খ) েবতপূরকের নীবত প্রকয়াকগর িতিািলী বলখুন।
গ) কপিা বহকিকি িীমাক মূল্যায়ন রুন।
র্) “িীমা চুবক্ত পরম বিশ্বাকির চুবক্ত”- ব্যাখ্যা রুন।
৫। েী া বলখুনঃ
) বিবডবিএল (BDBL)
খ) আইবিবি (ICB)
গ) স্ট এক্সকচঞ্জ(Stock Exchange)
র্) এিইবি (SEC)
ঙ) করা াকরজ হাউজ(Brokerage House)

খ বিভাগ
মানঃ ২৫*৪=১০০
৬। ) ক ন্দ্রীয় ব্যাং উত্তবির ইবতহািটি িংকেকপ বলখুন।
খ) কিকির উন্নয়কন ব্যাংক র ব ক ান ভূবম া আকে? আকলাচনা রুন।
গ) িাংলাকিকি এ টি ব্যাংক র উকদ্দশ্য ব হওয়া উবচৎ িকল আপবন মকন করন?
৭। ) ব্যাং তারল্য ব ? তারল্য ব্যিস্থাপনায় তত্ত্বিমূহ বলখুন।
খ) লমাবন ব্যাংক জরুরী তারল্য িং ে িমািাকন ব ভাকি িাহায্য কর? ব্যাখ্যা রুন।
গ) আমানত বমশ্রে এিং আমানত িীমা িলকত ব বুঝায়?
৮। ) ইিলামী আবথ ি ব্যিস্থার প্রিান প্রিান উকদ্দশ্যিলী বলখুন।
খ) ক ান ক ান বি কথক ইিলামী ব্যাংব ং ব্যিস্থা িািারে ব্যাংব ং ব্যিস্থা কথক অবি াে ি র? বুবঝকয় বলখুন।
গ) বিবনকয়াকগর গুরুত্বপূে ি ইিলামী খাতিমূহ ব ব ? িংকেকপ এই খাতগুকলা আকলাচনা রুন।
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Business Digest 3 Previos Exam’s Math and solution

৯। ) িাংলাকিকির অথ িননবত উন্নয়কন উন্নয়ন িংস্থাগুকলা এর অিিান িে িনা রুন।


খ) িাংলাকিকির ক্ষুদ্রঋে প্র ল্পিমূকহর সুবিিা ও অসুবিিাগুকলা িে িনা রুন।
গ) িাংলাকিি কৃবষ ব্যাংক র াে িািলী মূল্যায়ন রুন।
১০। ) ইকলক্ট্রবন ব্যাংব ং এর কমৌবল উপািানগুকলা বলখুন।
খ) ইকলক্ট্রবন ব্যাংব ং ত প্র ার? আকলাচনা রুন।
গ) অকোকমকেড কেলার কমবিন (ATM) এর ব্যাংব ং জগকত উপকোবগতা ব ?
র্) কডবিে াড ি ও কেবডে াড ি ব ?

২। গ) এ টি ক াম্পাবনর আবথ ি বিকেষ গে বিবনকয়াকগর জন্য বনকনাক্ত বতনটি বিবনকয়াগ প্র ল্প বচবিত করকেন কেগুকলার নগিপ্রিাহ বনকচ
কিয়া হকলা। ঐ ক াম্পাবনর বিবনকয়াগ মূলিন খরচ ১০% এিং বিবনকয়াগ মূলিন ১ ক াটি ো া হকল মূলিন িরাদ্দ রকের নীবত অনুোয়ী ক ান
প্র ল্প গ্রহে রা উবচৎ?

Cost of capital (i) = 10%


n= number of years=4

Project CF y1 y2 y3 y4 NPV
1 CF -6000000 1200000 2000000 2400000 3200000
Discounted CF -6000000 1090909 1652893 1803156 2185643 732,600.23
2 CF -3600000 1400000 1400000 1400000 1400000
Discounted CF -3600000 1272727 1157025 1051841 956218.8 837,811.62
3 CF -2000000 560000 600000 850000 850000
Discounted CF -2000000 509090.9 495867.8 638617.6 580561.4 224,137.70

Project 1 & 2 should be accepted because it will utilize the maximum


amount of capital & also ensures the highest amount of NPV.
Though project 3 has also positive NPV ,we cannot accept it due to the
shortage of capital.

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Business Digest 4 Previos Exam’s Math and solution

40th BCS
Finance
Subject Code: 711
Full Marks: 200
Time: 4 hours
Group A
(Answer any four questions)
Marks: 25*4=100

1 a. What is business finance?


b. Narrate the objectives of business finance.
c. Discuss the classification of business finance.

2. a. Discuss the different types of spontaneous source of short-term finance.


b. Why are those called spontaneous source? Explain.
c. Discuss the characteristics of short-term financing.
3 a. What do you mean by dividend policy, dividend payout ratio and retention ratio?
b. Discuss the different types of dividend policy.
c. Which dividend policy is the best?

4 a. Why is cost of debt less than cost of equity? Explain.


b. Flotation costs affect cost of capital. Explain.
c. Following is the capital structure of Yousha and Company:

Sources of Capital Amount(tk) Cost of Capital


Common Stock capital 10,00,000 14%
Retained earnings 20,00,000 14%
Preferred stock capital 10,00,000 12%
Debt Capital 30,00,000 10%
Total Capital 70,00,000

If the corporate tax rate is 40% and personal tax rate of common stockholders is 30%, calculate the
weighted average cost of capital.

5. a. Write the difference between capital budgeting and capital rationing.


b. Discuss the objectives of the capital budgeting.
c. A company is considering to purchase a new machine that costs Tk 60,000. The company’s tax rate is
40% and the company follows straight line method of depreciation. The annual cash flows have the
following cash projections:

Year Cash flows


1 21,000
2 29,000
3 36,000
4 16,000
5 12,000

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Business Digest 5 Previos Exam’s Math and solution

Requirements:
If the cost of capital is 10%, what is the net present value.
What is the internal rate of return?
Should the project be accepted? Show your argument.

Group B
Marks: 25*4=100

6. a. Write the difference between central bank and commercial bank.


b. Narrate the role of commercial banks in the economic development of Bangladesh.
7. a. What is money laundering? Discuss the stages of money laundering.
b. Briefly discuss the impact of money laundering on an economy like Bangladesh.
8. a. How does a commercial bank collect its funds? Discuss.
b. Discuss the lending principles of commercial banks.
9 a. State different types of deposit schemes that are in practice in Bangladesh at present.
b. Discuss the factors determining the level of deposits.
10 a. Discuss the remarkable feature of Islamic banking system.
b. What do you mean by the term “murabaha”? Why is this murabaha financing mode needed? Explain.

4 c. Following is the capital structure of Yousha and Company:

Sources of Capital Amount(tk) Cost of Capital


Common Stock capital 10,00,000 14%
Retained earnings 20,00,000 14%
Preferred stock capital 10,00,000 12%
Debt Capital 30,00,000 10%
Total Capital 70,00,000

If the corporate tax rate is 40% and personal tax rate of common stockholders is 30%, calculate
the weighted average cost of capital.
****
Ke = Cost of Equity.
Kd = Cost of Debt.
Tc = Corporate Tax Rate.

WACC Formula = Ke+ Kd * (1 – Tax rate)


WACC = percentage of financing that is equity * cost of equity + percentage of financing that is
debt * cost of debt * (1 – corporate tax rate)

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Business Digest 6 Previos Exam’s Math and solution

Ti 30% Tc 40%
1 2 3 4 5
Sources of Capital Amount Cost of weight(tk/total weighted
(tk) Capital(k) tk) cost(3*4)
Common Stock capital 10,00,000 14% 0.1428571 0.02
Retained earnings 20,00,000 14% 0.2857143 0.04
Preferred stock capital 10,00,000 12% 0.1428571 0.01714286
Debt Capital 30,00,000 10% 0.4285714 0.04285714
Total Capital 70,00,000 1
Cost of equity(Ke) 0.02+.04+0.01714286 0.07714286
Cost of debt after Tax- Kd(1-Tc) 0.04285714*(1-.40) 0.02571429
WACC 0.02571429+0.0257 0.1028
Weighted average 10.28%
cost of capital
5 c. A company is considering to purchase a new machine that costs Tk 60,000. The company’s tax rate is
40% and the company follows straight line method of depreciation. The annual cash flows have the
following cash projections:
Year Cash flows
1 21,000
2 29,000
3 36,000
4 16,000
5 12,000
Requirements:
If the cost of capital is 10%, what is the net present value.
What is the internal rate of return?
Should the project be accepted? Show your argument.

1. Depricitation 60,000/5= 12000


2. K (Cost of Capital) 10%
3. Tc (Corporate tax rate) 40%
1 2 3 4 5 6 7 8 9
Year CFBT Annual Taxable Tax AT NCF(3+6) PV Factor PV(7*8)
(n) Dep income(2-3) (40%) income (1/1.10)n
(4-5)
1 21000 12000 9000 3600 5400 17400 0.9091 15818.34
2 29000 12000 17000 6800 10200 22200 0.8264 18346.08
3 36000 12000 24000 9600 14400 26400 0.7513 19834.32
4 16000 12000 4000 1600 2400 14400 0.683 9835.2
5 12000 12000 0 0 0 12000 0.6209 7450.8

TOTAL PV 71284.74
NCO 60000
NPV 11284.74

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Business Digest 7 Previos Exam’s Math and solution

.ii) IRR Calculation:


IF K 17%
1 2 3 4 5 6 7 8 9
year CFBT Annual taxable tax(40%) AT NCF PV PV(7*8)
Dep income(2-3) income (3+6) Factor
(1/1.17)n
1 21000 12000 9000 3600 5400 17400 0.8547 14871.78
2 29000 12000 17000 6800 10200 22200 0.7305 16217.1
3 36000 12000 24000 9600 14400 26400 0.6243 16481.52
4 16000 12000 4000 1600 2400 14400 0.5336 7683.84
5 12000 12000 0 0 0 12000 0.4561 5473.2
TOTAL 60727.44
PV
NCO 60000
NPV 727.44

IF K 18%
1 2 3 4 5 6 7 8 9
year CFBT Annu taxable tax After tax NCF PV PV(7*8)
al Dep income (40%) income (3+6) Factor
(2-3) (1/1.18)n
1 21000 12000 9000 3600 5400 17400 0.8474 14744.76
2 29000 12000 17000 6800 10200 22200 0.7181 15941.82
3 36000 12000 24000 9600 14400 26400 0.6086 16067.04
4 16000 12000 4000 1600 2400 14400 0.5157 7426.08
5 12000 12000 0 0 0 12000 0.4371 5245.2
TOTAL 59424.9
PV
NCO 60000
NPV -575.1

IRR= Lower rate+ NPV at Lower rate *(Higher rate –Lower rate)
(PV Lr - PV Hr)
=17%+ {727/ (727+575) } * (18-17)%
=17%+.5583%
=17.56%

iii) As the NPV is positive as well as the IRR(17.56%) is greater than cost of
capital (10%), the project should be accepted.

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Business Digest 8 Previos Exam’s Math and solution

৩৭ তম বিবিএি (wnmveweÁvb)
বিষয় ক াডঃ ৭০১
পূে িমানঃ ১০০
(কেক ান ৪টি প্রকের উত্তর বিকত হকি)
িময়: ৪র্ণ্টা

1| (K) wnmveweÁvb‡K Kviev‡ii fvlv ejv nq †Kb?


1| (L) wnmveweÁ‡bi Z_¨ e¨enviKvix Kviv? ‡Kb Zviv wnmveweÁvb Z_¨ e¨envi K‡ib?
1| (M) g~j¨‡eva I Revew`wn m„wó‡Z wnmveweÁv‡bi f~wgKv e¨vL¨v Kiæb|
1| (N) evsjv‡`‡k wnmveweÁvb †ckvi Dbœq‡b AvBwmGwe (ICAB) Gi f’wgKv ms‡ÿ‡c eY©bv Kiƒb|

2| (K) ÒwnmveweÁ‡bi †gŠwjK mgxKi‡Yi mgZv KL‡bv wewNœZ nq bvÓÑ e¨vL¨v Kiyb|
2| (L) Rbve Kwig 2017 mv‡ji 1jv gvP© GKwU †mev`vbKvix cÖwZôvb Pvjy K‡ib| cÖ_g gv‡mi †jb‡`b¸‡jv wb¤œiƒc:

gvP©-1: cÖviw¤¢K wewb‡qvM bM` 1,00,000 UvKv, AvmevecÎ 20,000 UvKv Ges GKvU †gwkb hvi µqg~j¨ 30,000
UvKv (Avqy®‹vj 5 eQi)
wZb gv‡mi Ni fvov AwMÖg cÖ`vb 30,000 UvKv|
mvcøvBR µq bM‡` 5,000 UvKvq Ges evwK‡Z 7,000 UvKvq|
‡gwk‡bi Rb¨ exgvwKw¯Í cÖ`vb 1,800 UvKv|
gvP©-5: ¯’vbxq ˆ`wbK cwÎKvq weÁvcb cÖ`vb 3,000 UvKv|
gvP©-10: †mev cÖ`vb eve` Avq bM‡` 15,000 UvKv, evwK‡Z 8,000 UvKv|
gvP©-15: wewea LiP cÖ`vb 200 UvKv|
gvP©-20: e¨w³MZ Li‡Pi Rb¨ D‡Ëvjb 7,500 UvKv|
gvP©-25: †mev cÖ`vb eve` bM‡` Avq 8,000 UvKv|
gvP©-28: weÁvcb wej m¤ú~Y© cÖ`vb Kiv nj|
gvP©-30: Kg©Pvixi †eZb cÖ`vb 7,500 UvKv|
BDwUwjwU wej cvIqv †Mj 5000 UvKv|
gvP©-31: mviv gv‡mi mvcøvBR LiP 8,000 UvKv|
evwK Av`vq 5,000 UvKv Ges evwK cwi‡kva 6,000 UvKv|

KiYxq: (1) ‡Ueyjvi we‡kølY


(2) ‡Ueyjvi we‡kølY †_‡K Avw_©K weeiYx

3| (K) bM`vbwfwËK wnmveweÁvb Ges e‡KqvwfwËK wnmveweÁv‡bi cv_©K¨ wbY©q Kiæb|


3| (L) ÔI‡gMv mvwf©‡mmÕÑ Gi 2017 mv‡ji 31‡k wW‡m¤^ র Zvwi‡Li †iIqvwgj wb‡¤œ cÖ`Ë nj|

‡iIqvwgj
wW‡m¤^i 31, 2017

weeiY ‡WweU UvKv ‡µwWU UvKv


bM` 43,350
cÖvc¨ †bvU 50,000
mvcøvBR 2,800
AwMÖg exgv 8,950

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Business Digest 9 Previos Exam’s Math and solution

weeiY ‡WweU UvKv ‡µwWU UvKv


miÄvg 1,37,000
cÄxf’Z AePq- miÄvg 17,400
`vjvb 2,69,500
cÄxf’Z AePq- `vjvb 15,000
f~wg 1,50,000
cÖ‡`q wnmve 73,650
AbycvwR©Z †mev Avq 44,000
cÖ‡`q †bvU 1,00,000
g~jab 3,50,000
D‡Ëvjb 15,000
‡mev Avq 1,31,600
‡eZb LiP 20,000
Dc‡hvM LiP 15,000
weÁvcb LiP 20,000
7,31,650 7,31,650

mgš^qbg~n:
AbycvwR©Z †mev Avq †_‡K Avq n‡q‡Q 20,000 UvKv|
cÖvc¨ my` Avq 5,000 UvKv|
mvcøvBR gRy` 2,000 UvKv|
exgv †gqv` DËxb© n‡q‡Q 4,475 UvKv|
miÄv‡gi evwl©K AePq 10% Ges `vjv‡bi AePq 5%|
e‡Kqv my` LiP 10,000 UvKv|
KiYxq:
(K) 10 Ni wewkó Kvh©cÎ|
(L) mgvcbx `vwLjv|
4| (K) AePq Kx? AeP‡qi cwigvY wbY©‡q †Kvb ‡Kvb welq ¸iæZ¡c~Y©?
4| (L) †mvbvjx g¨vbyd¨vKPvwis †Kv¤úvwb wZbwU Avjv`v †gwk‡b Drcv`bKvh© cwiPvjbv K‡I Avm‡Q| †gwk‡bi cÖK„wZMZ Kvi‡Y wewfbœ
AePq c×wZ e¨envi K‡i cÖwZôv‡bi wnmveiÿY Kiv n‡q _v‡K| †gwkb¸‡jv msµvšÍ Z_¨ wb¤œiƒc:
‡gwkb µ‡qi ZvwiL g~j¨ Kvh©Kvj †k‡l g~j¨ Avqy®‹vj AePq
UvKv UvKv eQi c×wZ
A 1-1-2014 4,50,000 10,000 4 w¯’iwKw¯Í
B 1-1-2014 10,00,000 20,000 5 µgn«vmgvb
C 1-1-2015 8,00,000 50,000 5 Kvh©wfwËK
‡gwkb C Gi AvbygvwbK Kvh©Kvj 25,000 NÈv hvÑ
1g erm‡i 2q erm‡i 3q erm‡i 4_© erm‡i 5g erm‡i
4,000 NÈv; 5,000 NÈv; 6,000 NÈv; 6,000 NÈv; 4,000 NÈv|
KiYxq:
(1) 31‡k wW‡m¤^i 2016 Zvwi‡L AeP‡qi cwigvY wba©viY K‡i Rv‡e`v wjLyb Ges D³ Zvwi‡Li DØ„ËcÎ cÖwZ †gwk‡bi eyK f¨vjy
Avjv`vfv‡e cÖ`k©b Kiæb|
(2) hw` †gwkb B 1/1/2014 Gi cwie‡Z© 1/4/2014 Zvwi‡L µq Kiv n‡q _v‡K Z‡e D³ †gwk‡bi 2014 Ges 2015 mv‡ji
AeP‡qi cwigvY KZ n‡e?

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Business Digest 10 Previos Exam’s Math and solution

5| (K) †UªRvwi ÷K I ÷K LÐb ej‡Z wK †evSvq?


5| (L) †evbvm †kqvi Kx? †evbvm †kqvi Bmy¨I Gi myweav I Amyweav Kx?
5| (M) ms‡ÿ‡c d‡ibwmK GKvDw›Us I MÖxb GKvDw›Us Gi aviYv e¨vL¨v Ki|
6| (K) wbZ¨ gRy` c×wZ I KvjvwšÍK gRy` c×wZi g‡a¨ cv_©K¨ wbiƒcY Kiæb|
6| (L) b‡f¤^i 10 Zvwi‡L BZz †Kv¤úvwbi wbKU †_‡K 80,000 UvKvi cY¨ µq K‡i, GdIwe wkwcs c‡q›U, kZ© 2/10, n=30| b‡f¤^i
11 Zvwi‡L BZz †Kv¤úvwb cwienb LiP cwi‡kva LiP K‡I 2,000 UvKv| Ryb 12 Zvwi‡L bwkb‡K 3,000 UvKvi webó cY¨ †diZ †`Iqv
nq| D³ webó c‡Y¨i fMœve‡kl g~j¨ 1,500 UvKv| b‡f¤^i 19 Zvwi‡L evÆv ev` w`‡q bwkb †Kv¤úvwbi m¤ú~Y© UvKv cwi‡kva K‡i| D³
†Kv¤úvwb wbZ¨ gRy` c×wZ AbymiY K‡i|
KiYxq:
BZz †Kv¤úvwbi eB‡q cÖ‡qvRbxq Rv‡e`v `vwLjv|
bwkb †Kv¤úwbi eB‡q cÖ‡qvRbxq Rv‡e`v `vwLjv| BZz †Kv¤úvwb b‡f¤^i 10 Zvwi‡L †h cY¨ µq K‡i Zv bwkb Gi Kv‡Q µq g~j¨
60,000 UvKv|
6| (M) wW‡m¤^i 31 Zvwi‡L bvfvbv †Kv¤úvwbi Zzjbvg~jK DØ©ËcÎ cÖ`vb Kiv nj:

Bvfvbv †Kv¤úvwb
Zzjbvg~jK DØ„ËcÎ
wW‡m¤^i 31
m¤úwËmg~n 2017 UvKv 2016 UvKv
bM` 71,000 45,000
cÖvc¨ wnmve 44,000 62,000
gRy` cY¨ 1,51,000 1,42,000
AwMÖg LiP 15,280 21,000
f~wg 1,05,000 1,30,000
miÄvg 2,28,000 1,55,000
cywÄf’Z AePq miÄvg (45,000) (35,000)
`vjvb 2,00,000 2,00,000
cywÄf’Z AePq `vjvb (60,000) (40,000)
7,09,730 6,80,000
`vq I ÷K‡nvìviÕm BKz¨wqwU
cÖ‡`q wnmve 47,730 40,000
cÖ‡`q eÛ 2,60,000 3,00,00
mvaviY †kqvi (cÖwZwU 1 UvKv K‡i) 2,00,000 1,60,0000
msiwÿZ gybvdv 2,02,000 1,80,000
7,09,730 6,80,000

AwZwi³ Z_¨vewj:
1| 2017 mv‡ji bxU jvf
2| AePq LiP
3| bM‡` jf¨vsk cwi‡kva
4| bM‡` miÄvg µq 95,000 UvKv| 22,000 UvKv g~‡j¨i miÄvg hvi ewng~j¨ 10,000 UvKv| weµq Kiv nq 6,000 UvKv|

KiYxq:
c‡ivÿ cw×wZ‡Z GKwU bM` cÖevn weeiYx|

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Business Digest 11 Previos Exam’s Math and solution

৭। ) IAS-I অনুিাকর আবথ ি বিিরেীর অংিগুকলা ী ী?


খ) করওয়াবমল প্রস্তুত রে

৮। ) “এ টি সুষ্ঠ উৎপািন -ব্যয় বহিাি পদ্ধবত ব্যয় বনয়ন্ত্রকের উপায়”- ব্যাখ্যা রুন।
খ) উৎপািন -ব্যয় বহিািবিজ্ঞান ও আবথ ি বহিািবিজ্ঞাকনর মকে পাথ ি য বনে িয় রুন।
গ) “স্বাভাবি েবত এ টি পবর বল্পত েবত”- ব্যাখ্যা রুন।
র্) বমতব্যয় পবরমাে বনি িারকে ী ী বিষয় বিকিচনা রকত হয় িংকেকপ উকেখ রুন।
ঙ) “প্রবেয়া ব্যয় হকলা িমকয়র বিভাকগর এিং এ উৎপািকনর গড় ব্যয়”- ব্যাখ্যা রুন।

৯। )আচরকের বভবত্তকত ব্যকয়র কশ্রেীবিভাকগর িংবেি বিিরে বিন।


খ) আয় বিিরেী প্রস্তুত রে

১০। ) জি ব্যয় ও প্রবেয়া ব্যয় বহিাকির মকে পাথ ি য বলখুন।


খ) িরবেত অথ ি ী?
গ) অিম্পূে ি ঠি া- াকে ির মুনািা ীভাকি বনে িয় রা হয়?
র্) ঠি া াে ি বহিাি।

১১। ) “বনরীোর প্রিান উকদ্দশ্য ভুল ও জলা-জুয়াচুবর উির্ােন ও বনিারে”। মন্তব্য রুন।
খ) “ভাউবচং বনরীোর অপবরহাে ি উপািান”। ব্যাখ্যা রুন।
গ) “বনরীে মূল্য বনরূপ নন ব ন্তু মূকল্যর িাকথ বতবন র্বনষ্ঠভাকি জবড়ত”। আকলাচনা রুন।
র্) অভযন্তরীে বনয়ন্ত্রে, বনিারে ও বনরীোর মকে পাথ ি য কিখান।
ঙ) ভুল-ত্রুটি ও জুয়াচুবর িম্পক ি বনরীেক র তিব্য িে িনা রুন।
চ) বিি ভাউচাকরর বিবিষ্ট্য ী ী?
ে) িাংলাকিি বনরীোর কেকে আন্তজিাবত মানিমূহ িাস্তিায়ন িম্পক ি আকলাচনা রুন।

১২। ) রিাতা ক ? রিাতা ত প্র ার উকেখ রুন।


খ) আয় র অোকিি অনুোয়ী আকয়র বিবভন্ন উৎিিমূহ উকেখ রুন।
গ) উপ- র বমিকনর েমতা ও াে িািলী উকেখ রুন।
র্) উত্তম র বনি িারেী পদ্ধবতর িতিিমূহ িংকেকপ আকলাচনা রুন।
ঙ) আয় র বরোকন ির িাকথ ী ী িবললপে িংযুক্ত রকত হয় তা উকেখ রুন।
চ) রিাতার আিাবি মে িািা ীভাকি বনে িয় রা হয়?
ে) গৃহ-িম্পবত্তর িাবষ ি মূকল্যর িংজ্ঞা বিন। গৃহ-িম্পবত্তর িাবষ ি মূল্য ীভাকি বনে িয় রা হয়?

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Solution 4(i):

Machine A (Straight Line Method):

Depreciation for the year 2016 = (Cost –Salvage Value) / number of Years
= (Tk.4,50,000 - Tk.10,000) / 4 = Tk.4,40,000 /4= Tk. 1,10,000.

Machine B (Reducing Balance Method):


We know, under reducing balance method depreciation rate is a must for determining the depreciation.
When the cost of asset, residual value and useful life of an asset is given we can use the following formula
to calculate the depreciation rate:

r = 1 - (S/C)1/n
r = 1 - (20,000/10,00,000)1/5
r = 54 %
Where:
r = Rate of depreciation
n = Estimated useful life of asset = 5 Years
S = Residual value after the expiry of useful life = Tk. 20,000
C = Original cost of asset = Tk. 10,00,000.

Depreciation of Machine B under Reducing balance method can be calculated as follows:


Year Opening Book Value Depreciation Accumulated Ending Book Value
Depreciation
2014 10,00,000 5,40,000 5,40,000 4,60,000
(10,00,000*54%)
2015 4,60,000 2,48,400 7,88,400 2,11,600
(4,60,000*54%)
2016 2,11,600 1,14,264 9,02,664 97,336
(2,11,600*54%)

So, Depreciation of Machine B under Reducing balance method in 2016 is Tk. 1,14,264.

Machine C (Unit of Production Method):


Depreciation for the year 2016 = {(Cost –Salvage Value) * Units During the year} / Total number of Units
= {(Tk.8,00,000 - Tk.50,000)*5,000} / 25,000
= {Tk.7,50,000 * 5000) /25,000= Tk. 1,50,000.

Required Journal Entries On 31 December 2016 :


To show the Book Value of the machines in Balance sheet as on 31 December 2016, we need to find out the
accumulated depreciation of each machine, which is as follows:

Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Deprecation Expense-............………Dr. 1,10,000
2016
Accumulated Depreciation– Machine A…….Cr. 1,10,000
Dec 31
(to record depreciation expense of machine A)

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Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Deprecation Expense-............………Dr. 1,14,264
2016 1,14,264
Accumulated Depreciation– Machine B…….Cr.
Dec 31
(to record depreciation expense of machine B)

Deprecation Expense-............………Dr. 1,50,000


2016 1,50,000
Accumulated Depreciation– Machine C…….Cr.
Dec 31
(to record depreciation expense of machine C)

Machine A: = Tk. 1,10,000*3 = Tk. 3,30,000


Machine B = Tk. 9,02,664 (from depreciation calculation)
Machine C = {(Cost –Salvage Value) * Units till 2016} / Total number of Units
= {(Tk.8,00,000 - Tk.50,000)*9,000} / 25,000 = {Tk.7,50,000 * 9000) /25,000= Tk. 2,70,000.

Sonali Manufacturing
Balance Sheet
As on 31 December 2016
Solution: 4 (ii)

If Machine was purchased on 1 April 2014 instead of 1 January 2014 the amount of depreciation in 2014 &
2015 would be as follows:

Assets Taka
Machine A………………..…………………………………...Tk. 4,50,000
Less: Accumulated Depreciation– Machine A…………...Tk. 3,30,000 1,20,000

Machine A………………..……………………………….......Tk. 10,00,000


Less: Accumulated Depreciation– Machine A…………...Tk. 9,02,664 97,336

Machine A………………..……………………………….......Tk. 8,00,000


Less: Accumulated Depreciation– Machine A…………...Tk. 2,70,000 5,30,000

If Machine was purchased on 1 April 2014 instead of 1 January 2014 the amount of depreciation in 2014 &
2015 would be as follows:

Year Opening Book Depreciation Accumulated Ending Book Value


Value Depreciation
2014 10,00,000 4,05,000 4,05,000 5,95,000
(10,00,000*54%)*(9/12)
2015 5,95,000 3,21,300 7,26,300 2,73,700
(5,95,000 *54%)

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Solution 6 (b)

Required Journals:
Date Etu Company (Buyer) Noshin Company (Seller)
10 Inventory A/C…...Dr. 80,000
Nov Accounts payable……..Cr. 80,000 Accounts receivable (Etu)……...Dr, 80,000
Sales A/c……………………………....Cr,80,000

COGS…………………………...Dr. 60,000
Inventory…………………………. Cr., 60,000
11 Inventory……………..Dr. 2,000
Nov Cash…………………….Cr. 2000

Accounts payable…….Dr. 3,000


Inventory……………….Cr. 3,000 Sales return A/C………………..Dr. 3,000
A/C receivable A/c…………………….Cr. 3,000

Merchandise inventory………... Dr.2250


COGS………………………………….Cr. 2250
Accounts payable……..Dr. 77,000
Cash……………………..Cr 75,460 Cash A/c………………………..Dr. 75,460
Merchandise Inventory…Cr.1,540 Sales discount…………………..Dr. 1,560
A/c receivable………………………...Cr. 77,000

Solution 6 ©:

Navana Company
Cash flow statement (indirect method)
For the year ended 31st Decemeber, 2017

Particulars Taka Taka


Net Income (i) 37000
Cash Flow From operating activities: (ii)
Depreciation expense 42000
(+)Decrease in A/C Recievable 18000
(-)Increase in inventory (9450)
(+)Decrease in prepaid expense 5720
(+)Increase in Ali payable 7730
(-)Decearse in band payable (40000)
(+)Loss on sale of equipment 4000
28000
A. Cash Inflow from Operating activities (i+ii) 65000

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Continued:

Cash Flow from investing activities:


(-)Purchase of equipment (95000)
(+)Sale of equipment 6000
(+)Sale of land 25000
B.Cash Inflow from investing activities (64000)
Cashflow from Financing activities:
Payment of dividend (15000)
Issue of common share 40000
C. Cash Inflow from Financing activities 25000
Net changes in cash flow (A+B+C) 26000
(+)Cash in hand at the beginning of the period 45000
=Ending cash balance 71000

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Bangladesh Power Development Board


Recruitment test for the post of Assistant Director
(Accounts/Finance/Audit/Commercial Operation), 2018
Duration:2 hrs

Accounting (20 Marks)


1. What is primary responsibility of an auditor? Who is responsible for the content of the financial statements?
2. The following inventory related information is given for the month of January 2018:

Particulars No. of Units Unit Cost/Selling Price (Tk.)


Beginning Inventory 100 2.10
Sale 75 4.00
Purchase 150 2.80
Sale 100 5.00
Purchase 50 3.00

Using ‘Weighted Averaged Cost’ method under periodic inventory system, calculate the value of
i.Ending inventory
ii.Cost of goods sold; and
iii.Gross profit.
3. Differentiate between depreciation and impairment of assets with examples.
4. Explain LCNRV principle as per IAS-2.
5. Walton Company had net sales in 2015 of Tk. 14,00,000. On December 31, 2015, before adjusting entries, the
balances in selected accounts were accounts receivable Tk. 2,50,000 debit and allowance for doubtful accounts Tk.
2,400 credit. If Walton estimates that 2% of its net sales will prove to be uncollectible, prepare journal entry to record
bad debt expense on December 31, 2015.
6. Net income for the year for RFL company was Tk. 7,50,000. But the statement of cash flows reports that net cash
provided by operating activities was Tk. 8,60,000. RFL also reported capital expenditures of Tk. 75,000 and paid
dividend of Tk. 30,000. Compute RFL’s free cash flow. [
7. KBC Company’s bank statement for May 2018 shows the following data.
Balance on 1/05/2018 Tk. 1,26,500 and Balance on 31/05/2018 Tk. 1,42,800
Debit Memorandum:
NSF check Tk. 1,750
Credit Memorandum:
Collection of note receivable Tk. 5,050
The cash balance per books on May 31 is Tk. 1,33,190. Your review of the data reveals the following:
1)The NSF check was from Copple Co., a customer.
2)The note collected by the bank was a Tk. 5,000, 3-month, 12% note. The bank charged Tk. 100 collection fee.
No interest has been accrued.
3)Outstanding cheques on May 31 totalled Tk. 24,100.
4)Deposits in transits on May 31 toatalled Tk. 17,520.
5)A Victoria Peak Company cheque for Tk. 3,520, dated May 10, cleared the bank on May 25. The company
recovered this cheque, which was a payment on account for Tk. 3,250.

Required:
Prepare a bank reconciliation (Only adjusted cash balance as per Cash Book) on May 31.

8. Define ‘Off-Balance Sheet (OBS)’ items. How do these items arise?

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Finance & Banking (20 Marks)


9. The RSL company has a debt to total assets ration of 33.33 percent, and it needs to raise Tk. 1,00,000 for
expansion. Management feels that an optimal debt to total assets ratio would be 16.67 percent. Sales are currently
Tk. 7,50,000 and the total assets turnover is 7.5. How should the expansion be financed so as to produce the desired
debt ratio?
10. A machine has a cost of Tk. 1,80,000. It will have a life of 3 years and will be depreciated straight line to zero
salvage value. It will result in sales revenue of Tk. 2,00,000 per year and cash operating costs of Tk. 1,10,000 per
year. Use of the machine will require an increase in working capital of Tk. 70,000 for the 3 years, beginning at year
1. The firm’s tax rate is 40% and the appropriate after-tax discount rate is 8%.
Required:
What is the NPV for the machine?
11. Define working capital management. Why is it crucial to properly manage working capital in any business
organization?
12. Write short notes on: CAMEL, Syndicated Loans and Black Money.
13. Differentiate between scheduled and non-scheduled banks. Mention few names of non-scheduled banks in
Bangladesh.
14. Differentiate between call money rate and bank rate?
Management (10 Marks)
15.What are the five stages of Maslow’s Hierarchy of Needs? Give an example for each.
16.What are the differences between a Leader and a Manager?
17.What do you understand by delegation of authority?
18.Describe the advantages and disadvantages of decentralized management system.
Marketing (10 Marks)
19.KFC is now rolling out a new Kentucky Grilled Chicken line to add to its traditional fried chicken line up. Which
growth strategy does this represent?
20.Define the following terms with an example:
Niche Marketing
De-marketing
Market skimming pricing and
Market Penetration pricing
Computer (10 Marks)
21. What are the differences between primary memory and secondary memory?
22. What is the use of Macros in MS Word?
23. A wholesaler may sell 1 to 10 T-shirts for Tk. 8.50 each and 11 to 25 T-shirts for Tk. 8.00 each. 26 to 50 T-shirts
for Tk. 7.25 each. 51 to 75 T-shirts for Tk. 6.30 each, 76 to 100 T-shirts for Tk. 5.25 each and 100+ T-shirts for Tk.
3.95 each. Write the formula in column C to determine how much you have to pay by purchasing wholesale
products for your company in bulk assuming that total number of units orders is given in cell B12.

24. What is DBMS?


25. What is the use of ‘vlookup’ function in MS Excel?

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English (10 Marks)


26. Translation from Bengali to English:
a. Avwg GLvb †_‡K wKfv‡e Gqvi‡cv‡U© hve?
b. mvd‡j¨i Rb¨ †Zvgv‡K Awfb›`b Rvbvw”Q|
c. eb¨vi cvwb Kg‡Z ïiæ K‡i‡Q|
d. ‡Ljvcx FY wbim‡b m¤¢ve¨ cÖ‡qvRbxq Kg©cš’v wK?
27. Fill in the blanks with appropriate word(s)/article/preposition:
a. Articles have been painting pictures of animals ____ centuries.
b. Science is the result ____ people trying to understand the world around them.
c. He always goes back home from office ____ foot.
d. I ____ trying to solve this math for the last two hours.
28. Sentence Correction:
a. Before he had gone for the US, he had finished his studies.
b. By this time next year he will complete the construction of his house.
Bengali (10 Marks)
29. Translation from English to Benglai:
a.He did nothing but sleep.
b.He is out of luck.
c.A beggar must not be a chooser.
d.Like the commoners, the government is also heavily indebted.
e.Effect to the charm or death to the body.
30. fvem¤úªmviY wjLyb:
“ivZ hZ Mfxi nq
cÖfvZ ZZ wbK‡U Av‡m|”

General Knowledge (10 Marks)


31. The target year of achieving the Sustainable Development Goals (SDGs) is-
32. SWIFT stands for-
33. Bangladesh has highest volume of RMG trade with-
34. FRC stands for-
35. Which IAS relates to financial institutions?
36. Where and when did the Provisional Government of Bangladesh get formed during the Bangladesh Liberation
War?
37. Which country is the newest member of SAARC?
38. What is Per Capita Income of Bangladesh?
39. Name the three largest economics of the world.
40. What is the size of the recently announced Budget (2018-19) in Bangladesh?

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Question-1:
To give opinion on Financial Statement
Management

Question-2:( a)
Description Amount
Beginning inventory (100 x 2.10) 210.00
(-) Costs of Sales (75 x 2.10) 157.50
[Of rest 25 units] 52.50
(+) Purchase (150 x 2.80) 420.00
[Of 175 units] 472.50
[per unit cost=472.5/175=2.7]
(-) Cost of Sales (100 x 2.70) 270.00
[Of 75 units] 202.50
(+) Purchase (50 x 3) 150.00
Ending Inventory 352.50

b) Costs of Goods Sold = 157.50 + 270.00


= 427.50
c) Gross Profit = (75 x 4) + (100 x 5) – 427.50
= 327.50
Question-3:
Topic Depreciation Impairment
Definition Gradual reduction on tangible asset for its Reduction on intangible asset for its use
use
Regularity Regular Not regular
Certainty Certain Uncertain

Question-4:
LCNRV= Lower of Cost Net Realized Value
It is a principle of accounting that we have to recognize the lower amount of an asset between its book
value and market value.
Question-5:
Bad debt expense on net sales= 1,400,000 x 2% =28,000

Date Description Source Debit Credit


2015 Bad Debt Expense--------------------------------------------Dr 28,000
Dec-31 Allowance for Doubtful A/C-------------------------------Cr 28,000

Question-6:
FCF = Cash Flow from Operation – Capital Expenditure
= 8,60,000 – 75,000
= 7,85,000

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Question-7:

Description Amount
Balance on Bank Statement 1,42,800
(-) Outstanding Cheque (24,000)
(+) Deposit in Transit 17,520
Ending Balance 1,36,220
Balance on cash Book 1,33,190
(-) NSF Cheque (1,750)
(+) Collection of Notes Receivable 5,050
(-) Error in recording (270)
Ending Balance 1,36,220

Question-8:
Off-Balance Sheet (OBS) items:
OBS items are those items which don’t come in Financial Statements directly but mention in Notes
to the Accounts. This is because those items are yet to be recognized as transaction.
How they arise:
They arise from contingent assets or liabilities.

Question-9:

Current Debt= 1,00,000 x .3333= 33,333


Optimal Debt Limit after expansion = (1,00,000 + 1,00,000) x .1667
= 33,333
Decision: The expansion should be financed through full equity.
Question-10
: Time 0 1 2 3
Machine (1,80,000)
Change in NWC (70,000)
Net income 78,000 78,000 78,000
Back of NWC 70,000
FCF (2,50,000) 78,000 78,000 1,48,000

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So, NPV = -1,80,000 -70,000 +78,000 +

= 6,581
Note:

Sales 2,00,000
(-) Operating cost (1,10,000)
Gross Profit 90,000
(-) Depreciation (1,80,000/3) (60,000)
EBIT 30,000
(-) Tax (40%) (12,000)
18,000
(+) Depreciation 60,000
Net income 78,000

For Better understaning please check relevant chapters and formula given in the main
sections of the book

Assistant Manager (Accounts/Finance/Audit)


Recruitment test-2018
Duration:2hrs
Accounting (15 Marks)
Answer the following questions.
1.What do you mean by financial statements? Who are the users of the statements?
2.KBC Company’s bank statement for May 2018 shows the following data.
Balance on 1/05/2018 Tk. 1,26,500 and Balance on 31/05/2018 Tk. 1,42,800

Debit Memorandum:
NSF check Tk. 1,750
Credit Memorandum:
Collection of note receivable Tk. 5,050
a. The cash balance per books on May 31 is Tk. 1,33,190. Your review of the data reveals the
following:
b. The NSF check was from Copple Co., a customer.
c. The note collected by the bank was a Tk. 5,000, 3-month, 12% note. The bank charged Tk. 100
collection fee. No interest has been accrued.
d. Outstanding cheques on May 31 totalled Tk. 24,100.
e. Deposits in transits on May 31 toatalled Tk. 17,520.
f. A Victoria Peak Company cheque for Tk. 3,520, dated May 10, cleared the bank on May 25.
The company recovered this cheque, which was a payment on account for Tk. 3,250.
Required:
Prepare a bank reconciliation statement on May 31and pass the necessary journal entries.
3. The selling price per unit, variable-expense ratio, and total fixed costs for the year of Barilgoan Company
Limited are Tk. 125, 60% and Tk. 3,84,000 respectively. How many units will have to be sold in order to
earn a target profit of Tk. 96,000 if income tax rate is 40%?

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Finance (15 Marks)


4. Your grandmother put some money in an account for you on the day you were born. This account pays 8%
interest per year. On your 21st birthday the account balance was Tk. 5,033.83. What was the amount of
money (approximately) that your grandmother originally put in the account?
5. Bahar Brothers has the following data for the year ending 12/31/2015: Net income Tk. 600; Net operating
profit after tax (NOPAT) Tk. 700; Total assets Tk. 2,500; Short-term investments Tk. 200; Shareholders’
equity Tk. 1,800; Total debt Tk. 700; and Total operating capital Tk. 2,100. Bahar’s weighted average
cost of capital is 10%. Calculate its economic value added (EVA) amount.
6. People Pharmaceutical is planning for Tk. 5 million in capital expenditures next year. People’s target
capital structure consists of 60% debt and 40% equity. If net income for the next year is Tk. 3 million and
People follows a residual distribution policy with all distributions as dividends, what will be its dividend
payout ratio?
7. A firm has identified four possible projects, all of which are dividends:

Project Initial Investment NPV


A Tk. 50,000 Tk. 100,000
B Tk. 10,000 Tk. (50,000)
C Tk. 10,000 Tk. 40,000
D Tk. 15,000 Tk. 45,000
All projects must be started immediately but the firm has only Tk. 50,000 available for investment.
Project C and D are mutually exclusive.
Required: Determine the optimal project selection.
8. Define the right share. How does a rights offering protect a firm’s shareholders against the dilution of
ownership?
Audit (10 Marks)
9. “The practice of Ethics is more important in Assurance service than any other professions.”- Why it
is so? Discuss the fundamental principles of Code of Professional Ethics.
10. What is Audit Risk?
11. What are the five components of Internal Control System that an auditor must understand as part of
understanding the entity?
Analytical Ability (10x2= 20 Marks)
12. Find the minimum number of straight lines required to make the given figure.

13. A and B together have Tk. 1210. If 4/15 of A’s amount is equal to 2/5 of B’s amount. How much
amount does B have?
14. Two numbers are respectively 20% and 50% more than a third number. The ratio of the two number
is:
15. Which is the missing letters in this series: SCD, TEF, UGH, ____ , WKI.
16. The captain of Bangladesh cricket team of 11 members is 26 years old and the wicket keeper is 3
years older. If the ages of these two are excluded, the average age of the remaining players is one
year less than the average age of the whole team. What is the average age of the team?
17. There are 100 employees in a conference hall of AB bank. You note that 99% of them are managers.
How many managers would need to leave the conference in order to reduce the percentage of
managers in the hall to 98%?
18. Tickets numbered 1 to 20 are mixed up and then a ticket is drawn at random. What is the probability
that the ticket drawn has a number which is multiple of 3 or 5?

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19. Blueberries cost more than strawberries.


Blueberries cost less than raspberries.
Raspberries cost more than strawberries and blueberries.
If the first two statement are true, decide whether the third statement is true, false, or uncertain.
20. If FRIEND is coded as HUMJTK, how can CANDLE be written in that code?
21. Read the passage carefully and answer the question:
At a small company, parking spaces are reserved for the top executives: CEO, president, vice
president, secretary, and treasurer with the spaces lined up in that error. The parking lot guard can
tell at a glance if the cars are parked correctly by looking at the color of the cars. The cars are
yellow, green, purple, red, and blue and the executives names are Amir, Babul, Camelia, Dewan,
and Emon.
The car in the first space is red.
A blue car is parked between the red car and the green car.
The car in the last space is purple.
The secretary drives a yellow car.
Amir’s car is parked next to Dewan’s.
Emon drives a green car.
Babul’s car is parked between Camelia’s and Emon’s.
Dewan’s car is parked in the space.
Who is the secretary of the company?

Bengali, English & Power Sector (20 Marks)


22. Translation from English to Bengali:
a. How do I get to the airport from here?
b. I congratulate you on your success.
c. I am looking for a supermarket. Do you know where the closest one is?
d. After you turn right, go for five blocks and turn left.
23. Fill in the blanks with appropriate word(s):
a. He always goes back home from office ____ foot.
b. The train ____ come before I reached the station.
c. Can you ____ any conclusion from these information.
d. I ____ trying to solve this math for the last two hours.
e. ____ industries, such as banking and travel, in which computer are not a convenience but a
necessity.
f. I’ll see you ____ Chrismas.
24. Write an essay on “The Prospects and Problems of Solar Power Industry in Bangladesh”.
[Hints: current status of the solar energy, problems facing, future potentials, government’s role etc.]

General Knowledge (20 Marks)


25. Answer the following short questions:
a. The ‘Black flag’ signifies ………………………………..
b. Who was the man of the match in the cricket world cup 2019 final held in England and Wales?
c. Fathometer is used to measure ………………………………
d. How many wickets are picked by Mustafizur Rahman in the cricket world cup 2019?
e. When is Mujib Nagar Day observed?
f. Where is Payra seaport situated?
g. When was ‘Bangabandhu Satellite-1’ launched?
h. Green Peace is an organization dealing with …………………………
i. A ‘Bull Market’ means that share prices are ………………………..
j. Which is currently the largest power plant in Bangladesh?

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26. Write answers on the following questions within 2-3 sentences:


I. Agartala Conspiracy Case
II. Rohingya Refugee Crisis
III. Vision 2041
IV. Agenda- 2030
V. Why is Bhanga Upazilla, Faridpur is geographically important to the world?

CB questions:
Question-1:
Financial statements are formal written records of the financial performance and financial
position of a company. There are Five Components of Financial Statements:
1. Balance Sheet or, Statement of Financial Position
2. Income Statement or, Statement of Comprehensive income
3. Statement of Changes in Shareholders’ Equity or Retained Earnings Statement
4. Statement of Cash Flow
5. Notes to the financial statements.
Financial statements are the main source of financial information for most decision
makers. There are many users of the financial statements produced by an organization. The
users may be classified into internal and external users.
A) Internal Users: Internal users of accounting information are those individuals inside a
company who plan, organize, and run the business for the interest of the organization. e. g.
Proprietor, Management authority, Internal auditor, Accounts departments, Company
officers etc.
B) External Users: External users are individuals and organizations outside a company
who want financial information about the company for their own interest. For example,
Government, Shareholders, Lenders, Creditors, Investors, Customers, Researchers,
Chamber of commerce, General public, External Auditor, Stock Exchanges, Tax authority
etc .

Question-2:
Bank Reconciliation Statement
Description Amount
Balance on Bank Statement 1,42,800
(-) Outstanding Cheque (24,000)
(+) Deposit in Transit 17,520
Ending Balance 1,36,220
Balance on cash Book 1,33,190
(-) NSF Cheque (1,750)
(+) Collection of Notes Receivable 5,050
(-) Error in recording (270)
Ending Balance 1,36,220

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Question-3:
Business Digest 26 Previos Exam’s Math and solution

Journal Entries:

Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit

Cash / Bank....……………Dr. 5050


Bank fee expense....……………Dr. 100
2018
Notes Receivable..………………….…Cr. 5000
May 31 150
Interest Revenue..………………….…Cr.
( to record bank’s collection of notes)

Accounts Receivable-Copple Co.....………Dr. 1,750


2018
Cash / Bank....……………………………………….Cr. 1,750
May 31
( to record NSF Check from Coople Co.)

Cash / Bank....……………………….Dr. 270


2018 270
Accounts Payable– Victoria Peak Co………...Cr.
May 31
( to correct Victoria Peak Company Check)

Question:3

As the tax rate is 40%, so in order to earn a profit of Tk. 96,000 the company has to earn Tk.
160,000 as profit before tax.
We know,
Units be sold in order to earn a target profit =

=
=544,000 / 50 =10,880 Units
Here, variable cost per unit= Selling per unit Price * variable-expense ratio= ( Tk. 125*60%) = Tk. 75 .
Question:4

We know, present value of compound interest =

Where, i= Interest rate= 8%, n= number of years = 21.


So, Present value= Tk. 5,03,383/(1+.08)^21= Tk. 1,00,000.
So, the amount of money my grandmother originally put in the account is Tk. 1,00,000.

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Question:5
We know, Economic Value Added = NOPAT - Capital Invested * WACC
= Tk. 700- Tk. 2,500*10%
= Tk. 700– Tk. 250
= Tk. 450.
Here, Capital Invested= Total Debt + capital leases + shareholders'' equity.

Question:6
According to the People’s target capital structure, the amount needed as internal financing
(equity) for the Tk. 5 million expenditure would be Tk. Tk. 2 Million (Tk. 5 million * 40%). As
People Pharmaceutical follows residual distribution policy, the amount available for
distribution as dividend would be Tk. 1 million (Tk. 3 million - Tk. 2 million). We know
dividend payout ratio = (Cash Dividend / Net Income). So, the dividend payout ratio of People
Pharmaceutical would be 33.33% (Tk. 1 million/ Tk. 3 million).

Question:7
As per NPV decision criteria, Project B is not feasible as it provides negative NPV. Here, Project
A , C & D have a Profitability index (PI) of 2.00, 4.00 & 3.67 respectively. Now, as the firm has
only Tk. 50,000, the firm will not be able to invest in all the Projects, so the firm need to make
capital rationing decision. Here, both C & D have a higher PI than Project A but C & D are
mutually exclusive. As all the projects are divisible, so we must choose Project A and one from
Project C & Project D. So let’s examine Project combinations:
Project C & A: Investment pattern would be Tk. 10,000 in Project C & rest Tk. 40,000 in Project A. So
the total NPV would be Tk.1,20,000 (Tk. 40,000 from Project C & Tk. 80,000 from Project A).
Project D & A: Investment pattern would be Tk. 15,000 in Project D & rest Tk. 35,000 in Project A.
So the total NPV would be Tk.1,25,000 (Tk. 55,000 from Project C & Tk. 70,000 from Project A).
So, as Investment in Project A & D end up with higher NPV, the optimal investment decision
for the firm is to invest in in project A tk.35,000 and in Project D Tk.15,000.

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Question:8
Right shares are those shares which are issued by a corporation in ratio of equity shares to existing
shareholders to raise capital for corporation. Rights shares protect against dilution of ownership by
allowing existing stockholders to purchase additional shares of any new stock issues. Without
this protection controlling & voting power of the existing shareholders will be reduced.
Question:9
Ethical conduct is essential when performing an audit in order to meet the defining
characteristics of the auditing profession which are trust, independence and integrity.
Respecting the audit rules and standards is not enough, while in fact legislation is a minimum
to respect in the audit process. Often the rules need to be interpreted and auditors find
themselves is a need for reliance on good judgment and so, professional awareness as well as
respect of moral and ethical precepts are key in conducting an audit.
The Code of Ethics is a statement of principles and expectations governing behavior of
individuals and organizations in the conduct of auditing. Code of Ethics for Professional
Accountants includes:
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behavior

Question:10
Audit risk refers to the risk that an auditor may issue an unqualified report due to the auditor's
failure to detect material misstatement either due to error or fraud.
Audit Risk = Inherent Risk x Control Risk x Detection Risk.
Question:11
nternal Audit is the appraisal and monitoring activity established within the entity to examine,
evaluate and report to the management and directors on the adequacy and effectiveness of the
accounting and internal control system. Five components of an effective "internal control system"
that an auditor must understand as part of understanding the entity are as follows:
1) Control Environment
2) Risk Assessment
3) Control Activities
4) Information and Communication
5) Monitoring

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Question and Solution of EGCB Recruitment Test


Post: Junior Assistant Manager (Accounts/Finance/Audit)

01. Write the answers or the following questions in the answer booklet (a-j): [20]
a. Patents would appear in which section of the balance sheet?
Answer: Patents go in the intangible assets subsection of the classified balance sheet.
b. In an accounting period, when does firm usually take a physical inventory?
Answer: A full physical count is usually performed once a year, closer to the end of the year.
c. In a period of rising prices, which inventory method tends to give the highest reported inventory?
Answer: FIFO.
d. A company's five-day weekly payroll of Tk. 2,940 is paid on Fridays (Saturday and Sunday
are weekend). Assume that the last day of the month falls on Wednesday. What will be the
required adjusting entry for the month end?
Answer:
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Wages Expense....……………Dr. 1764
Wages Payable..………………….…Cr. 1764

(to record accrued wages)

e. Under which heading the 'Interest expense on a mortgage' would be classified on a


comprehensive income statement?
Answer: 'Interest expense on a mortgage' is classified under the head of Financing Expense on
a comprehensive income statement.
f. A project costs Tk. 475 and has cash flows of Tk.100 for the first three years and Tk. 75 in
each of the Project’s last five years. What is the payback period of the project?
Answer:
(cash flows in Taka)
Year Annual Cumulative
Cash Flow Cash Flow
0 (475) (475)
1 100 (375)
2 100 (275)
3 100 (175)
4 75 (100)
5 75 (25)
6 75 50

Payback Period = 5 + 25/75 = 5 + 0.33 ≈ 5.33 years

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g. Buying a vehicle for the company- what kind of expenditure is this?


Answer: Capital expenditure.
h. What is the decision rule for internal rate of return (IRR)?
Answer: The project will be accepted if the IRR is greater than the required rate of return.
i. Mr. Z invested Tk. 6,200 in an account that pays 5 percent simple interest. How much money ?
Answer: The amount of interest on Tk. 6,200 at a 5% simple interest rate for ten year would be Tk. 3,100
(Tk. 6,200*5%*10). So, at the end of ten years Mr. Z will he have Tk. 9,300 (Tk. 6,200+Tk. 3,100).
j. Which term is used to describe a loan wherein each payment is equal in amount and includes both
interest and principal?
Answer: Annuity method of loan amortization.

2. The charcoal company is purchasing a second-hand polishing machine from a competitor who has gone
bankrupt.it will incur the following costs:
Agreed price to be paid to tender………………………………… Tk. 8,000
Dismantling the machine at its current location……………...…….. Tk. 400
Transportation to Charcoal’s factory………………………….……. Tk. 350
Machine refurbishment cost prior to re-installation……………...… Tk. 175
Re-installation …………………………………………………....… Tk. 125
What should be the total amount to be included in non-current assets in respect of the machine? [10]

Answer: According to IAS 16: Property, Plant and Equipment is initially measured at its cost. Cost includes:
its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates;
any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management;
and the estimated costs of dismantling and removing the item and restoring the site on which it is
located, unless those costs relate to inventories produced during that period.
So for the given scenario, total amount to be included in non-current assets in respect of the machine
would be Tk. 9,050 (Tk. 8,000+400+350+175+125).

3. You just paid Tk. 750,000 for an annuity that will pay you and your heirs Tk. 45,000 a year forever.
What rate of return are you earning on this policy? [10]

Solution:
We know, Present Value of perpetuity =

From the above formula we can derive the return of perpetuity, which will be Cash Flow / Present Value
of perpetuity. So, the return on the perpetuity would be 6% (Tk.45,000/ Tk. 750,000).

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Question and Solution of DPDC Recruitment Test


Post: Assistant Manager (Accounts/Finance/Audit)

1. Write only the ANSWERS of the following questions in the answer booklet
a. An annuity is a stream of Equal annual flows.
b. Beta is useful for comparing the relative Volatility/ Riskiness of different stocks.
c. If the NPV of a project is greater than 0, the PI will be greater than One (1).
d. LUCKY Enterprise has a dividend yield ration of 4% and price earnings ratio of 10 and paid a dividend per
share of Tk. 0.60. What is the earning per share?
Answer: Given,
Dividend yield ratio is 4% and dividend paid per share is Tk.0.60, so market price per share= (0.60/4)*100=Tk.15.
Again, here, price earnings ratio is 10 & price per share is Tk. 15, so earning per share is Tk.1.5 (Tk.15/10).
e. In 3 years you are to receive $ 5000. If the interest rate were to suddenly increase, the present value of that
future amount to you would Decrease.
f. Minden Co has sales of $500,000, operating profit of $50,000. Interest expense of $10,000, tax
expense of $20,000, total equity of $125,000 and total debt of $275,000. is the debt to assets
ratio?
Answer: We know, debt to assets ratio = = = 68.75%

Here, total assets = total equity + total debt = $125,000 + $275,000 =$400,000.
g. What is the equation of Acid-Test Ratio in accounting?

h. A company purchased a car at a cost of $42,000 and expects its salvage value to be $6,000 after
120,000 miles of service. Using the units-of-production methods, what is the first year’s depreciation
if the car is driven 24,000 miles?
Answer: we know,
Depreciation under units-of-production method = * Production during the year

= * 24,000 =$7,200

Here, depreciable value= cost – salvage value =$42,000-$6000= $36,000.


i. Visual Company overstated its 2017 ending inventory by Tk. 22,000. What impact this error has on
cost of goods sold in 2017?
Answer: In 2017 cost of goods sold will be understated by Tk. 22,000.
j. In vertical analysis of Financial Statement, the base amount for depreciation is Net Sales.

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2. The accounting records of ABC Company show the following data. Beginning inventory
4,000 units at $3, purchases 6,000 units at $4, sales 7,000 units at $12. Determine the cost of
goods sold during the period under a periodic inventory system using (a) the FIFO method,
and (b) the LIFO method.
Answer:
(a) Cost of goods sold under the FIFO method will be comprised of first 4,000 units (from
beginning inventory) at $3 and the remaining 3,000 (from purchase) units at $4. Which is,
4,000*$3 + 3,000*$4=$12,000+$12,000=$24,000.
(b) Cost of goods sold under the LIFO method will be comprised of 6,000 units (from purchase)
at $4 and remaining 1,000 units (from beginning inventory) at $3. Which is, 6,000*$4 +
1,000*$3=$24,000+$3,000=$27,000.
3. The Sprouts-N-Steel Company has two divisions; health foods and specialty metals. Each
division employs debt equal to 30 percent and preferred stock equal to 10 percent of its total
requirements, with equity capital used for the remainder. The current borrowing rate is 15
percent, and the company's tax rate is 40 percent. At present, preferred stock can be sold
yielding 13 percent. Sprouts-N-Steel wishes to establish a minimum return standard for each
division based on the risk of that division. The company has thought about using the capital-
asset pricing model in this regard. It has identified two samples of companies, with modal
value betas of 0.90 for health foods and 1.30 for specialty metals. The risk-free rate is
currently 12 percent and the expected return on the market portfolio 17 percent. Using the
CAPM approach, what weighted average required returns on investment would you
recommend for these two divisions?
Answer:
Here, weight of debt= 30%, weight of Preferred stock=10% and weight of equity= 60% (100%-30%-10%)
After tax cost of debt= 15 %*( 1-.40) =9%;
Cost of preferred stock=13%
Cost of equity for health food division under CAPM approach= 12%+ (17%-12%)*.9=12%+4.5%=16.5%
Cost of equity for specialty metals division under CAPM approach= 12%+ (17%-12%)*1.3=12%+6.5%=18.5%

Weighted average required returns on health foods division =9%*.3+13%*.1+16.5%*.6=13.9%


Weighted average required returns on specialty metals division =9%*.3+13%*.1+18.5%*.6=15.1%

5. A restaurant has a set menu for 700 Taka. A 15, VAT is also imposed on the food value.
The set meal has a discount of 20%. Find the effective discount for the set meal?
Answer: Here, the original price of the set menu is Tk. 700, at a 20% discount the price
would be Tk. 560 (Tk. 700*.80). Now as 15% VAT is applicable to the product so the
amount to be paid would be Tk.560+ Tk.560*15%= Tk. 644. So, the effective discount for
the set meal will be Tk.56 (Tk. 700- Tk.644).

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Question and Solution of DPDC Recruitment Test


Post: Junior Assistant Manager (Accounts/Finance/Audit)

1. Write only the ANSWERS of the following question in the answer booklet: [20]
a. The discount rate at which two projects have identical NPV is referred to as cross over rate.
b. Net profit margin (NPM) is 5 Percent, total assets are $8 million, and ROI is 8 percent, the firm's
total asset turnover (TAT) is 1.6 Times.
Explanation: we know, Total Asset Turnover = = =1.6 times
Here, the amount of net sales is not given, but we can find the amount of net sales in the following
ways. NPM is 5%, so we can say that if net profit is $5 then amount of net sales would be $100. On the
other hand, ROI is 8% so the amount of net income would be $640,000 ($8,000,000*.08). So, now the
value of net sales would be $12,800,000 ($640,000/.05).
Note: ROI= (Net Income/ Total Investment), but as here the amount of investment is not given so
we can use total asset as a proxy of investment.
c. When the market’s required rate of return for a particular bond is much less than its coupon rate, the
bond is selling at a premium.
d. The use of fixed operating costs to magnify the effects of changes in sales on the firm's earnings before
interest and taxes is defined as Operating leverage.
e. Zetro Co. had a beginning retained earnings balance of $54,000 on January 1, 2019. Net income
before taxes in 2019 was $18,000. The income tax rate was 40%. Lamed also paid out $7.000 in
dividends during 2019. What is the ending retained earnings balance?
Answer: Ending Retained earnings = Opening Retained earnings + Net income after tax - Dividend paid
= $54,000+$10,800-$7000
= $ 57,800
Here, net income after tax= $ 18,000*(1-.4) = $10,800
f. Who bears the shipping cost in case of FOB shipping point? Answer: the buyer of the goods.

g. What is the formula of calculating EPS? Earnings Per Share =


h. Raptor Inc. has retained earnings of Tk. 500,000 and total stockholders' equity of Tk. 2,000,000. It has
100,000 shares of Tk. 8 par value common stock outstanding, which is currently selling for Tk : 30
per share. If Raptor declares a 10% stock dividend on its common stock, what is the impact of this
declaration on common stock?
Answer: as we know stock dividend does not involve cash, so declaration of stock dividend will not
change total stockholders' equity. However, declaration of a 10% stock dividend will increase number of
common stock by 10% (100,000*10%= 10,000 shares) yielding an increase in common stock by
(100,000*10%*8)= Tk. 80,000 and an increase of paid-up capital by (100,000*10%*22)= Tk. 2,20,000.
i. Mabo Company makes calculators that sell for Tk. 20 each. For the coming year, management
expects fixed costs to total Tk. 220,000 and variable costs to be Tk. 9 per unit. What is the break-even
point in units?
Answer: We know, Break-even point in units =

So, BEP (Units) = = 20,000 units

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j. Visual Company overstated its 2010 ending inventory, by Tk. 22,000. What impact this
error has on ending inventory, in 2010 and 2011?
Answer: in 2010 ending inventory will be overstated by Tk. 22,000 & in 2011 there will
be no impact on ending inventory. The reason is, the overstated amount of inventory at
the end of one accounting period becomes the beginning inventory of the following
period, the following period's cost of goods sold will be too high and will result in the
period's gross profit and net income being too low.
2. T. Co. assigned Tk. 500,000 of accounts receivable to M. Finance Co.as security for a
loan of Tk. 420,000. M. Finance Co. charged a 2% commission on the amount of the
loan; the interest rate on the note was 10%. During the first month, T. Co. collected Tk.
140,000 on assigned accounts after deducting Tk.380 of discounts. T. Co. accepted returns
worth Tk. 1,350 and wrote off assigned accounts totaling Tk.3730. Calculate the amount
of cash T. Co. received from M. Finance Co. at the time of the assignment? [10]
Answer: To find out the amount received by T. Co. from M. Finance Co. at the time of the
assignment let’s see the journal entries for the entire transaction for first month:
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
i) Cash……………………….…………………….……Dr.
4,11,600
Commission on Loan…………………..………Dr.
8,400
At the Note Payable ………………….………………..Cr.
4,20,000
time of (to record receipt of cash and commission on loan)
Consign- ii) Accounts Receivable - Assigned …………Dr. 5,00,000
ment Accounts Receivable……………………..…..Cr. 5,00,000
(to record receipt of assigning of accounts)

iii) Cash……………………………………….………Dr. 1,40,000


Sales Discounts………………….……………Dr. 380
Sales Return………………………….……..…Dr. 1,350
Bad debt expense……………….…...…...…Dr. 2,380
Accounts Receivable - Assigned…….…..Cr. 1,44,110
At the end
(to record sales discounts, sales return, uncollectible ac-
of First
counts and collection of 1st month accounts receivable)
Month
iv) Note Payable……………………….…….………Dr. 1,40,000
Interest Expense …………………....………..…Dr. 3,500
Cash ……………………………………………..Cr 1,43,500
(to record payment to bank, including 1 month interest
4,20,000*.10/12=3500)

As the requirement was to calculate the amount of cash T. Co. received from M. Finance Co. at the
time of the assignment. So the answer is TK. 4,11,600.

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3. The ledger of Harun, Inc. on March 31, 2018, includes the following selected accounts
before adjusting entries. Debit Credit Prepaid Insurance 3,600 Office Supplies 2,800
Office Equipment 25,000 Accumulated Depreciation-Office Equipment 5,000 Unearned
Revenue 9,200. An analysis of the accounts shows the following. i) Insurance expires at
the rate of Tk. 100 per month. ii) Supplies on hand total Tk. 800. iii) The office
equipment depreciates Tk.200 a month. iv) One-half of the unearned revenue was
earned in March. Prepare the adjusting entries for the month of March. [10]

Adjusting Entries

Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
i) Insurance Expense………………………Dr. 100
Mar-31, Prepaid Insurance ………………………….Cr. 100
2018 (to record expired prepaid insurance)

ii) Supplies Expense………………..……Dr. 2,000


Mar-31, Office Supplies……………………….…..Cr. 2,000
2018 (to record the use of supplies expense)

iii) Depreciation Expense…………………Dr. 200


Mar-31, Accumulated Depreciation-Office Equipment…Cr. 200
2018 (to record depreciation expense)

iv) Unearned Revenue……………….……Dr. 4,600


Mar-31, Revenue …………………………….…..Cr. 4,600
2018 (to record earned revenue )

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Agrani Bank Recruitment Test: Question and Solution


Post: Auditor

5. Topical questions:[9*10]
a) An old machine is sold for TK 50,000, its cost being 90,000 and accumulated
depreciation TK 20,000. Give the journal entry for the sale.
Answer:
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Accumulated Depreciation-Machine...Dr. 20,000
Cash…………………….…………....……………Dr. 50,000
Loss on the sale of Machine...……………Dr. 20,000
Machine………………………....………………….…Cr. 90,000
(to record sale of old machine)
b) Briefly explain two limitations an income statement.
Income statements include judgments and estimates, which mean that items that might be
relevant but cannot be reliably measured are not reported and that some reported figures
have a subjective component.
With respect to accounting methods, one of the limitations of the income statement is that
income is reported based on accounting rules and often does not reflect cash changing hands.
c) Cost of goods sold is TK 16,000, profit margin on sales is 20%, then determine sales revenue.
Answer: We know, Sales Revenue = Cost of goods sold / (1-Profit margin rate)
= Tk. 16,000 / (1-.20)
= Tk. 16,000 / .8 = Tk. 20,000.
d) Inventory TK 30,000, accounts receivable TK 45,000, cash TK 15,000, accounts payable TK
25000, tax payable TK 18,000. Determine current ratio.
Answer: We know, Current Ratio= Currant Asset / Current Liabilities.
So, current Ratio=(30,000+45,000+15,000) / (25,000+18,000)
= 90,000 / 43,000b = 2.09 Times.
e) The business of the government is not to do business. Do you agree? Why?
Answer: Although corporations and governments are organizations, that may be one of the
few traits they have in common. The role of a business, any business, is to make money.
Although governments must respond to the desires of their constituents (consumers) by
providing necessary services (products), here the path diverges because public officials,
unlike those in the private sector, must balance meeting the bottom line with the expectation
that they will also provide for the common good, however that's defined. And, they must
differentiate between Profit vs. People, Shareholders vs. Citizens, and Customers vs.
Constituents. So, I agree to the statement “The business of the government is not to do
business”.
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f) Public Accounts Committee is a very important Parliamentary Standing Committee. Discuss


the functions of this committee.
Answer: The functions of Standing Committee on Public Accounts includes, but not limited to:
(1) Examination of accounts showing the appropriation of sums granted by the House for the
expenditure of the Government, the annual finance accounts of the Government and such other
accounts laid before the House as the Committee may think fit.
(2) In scrutinizing the Appropriation Accounts of the Government and the report of the Comptroller
and Auditor-General thereon

g) What is auditors' independence? Explain.


Answer: Auditor independence refers to the independence of the internal auditor or of the external
auditor from parties that may have a financial interest in the business being audited. It is
characterized by integrity and an objective approach to the audit process. The concept requires
the auditor to carry out his or her work freely and in an objective manner. Aside from the
contractual and financial relationship between an organization and its external auditors,
maintaining the independence of external auditors is a strict requirement in most legal and
regulatory forms of auditing, especially when the subject organization is a publicly traded entity.
h) What are the various types of an audit report? Give one example for each type.
Answer: The Types of Audit Reports (opinion) fall into four categories. Those are:
1) The unqualified opinion is the best possible audit outcome. It means the financial
statements are prepared in compliance with GAAP and BFRS and statements represent
true and fair view.
2) A qualified opinion means the auditor finds that reports conform to GAAP, except in just a
few areas. For these areas, the auditor cannot assert conformance and cannot be sure of
true and fair view.
3) Adverse opinion means the auditor finds the financial statements are materially misstated.
4) Auditors may issue a disclaimer of opinion. Note especially that this is not an opinion.
Instead, it means that auditors choose not to audit because they believe they cannot
audit impartially or the auditor's scope is limited.

i) Give the names of five IAS

IAS # Name IFRS # Name

IAS 1 Presentation of Financial Statements IFRS 3 Business Combinations


IAS 2 Inventories IFRS 7 Financial Instruments: Disclosures
IAS 4 Depreciation Accounting IFRS 9 Financial Instruments
IAS 5 Information to Be Disclosed in Financial Statements IFRS 10 Consolidated Financial Statements
IAS 7 Statement of Cash Flows IFRS 12 Disclosure of Interests in Other Entities

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Business Digest 38 Previos Exam’s Math and solution

Saghor Company distributes a single product. The company’s sales and expenses for last
month follow:
Total Per Unit
Sales. . . . . . . . . . . . . . . . . . . . . . . . 450,000 30
Variable expenses . . . . . . . . . . . . . 180,000 12
Contribution margin . . . . . . . . . . . 270,000 18
Fixed expenses. . . . . . . . . . . . . . . 216,000
Net operating income . . . . . . . . . . . 54,000

Required:

1.What is the monthly break-even point in units sold and in sales Tk. ?
2. What is the total contribution margin at the break-even point?
3. How many units would have to be sold each month to earn a target profit of 90,000? Use the
formula method. Verify your answer by preparing a contribution format income statement at the target
sales level.
4. Compute the company’s margin of safety in both Taka and percentage terms.
5. What is the company’s CM ratio? If sales increase by 50,000 per month and there is no change in fixed
expenses, by how much would you expect monthly net operating income to increase?
6. Compute the company’s degree of operating leverage.
7. Using the degree of operating leverage, estimate the impact on net operating income of a 5%
increase in sales.
8. Verify your estimate by constructing a new contribution format income statement for the company
assuming a 5% increase in sales.

Solution 1.
Unit sales to break even

=12000 Units

So, In Tk. = 12000 30= Tk. 360000

Solution 2. Total contribution margin is equal to fixed expense at break even point. Thus Total
contribution margin is Tk. 216000. Alternatively,

Total CM= Total Sale- Total Variable cost


=360000- (12×12000)
=360000-144000
=216000

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Solution 3. Unit Sales to Target Profit = ( Target Profit+Fixed Expense)÷Unit Contribution margin
= (90000+216000)÷18= 17000 Units

Explanation Total Unit


Sales (17000×30) 510000 30
Variable expense (17000×12) 204000 12
Contribution Margin 306000 18
Fixed Expense 216000
Net Operating Income 90000

Solution 4.
Margin of Safety in Taka = ( Total Sales- Break Even Sales)
= (450000-360000)
= 90000

Margin of Safety in Percentage =

= 90000÷450000
= 20%
Solution 5.

Contribution Margin ratio (CMR) =

= 18÷30

= 60%

Expected Total CM = ( Expected Total Sales × CMR)


= (500000×60%)
= 300000
Present Total CM = ( Present Sales- CMR)
= 450000× 60%
= 270000

So, Increases Contribution margin = 300000-270000


= 30000

Thus, Given no change in fixed expense, will lead to 30000 increase in net operating
income if sales increase by 50000 Tk.

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Solution 6. Degree of Operating Leverage = ( Total Contribution Margin÷Net operating Income)/


= 270000÷54000
= 5 Times

Solution 7. Estimated increase in net operating income if 5% increase in sales happen,


= Degree of Operating leverage× Percentage increase
= 5× 5%
= 25%
Thus, an increase of 5% sale would result in 25% increase in net operating income.

Solution 8.

Explanation Total Percentage of Sale


Sales (15750×30) 472500 100
Variable expense (15750×12) 189000 40%
Contribution Margin (15750×18) 283500 60%
Fixed Expense 216000
Net Operating Income 67500

Increase in net operating income = 67500- 54000= 13500 or 25%

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Business Digest 41 Previos Exam’s Math and solution

ABC Company Ltd.


Bank Reconciliation Statement
31 December, 2018

Description Amount Amount


Bank Balance according to Bank Statement *****
Add:
Deposit in Transit *****
Error in adding less amount by bank *****
Error in subtracting extra more amount by bank ***** *****
Subtract:
Outstanding cheque (*****)
Error in adding extra more amount by bank
(*****)
Error in subtracting less amount by bank (*****) (*****)

Ending Balance *****


Bank Balance according to Cash Book *****
Add:
Credit Memorandum: Collection of Notes Receivable *****
Error in adding less amount by Company *****
Error in subtracting extra more amount by Company ***** *****
Subtract:
Outstanding cheque: NSF cheque
Error in adding extra more amount by Company (*****)
Error in subtracting less amount by Company (*****) (*****)
(*****)

Ending Balance *****

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Business Digest 42 Previos Exam’s Math and solution

Rule-A: In case of error only in a single account, while opposite account is correct.
Give entry for the correct account- Debit/Credit
Suspense account- Credit/Debit

1. Recording less amount in a single account:


Example: Purchase of 50,000 taka has been recorded as 45,000 taka in purchase account.

Date Description Source Debit Credit


2020 Purchase-----------------------------------------------------Dr 5,000
Dec-31 Suspense A/C-----------------------------------------------Cr 5,000

2. Recording extra amount in a single account:


Example: Purchase of 50,000 taka has been recorded as 52,000 taka in purchase account.
Date Description Source Debit Credit
2020 Suspense A/C-----------------------------------------------Dr 2,000
Dec-31 Purchase-----------------------------------------------------Cr 2,000

3. Not recording a single account:


Example: Purchase of 50,000 taka has not been recorded in purchase account.
Date Description Source Debit Credit
2020 Purchase A/C----------------------------------------Dr 50,000
Dec-31 Suspense A/C---------------------------------------Cr 50,000

4. Recording twice of a single account:


Example: Purchase of 50,000 taka has been recorded twice in purchase account.
Date Description Source Debit Credit
2020 Suspense A/C-------------------------------------Dr 50,000
Dec-31 Purchase-------------------------------------------Cr 50,000

Recording a certain account on the opposite side:


Example: Commission payment 3000 taka has been recorded in the account of commission received.
Ratification entries:
Date Description Source Debit Credit
2020 Commission payment A/C------------------------Dr 3,000
Dec-31 Commission received A/C------------------------Dr 3,000
Suspense A/C----------------------------------------- 6,000
Cr

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Rule-B: Incase of error in both account / Journal Book.


1. Recording less amount in a journal book:
Example: Purchase of 50,000 taka has been recorded as 45,000 taka in purchase journal.
Ratification entries:
Date Description Source Debit Credit
2020 Purchase A/C-------------------------------------------Dr 5,000
Dec-31 Accounts Payable--------------------------------------Cr 5,000

Recording extra amount in a journal book:


Example: Purchase of 50,000 taka has been recorded as 52,000 taka in purchase journal.

Date Description Source Debit Credit


2020 Accounts Payable-------------------------------Dr 2,000
Dec-31 Purchase A/C------------------------------------Cr 2,000

Recording a journal mistakenly in another journal book:


Example: Purchase of 50,000 taka has mistakenly been recorded sale’s book.
Date Description Source Debit Credit
2020 Purchase A/C-------------------------------------------Dr 50,000
Dec-31 Accounts Payable--------------------------------------Cr 50,000
Sales A/C------------------------------------------------Dr 50,000
Accounts Receivable-----------------------------------Cr 50,000
Recording an account mistakenly in another account:
Example: Machine installation cost 3000 taka has been recorded in wage account.

Date Description Source Debit Credit


2020 Machine A/C ---------------------------------Dr 3,000
Dec-31 Wage A/C--------------------------------------Cr 3,000

Not recording a full transaction:


Example: Bank charge 100 taka has not been recorded.
Ratification entries:

Date Description Source Debit Credit


2020 Bank charge A/C --------------------------------------Dr 100
Dec-31 Bank A/C-----------------------------------------------Cr 100

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Business Digest 44 Previos Exam’s Math and solution

1) Prepaid Expense:
a) If first time it was recorded as an asset (British Method):
One year has passed of prepaid insurance 5000 taka for 5 years.
Recorded during first time Adjusting entry
Prepaid insurance -----------------Dr 5000 Insurance expense -------------------Dr 1000
Cash ------------------------------Cr 5000 Prepaid insurance--------------------------Cr 1000

★ If first time it was recorded as an expense (American Method):


One year has passed of prepaid expense 5000 taka for 5 years.
Recorded during first time Adjusting entry
Insurance expense ---------------Dr 5000 Prepaid insurance ------------------Dr 4000
Cash --------------------------------Cr 5000 Insurance expense ---------------------Cr 4000

2) Unearned Revenue:
a) If first time it was recorded as a liability (British Method):
Half portion of unearned revenue 10,000 taka has been earned.
Recorded during first time Adjusting entry
Cash -----------------------------Dr 10,000 Unearned Revenue A/C----------------Dr 5,000
Unearned Revenue ---------------Cr 10,000 Service Revenue A/C------------------------Cr 5,000

b) If first time it was recorded as an Income (American Method):


Half portion of service revenue 10,000 taka has not been earned.
Recorded during first time Adjusting entry
Cash A/C -----------------------------Dr 10,000 Service Revenue A/C ----------------------Dr 5,000
Service Revenue------------Cr 10,000 Unearned Revenue A/C--------------------Cr 5,000
3) Accrued Income:
Commission earned but still not been received/recorded 2,500 taka.

Adjusting entry
Accrued Commission A/C----------------Dr 2,500
Commission Revenue A/C-----------------Cr 2,500

4) Accrued Expense:
Commission earned but still not been received/recorded 2,500 taka.

Adjusting entry
Rent expense A/C----------------Dr 2,500
Accrued rent A/C--------------------Cr 2,500

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5) Merchandise Inventory:
a) Perpetual Inventory System: If COGS and Ending inventory is given in the question

Transaction Adjusting entry


Inventory 55,000 taka COGS A/C ----------------------Dr 5,000
COGS 1,00,000 taka Merchandise inventory A/C-------Cr 5,000
On Dec-31, 2020 actual value of ending inventories
is 60,000 taka.
Inventory 55,000 taka Merchandise inventory A/C -----------Dr 5,000
COGS 1,00,000 taka COGS A/C--------------------------Cr 5,000
On Dec-31, 2020 actual value of ending inventories
is 50,000 taka.

b) Periodic Inventory System: If purchase and beginning inventory is given in the question.
[GLv‡b cÖviw¤¢K gRy‡`i e¨v‡jÝ k~Y¨ (0) K‡i †`qv nq]

Transaction Adjusting entry


Beginning Inventory 55,000 taka Closing Inventory ----------------------Dr 60,000
Closing Inventory 60,000 taka Beginning Inventory ------------------Cr 55,000
Income Summary A/C-----------------Cr 5,000

5) Other Adjusting Entries:

Transaction Adjusting entry


1) Market price of closing inventory is Merchandise inventory A/C -----------Dr 40,000
estimated 50,000 taka while purchase price COGS A/C-------------------------------Cr 40,000
was 40,000 taka

2) Market price of closing inventory is Merchandise inventory A/C -----------Dr 50,000


estimated 50,500 taka in which Unused COGS A/C-------------------------------Cr 50,000
stationary is 500 taka
Unused stationary -----------Dr 500
Stationary expense----------------------Cr 500
3) Market price of closing inventory is Merchandise inventory A/C ---------Dr 45,000
estimated 50,000 taka in which fire-burn Loss by fire-burn inventory ----------Dr 3,000
inventory of 5,000 taka is included. Insurance
company agreed to pay 2,000 taka. Accrued insurance right --------------Dr 2,000
COGS A/C------------------------------Cr 50,000
4) 10% Depreciation on machinery of Depreciation expense a/c------------ Dr 10,000
1,00,000 Accumulated depreciation (machinery)-----Cr 10,000
5) Machinery in trial balance is 20,000 taka. Depreciation expense a/c -----------Dr 2,000
But now its value is estimated 18,000 taka. Accumulated depreciation (machinery)-----Cr 2,000
6) 10% impairment of Goodwill 1,00,000 Impairment expense a/c------------ Dr 10,000
taka. Goodwill a/c---------------------------------Cr 10,000

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Transaction Adjusting entry


7) ¾ of Advertisement expense 40,000 taka Deferred Advertisement --------------Dr 30,000
is deferred. (First time recorded as an Advertisement expense ------------------ Cr 30,000
expense)
8) ¼ of 40,000 taka advertisement is to be Advertisement expense --------------- Dr 10,000
amortized. (First time recorded as an asset) Deferred advertisement ------------------ Cr 10,000
9) 10% interest on capital of taka 80,000. Interest on Capital --------------------- Dr 8,000
Capital -------------------------------------------Cr 8,000
10) 10% interest for 6 months is to be Withdrawal a/c ------------------------- Dr 500
charged on withdrawal of 10,000 taka. Interest on Withdrawal a/c ------------ Cr 500
11) Owner withdrew product of which Withdrawal a/c ------------------------Dr 5,000
selling price is 5,000 taka. Sale a/c ------------------------------------- Cr 5,000
12) Owner withdrew product of 4,000 taka. Withdrawal a/c ------------------------Dr 4,000
Purchase a/c --------------------------------- Cr 4,000
13) On the condition of sale or return, Sale -------------------------------------- Dr 10,000
10,000 taka product is included in Sale Debtor --------------------------------------- Cr 10,000
which is not sold yet.
The purchase price of the product was 8,000 Merchandise inventory ------------ Dr 8,000
taka. COGS ------------------------------------------------ Cr 8,000

14) Purchaser returned product of 5,000 Sale return ---------------------------- Dr 5,000


taka of which purchase price was 4,000 Debtor ----------------------------------------- Cr 5,000
taka. Merchandise inventory ------------ Dr 4,000
COGS ------------------------------------------- Cr 4,000
15) 15% VAT is included in purchase of VAT current a/c ---------------------- Dr 9,000
69,000 taka. (69,000 x 15/115 = 9,000) Purchase --------------------------------------- Cr 9,000
16) 15% VAT is included in sale of 92,000 Sale ------------------------------------- Dr 12,000
taka. (92,000 x 15/115 = 12,000) VAT current a/c ----------------------------- Cr 12,000
17) Sale of furniture of 1,000 taka is Sale -------------------------------------- Dr 800
included in sale account by 800 taka. Loss on furniture sale --------------- Dr 200
Furniture ------------------------------------ Cr 1,000
18) Sale of furniture of 1,000 taka is Sale -------------------------------------- Dr 1,200
included in sale account by 1,200 taka. Profit on furniture sale ------------------ Cr 200
Furniture ------------------------------------ Cr 1,000
19) Stationary purchase of 4,000 taka is Stationary expense ------------------ Dr 4,000
included in general expense. General expense -------------------------- Cr 4,000
20) Beginning inventory included stationary Stationary expense ------------------ Dr 1,500
of 500 taka. Merchandise inventory ------------------- Cr 1,500
21) At the end of accounting period, Unused Stationary ------------------- Dr 1,500
stationary of 1,500 taka is unused. (First Stationary expense ----------------------- Cr 1,500
time recorded as an expense)
22) Sale without profit of 5,000 taka is Sale -------------------------------------- Dr 5,000
recorded as sale. Purchase ------------------------------------- Cr 5,000

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Direct Write off Method: It is calculated on debtor.


Example-1: Debtor is 1,00,000. At 30 Dec, 2018 it is observed that 5,000 of the debtor will be collecteble.
Date Description Source Debit Credit
2013 Bad debt expense----------------------------------Dr 5,000
Dec-31 Account Receivable ----------------------------Cr 5,000

Income Statement
Expenditure Amount Income Amount
Bad debt expense 5,000

Balance Sheet
Asset Amount Amount
Current Asset:
Account Receivable 1,00,000
(-) Bad debt expense (5,000) 95,000

Allowance Method:
B-1) Percentage of receivable system:
In this method, allowance needs to be adjusted with the beginning balance and conditions given in the
questions. The beginning balance of bad debt allowance should be adjusted in such a way so that the
calculated result (bad debt expense) from the question should be the net balance or ending balance of bad
debt allowance.

Example-2.1: Credit balance of bad debt allowance on 01 January, 2018 is 5,000. Account Receivable in
this year was 80,000. It is decided that bad debt allowance would be 10% of Account Receivable.
Solution:
On 31 Dec, 2018, Ending balance of bad debt allowance = 80,000 x 10%
= 8,000
So, we need to adjust = 8,000 – 5,000
= 3,000
Date Description Source Debit Credit
2013 Bad debt expense----------------------------Dr 3,000
Dec-31 Bad debt allowance -----------------------Cr 3,000

Income Statement
Expenditure Amount Revenue Amount
Bad debt expense 3,000

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Balance Sheet
Business Digest 48 Previos Exam’s Math and solution

Balance Sheet
Liabilities and Equities Amount Amount
Allowance:
Old Bad debt allowance 5,000
(+) New Bad debt allowance 3,000 8,000

B-2) Percentage of Sale system:


Here whatever the beginning balance of bed debt allowance doesn’t matter for us. We directly accept the
certain percentage of sales as bed debt allowance; no need of any adjustment.
Example-4.1: Credit balance of bad debt allowance on 01 January, 2018 is 5,000. Account Receivable in
this year was 80,000. Net sales on credit is 90,000. It is decided that bad debt allowance will be reserved
10% of net sales on credit.
Solution:
bad debt allowance = 90,000 x 10%
= 9,000

Date Description Source Debit Credit


2013 Bad debt expense----------------------------------Dr 9,000
Dec-31 Bad debt allowance ----------------------------Cr 9,000

Income Statemen
Expenditure Amount Revenue Amount
Bad debt expense 9,000

Balance Sheet
Liabilities & Equities Amount Assets Amount
Allowance:
Old Bad debt allowance----------5,000
(+) New Bad debt allowance---9,000 14,000

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Business Digest 49 Previos Exam’s Math and solution

Declining Method: Amount of depreciation gradually decreases year after year.


Here, Depreciation rate= 100%/Useful life
[GLv‡b depreciation wba©vi‡Y salvage value Gi †Kvb KvR ‡bB| ïay †kl eQi depreciation rate w`‡q ¸Y bv w`‡q
Ending Value of Asset ‡_‡K Salvage Value ev` w`‡q H eQ‡i‡I Rb¨ depreciation ‡ei Kie|
Example-2: On 01 January, 2015 ABC Company Ltd. bought a machine of 1,80,000 taka. Machine
installation cost 12,000 taka, transportation cost 8,000 taka, expected lifetime 4 years, estimated salvage
value 65,000 taka.

Calculate the depreciation and then prepare journal and financial statement for the 4 years.

Solution:
Depreciation rate= 100%/4 years = 25%
Machine= 1,80,000 + 12,000 + 8,000 = 2,00,00

Yea Beginning Accumulated Ending Value of


Depreciation
r Value of Asset depreciation Asset
2015 2,00,000 2,00,000 x 25% = 50,000 50,000 1,50,000
2016 1,50,000 1,50,000 x 25% = 37,500 87,500 1,12,500
2017 1,12,500 1,12,500 x 25% = 28,125 1,15,625 84,375
2018 84,375 84,375 – 65,000 = 19,375 1,35,000 65,000

Sum of Years Digit Method:


Example-4: On 01 January, 2015, ABC Company Ltd. purchased a machine of taka 6,80,000 of which
salvage value is taka 40,000. Estimated life is 4 years. Now calculate depreciation for each year.
Solution:

Depreciable amount= 6,80,000 – 40,000= 6,40,000


Sum of Years Digit= 4+3+2+1= 10 years

Or sum of years digit=

Year Depreciable amount Depreciation rate Depreciation


2015 6,40,000 4/10 6,40,000 x 4/10 = 2,56,000
2016 6,40,000 3/10 6,40,000 x 3/10 = 1,92,000
2017 6,40,000 2/10 6,40,000 x 2/10 = 1,28,000
2018 6,40,000 1/10 6,40,000 x 1/10= 64,000

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Business Digest 50 Previos Exam’s Math and solution

৩৮ তম বিবিএি
ব্যিস্থাপনা
বিষয় ক াডঃ ৭৩১
বনি িাবরত িময়-৪ র্ন্টা
পূে িমান-২০০
বিভাগ
মানঃ ২৫*৪=১০০

১। ) এ জন ব্যিস্থাপক র ক ান িরকনর িেতা থা া উবচৎ তা িে িনা রুন।


খ) “ব্যিস্থাপনা বিজ্ঞান ও লা উভয়”- আপবন ব এ িক্তকব্যর িাকথ এ মত ? ব্যাখ্যা রুন।
গ) কহনবর কিওকলর নীবতগুকলার প্রাকয়াবগ বি উকেখপূি ি আধুবন ব্যিস্থাপনায় অিিান তুকল িরুন।
২। ) বিজ্ঞাবন ব্যিস্থাপনার বিবভন্ন বি ব্যাখ্যা রুন।
খ) আপবন ব মকন করন কে, িাংলাকিকি নিবনবমিত বিল্প প্রবতষ্ঠানিমূকহ বিজ্ঞাবন ব্যিস্থাপনার প্রকয়াগ যুবক্তিঙ্গত ? আপনার
মতামকতর স্বপকে যুবক্ত বিন।
গ) এি. ডবিউ কেলকরর অিিান আকলাচনা রুন। তাঁক ক ন বিজ্ঞাবন ব্যিস্থাপনার জন িলা হয়?
৩। ) “অবিি হল কেক ান প্রবতষ্ঠাকনর স্নায়ুক ন্দ্র স্বরূপ”- আপবন ব এ মত , আকলাচনা রুন ।
খ) িাংলাকিকি অবিি ব্যিস্থাপনা ক ন গুরুত্বপূে ি, ব্যাখ্যা রুন।
গ) এ জন িিল অবিি ব্যিস্থাপক র কে ি ল আিশ্য ীয় গুোিবল থা া ির ার তার এ টি বিিরে বিন।
৪। ) মী বনি িাচন প্রবেয়ার পিকেপ আকলাচনা রুন।
খ) প্রবিেকের প্রকয়াজনীয়তার লেেিমূহ ী ী? ীভাকি প্রবিেকের প্রকয়াজনীয়তা অনুমান রা োয়?
গ) িাংলাকিকি বনি িাহী উন্নয়কন ী ী ক ৌিল অিলম্বন রা কেকত পাকর?
৫। ) ক াম্পাবন ব্যিস্থাপনার বিবভন্ন িরনিমূহ িে িনা রুন।
খ) ক াম্পাবনর এ জন পবরচালক র আইনগত কোগ্যতা িম্পক ি আকলাচনা রুন।
গ) ক াম্পাবন ব্যিস্থাপনায় এ জন পবরচালক র িেতা ও অবি ার িমূহ উকেখ রুন।
খ বিভাগ
মানঃ ২৫*৪=১০০

৬। ) িমাজ ও ব্যিস্থাপনা অঙ্গাংগীভাকি জবড়ত। ব্যাখ্যা রুন।


খ) এ টি প্রবতষ্ঠাকনর অভযন্তরীে ও িাবহয পবরকিকির উপািানিমূহ আকলাচনা রুন।
গ) তুলনামূল ব্যিস্থাপনা ও পবরিতিন ব্যিস্থাপনা প্রবেয়া তুকল িরুন ।
৭। ) িংগঠন প্রবেয়ার বভবভন্ন পিকেপগুকলা আকলাচনা রুন।
খ) িংগঠন বিক ন্দ্রী রকের সুবিিা ও অসুবিিাগুকলা আকলাচনা রুন।
গ) র্তিত্ব অপিকের নীবতমালাগুকলা উকেখ রুন।

৮। ) পবর ল্পনার প্রকৃবত ব্যাখ্যা রুন।


খ) আপবন ীভাকি পবর ল্পনাক িলপ্রসূ রকিন?
গ) এ টি নি-প্রবতবষ্ঠত প্রবতষ্ঠাকনর জন্য আপবন ক ান পবর ল্পনা সুপাবরি রকিন এিং ক ন?

৯। ) কনর্তকত্বর গুোিবল তত্ত্ব ী? ব্যাখ্যা রুন।


খ) িাংলাকিকির কপ্রোপকে পবরবস্থবত বভবত্ত কনর্তত্ব িম্পক ি আপনার মতামত বিন।
গ) জনবহনতষী বস্বরতাবন্ত্র কনর্তকত্বর বিবিষ্ট্যগুকলা ী ী? উিাহরেিহ উকেখ রুন।

১০। ) বনয়ন্ত্রে ীভাকি পবর ল্পনার িাকথ িম্পব তি ? ব্যাখ্যা রুন।


খ) াে ি র বনয়ন্ত্রকের বিবভন্ন পিকেপ বিকেষে রুন।
গ) িিল িাকজেীয় বনয়ন্ত্রকের পূি িিতিিমূহ আকলাচনা রুন।

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Business Digest 51 Previos Exam’s Math and solution

40th BCS
Management
Subject Code: 731
Full Marks: 200
Time: 4 hours
Group A
(Answer any four questions from each group)
Marks: 25*4=100

1.a) Management is getting things done by others. Do you agree with this statement? Explain.
b) A manager plays many roles in an organization. What are those roles?
c) A manager must possess different skills/. What are those skills? Which skill is essential for top
level managers?
2.A) Planning is the preliminary function of management. Explain why.
b) Discuss the different types of planning. What kind of planning is Padma Bridge?
c) As a manager of an organization what factors would you consider while making a plan?
3. a) Increasing productivity is the main theme of scientific management. Explain the statement.
b) Tailor, the father of scientific management, believes that employees work only for money. Do
you agree with this statement? Give your opinion.
c) Henry Fayol’s principles are universal. Explain.
4.a) Discuss the different methods of coordination among the different departments of an organization.
b) A manager prepares different types of reports. Briefly discuss the different parts of report.
c) How would you conduct a good meeting?
5.a) Write down the direct and indirect financial benefits that an employee receives.
b) Describe the Theory of Equity in giving financial benefits.
c) What factors should be considered while deciding salary is a competitive market?
Group B
Marks: 25*4=100
6.a) Show arguments for and against the social responsibility of management.
b) How would you raise the ethical standard of a manager?
c) Discuss the similarities and differences between the management systems in Japan and Bangladesh.
7.a) What do you mean by management by objective (MBO)? What are the merits and limitations of
MBO?
b) Discuss the steps of strategic level planning.
c) What are the steps of decision making process? Mention the decision making errors.
8.a) Distinguish between a manager and a leader.
b) A leader influences other’s behavior by utilizing his authority. What are the different types of
authority used by leader?
c) Benevolent leadership is essential for the development of an organization. Give your opinion.
9.a) Discuss the steps of motivation process.
b) Explain the Maslow’s theory of motivation.
c) How would you motivate the individual workers of Bangladesh?

10.a) Correct and effective controlling system is the main driving force for executing a plan. Give your
arguments.
b) Analyze the techniques of non-budgetary control system.
c) Discuss the various steps of controlling and their limitation.

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Business Digest 52 Previos Exam’s Math and solution

Subject: Marketing
Full marks: 200
Time: 4 hours
Part-1
Answer any five questions
Marks: 20*5=100
1. a) Write a modern definition of marketing and explain it.
b) Show the differences between product concept and selling concept?
c) “The key to creating long-term consumer relationship is to ensure superior value and satisfaction
for consumers”- Discuss the statement logically. 7
2. a) What is meant by product mix? What are the essential decision making issues in product
development?
b) Explain your idea of three product levels with examples.
c) Identify decision making areas in determining brand strategy.
3.a) Explain the differences between full-cost pricing and marginal-cost pricing with
examples.
b) State the objectives of pricing.
c) Briefly discuss the strategies used for adjusting price increase and decrease in the market.
4. a) What do you mean by marketing environment? Why is it important?
b) Describe the environmental forces/factors that affect a company’s ability to serve
its customers.
c) Explain the key changes that occur in the cultural environment, and discuss how
these changes affect marketing decisions.
5.a) What are the major steps of target marketing?
b) Discuss the level of market segmentation.
c) Explain which variables are used in segmenting the market for soft drinks.
6.A) Explain the new product development process.
b) What is meant by fad, fashion and style in product life cycle?
c) The marketing manager has nothing to do when a product reaches the decline stage- Comment.

7.A)Identify the problems in the marketing of Bangladeshi printed share.


b) What steps may be taken to overcome these problems?
c) Discuss the role of Export Promotion Bureau in increasing the quantity and volume of export
items.
Part-2
Answer any five questions
Marks: 20*5=100

8 a) What is meant by integrated marketing communication?


b) Discuss the reasons for growth of integrated marketing communication?
c) Discuss the various tools of marketing communication?
9 a) What is meant by personal selling and salesmanship?
b) Explain the model of personal selling.
c) Discuss the chronological steps of personal selling process. 9

10 a) Discuss the objectives of direct marketing.


b) Describe the benefits of direct marketing from the point of view of both buyers and sellers
c) Discuss the various forms of direct marketing.

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Business Digest 53 Previos Exam’s Math and solution

11 a) Differentiate between mission and objective.


b) How is strategic planning carried out at the business unit level?
c) What is marketing planning? Discuss its objectives.

12 a) Differentiate between wholesaling and retailing.


b) What are the marketing decisions of the wholesalers?
c) Describe the differences between full-service and limited-service wholesalers.
13 a) How would a businessman decide about participation in international marketing?
Explain.
b) Describe the considerations in deciding about foreign investment.
c) Analyze the product strategies used in international market.

14 a) How would you use Michael Porter’s model in analyzing market competition?
b) Elucidate the strategies used in competition by market challengers.

Subject: Marketing
Full marks: 200
Time: 4 hours
Part-1
Answer any five questions
Marks: 20*5=100
1 a) Discuss the basis of market segmentation.
b) Explain various strategies that may be adopted to determine product positioning in the target
market.
2 a) What is meant by service?
b) Describe characteristics of service with examples.
c) What strategies must be followed in service marketing? Explain.
3 a) What are the differences between direct and indirect channels of distribution.
b) “Proper selection, management, motivation and job performance evaluation of distribution
channel members are the salient responsibilities in managing indirect channel of distribution.”
Justify the statement.
c) Under what condition is it logical to use multiple channels of distribution?

4 a) Discuss the role of ‘Export Promotion of Bureau of Bangladesh’ in the export development of the
country.
b) Identify the basic problems in the marketing of consumer goods in Bangladesh.
c) How would you evaluate the role of stock exchanges in developing the capital market of
Bangladesh?
5 a) Explain with examples the difference between the selling concept and marketing concept in the
present context of Bangladesh?
b) What are the marketing challenges of the new millennium and how are the companies facing
them? Explain.
6 a) What is meant by price? Explain the relationship between price and demand.
b) Discuss the external factors that determine the price.
c) What is meant by break even pricing? Explain the role of cost, demand, and competition in setting
the price.

7 a) What is advertising? How does it influence the standard of living?


b) Is advertising a waste? –Explain.
c) Describe the different methods of developing an advertising campaign.

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Business Digest 54 Previos Exam’s Math and solution

Part-2
Answer any five questions
Marks: 20*5=100

8 a) What is integrated marketing communication? Describe the process of marketing communication.


b) Discuss the various tools of communication. Describe the factors that affect the selection of
promotional mix.

9 a) What is meant by personal selling? Evaluate the contribution of personal selling in our economy
and society.
b) Explain “Personal selling means personal advertising.”
c) Is personal selling an art, science or a profession? Explain.

10 a) What is strategic marketing planning?


b) Narrate the steps in strategic marketing planning.
c) How can you develop partnership relationship with clients?

11 a) Describe the alternative strategies to enter into international market.


b) What are the reasons for the increasing trend of using joint venture?
c) What are the features of international licensing contract? Explain.
12 a) State the stages of new product development.
b) What strategies should be logically adopted in introducing new product in the market?
c) Identify the issues of failure to get market acceptability of a new product.

13 a) Distinguish between wholesaler and large scale retailer.


b) What are the reasons for expansion of large scale retailing in modern days?
c) What are the decision areas in respect of market logistics?

14 a) What is direct marketing? Elucidate its forms.


b) Present the application areas of catalogue marketing and telemarketing with examples.
c) Do you think the role of e-commerce is important in Digital Bangladesh? Why?

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Average return
Name of the Formula Explanation
Formula
Holding
Period Return 𝐸𝑛𝑑𝑖𝑛𝑔𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
HPR= 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
(F-1)
Holding HPR=Holding Period Return
Period Yield HPY=HPR-1
(HPY): (F-2)
Arithmetic
Mean ∑ 𝐻𝑃𝑌 ΣHPY= sum of all holding period
(F-3) 𝐴𝑀 = yields
𝑛

Geometric
Mean GM= [πHPR]1/n – 1
(determines
the = [(1+Return1) x (1+Return2) x
performance (1+Return3))]1/n - 1
results of an
investment or
portfolio)
(F-4)

Risk and return


Name of Formula Explanation
the
Formula
Expected Pi =Probability of return
𝑛
Return E(R)i = ∑𝑖=1(Pi 𝐱Ri) Ri=Possible Return
(F-5)
𝑛
Variance σ2=∑𝑖=1[(Pi) 𝐱(Ri − E(R)i)2 ] Pi =Probability of return
(F-6) Ri=Possible Return
E(R)i= Expected Return
Standard 𝑛 Pi =Probability of return
Deviation σ=√∑𝑖=1[(Pi) 𝐱(Ri − E(R)i)2 ] Ri=Possible Return
(F-7) E(R)i= Expected Return
Coefficient
of Variation 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛𝑜𝑓𝑅𝑒𝑡𝑢𝑟𝑛
CV= 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑𝑅𝑎𝑡𝑒𝑜𝑓𝑅𝑒𝑡𝑢𝑟𝑛
(F-8)
Nominal NRFR=Nominal Risk-Free Rate
required RRFR=Real Risk-Free Rate
rate of NRFR=[(1+RRFR) x (1+Expected Rate of
return on Inflation)-1
risk free
investment
(F-9)
Risk-free RRFR=Real Risk-Free Rate
investment (1+RRFR) NRFR= Nominal Risk-Free Rate
RRFR=(1+𝑅𝑎𝑡𝑒𝑜𝑓𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛) −1
rate
(F-10)
Risk Risk Premium=f (Business Risk. Financial
Premium Risk, Liquidity Risk, Exchange Rate Risk,
(F-11) Country Risk)
Value Indext=Index value on day t
Weighted Pt=Ending prices for stocks on day t
Qt=Number of outstanding or freely
Index floating shares on day t
(F-12) Σ PtQt
Indext=ΣPbQb x Beginning Index Value Pb=Ending price for stocks on base day
Qb= Number of outstanding or freely
floating shares on base day
Covariance Covij=E{[Ri − E(Ri)][Rj − E(Rj)]} Ri=Return on stock I
of Returns EV−BV+CF E(Ri)=Expected return on stock i
Here Ri=
(F-13) BV Rj=Return on stock j
E(Rj)=Expected return on stock j
Covariance rij=Correlation Coefficient of
and 𝐂𝐎𝐕𝐢𝐣 Returns
rij= 𝝈𝒊𝝈𝒋
Correlation σi=standard deviation of Rit
(F-14) σj=standard deviation of Rjt

Weighted WACC = D=debt


Average D E E=equity
Cost of kd (1 − t) x + ke x Kd=cost of debt
D+E D+E
Capital t= corporate tax rate
(WACC) ke=cost of euity
(F-14*)

Risk and return (portfolio)


Name of the Formula Explanation
Formula
Expected
Return on RP = w1R1 + w2R2
Portfolio
(F-15)
Standard W1=weight of stock1
Deviation of σ1=variance of return of stock1
Portfolio W2=weight of stock2
(F-16) σ2=variance of return of stock2
Covij=Covariance of stock1 and 2
rij= Correlation coefficient of stock1
and 2
Variance of W1=weight of stock1
Portfolio σp2= w12 σ12+w22 σ22+2w1w2r1,2 σ1 σ2 σ1=variance of return of stock1
(F-17) W2=weight of stock2
σp2= w12 σ12+w22 σ22+2w1w2Cov1,2 σ2=variance of return of stock2
Covij=Covariance of stock1 and 2
rij= Correlation coefficient of stock1 and 2

Required rate of return


Name of the Formula Explanation
Formula
Expected ERi = Expected return of investment
Return based on Rf = Risk-free rate
CAPM βi = Beta of the investment
(F-18) E(Ri )= Rf + βi(Rm – Rf) Rm = Expected return on market
(Rm - Rf) = Market risk premium
Market risk Market risk premium=(Rm - Rf) Rm = Expected return of market
premium Rf = Risk-free rate
(F-19)
Underwriter’s 𝑈𝑛𝑑𝑒𝑟𝑤𝑟𝑖𝑡𝑒𝑟 ′ 𝑠𝑝𝑟𝑒𝑎𝑑
spread
(F-20) 𝐺𝑟𝑜𝑠𝑠𝑆𝑎𝑙𝑒𝑠𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 − 𝑁𝑒𝑡𝑠𝑎𝑙𝑒𝑠
=
𝐺𝑟𝑜𝑠𝑠 𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠

Dividend Yield Divt+1=dividend at the end of the period


(F-21) Dividend yield=Divt+1/Pt Pt=Price at the beginning of the year

Capital Gain Capital gain=(Pt+1-Pt)/Pt Pt+1=Price of the stock at the end


(F-22) Pt=Initial price of the stock

Accounting
Name of the Formula Explanation
Formula
F-23
Current assets
Current ratio=Current liabilities

(F-24)
Cash+Short term investments+Receivables
Quick ratio=
Current liabilities

(F-25) Cash and Marketable Securities


Cash ratio= Current liabilities

Debtor or
receivable Credit Sales
Receivable turnover = Average Account Receivable
turnover or,
Days Sales
Outstanding
(F-26)
Account
receivable Average receivable collection period
period or, Days 365 Days
Sales =
Debtor or receivable turnover
Outstanding
(F-27)
Stock or
inventory Cost of Goods Sols (COGS)
turnover Average Inventory
(F-28)
Inventory
period or, Days Average inventory processing period=
Inventory
Outstanding 365 Days
(F-29) Inventory turnover
Creditor or
Payable Credit Purchase
turnover Average Account Payable
(F-30)
Account
payable period Payable payment period
or, Days
Payable 365 Days
Outstanding =
Creditor or payable turnover
(F-31)
Total Asset
Turnover
(F-32) Net Sales
Average Total Net Assets
(F-33)
Net Sales
Fixed Asset Turnover=Average Net Fixed Assetss

(F-34)
Net Sales
Equity Turnover=Average Equitys

Gross Profit
margin Gross Profit
(F-35) Net Sales

Operating
Profit margin Operating Profit
(F-36) Net Sales

Net Profit Net Profit


margin Net Sales
(F-37)
Return on
Total Invested Net Income + Interest Expense
Capital Average total invested capital
(F-38)
Return on
Total Equity Net income
(F-39) Average total equity

Return on
Owner’s Net income − Preferred Dividend
Equity Average Common Equity
(F-40)
Dupont
System: ROE Net Income Net Sales Total Assets
(F-41) = Net Sales
x Total Assests x Total Equity

= Net Profit Margin x Asset Turnover Ratio


x Financial Leverage

Financial
Leverage Total Assets
Multiplier Common Equity
(F-42)
Tax Retention
Ratio Income Taxes
100% −
(F-43) Net Income before tax

Business Risk=f (Coefficient of Variation of


Business Risk Operating Earnings)
(F-44)
Standard deviation of Operating Earnings(OE)
=
Mean Operating Earnings

𝒏 𝟐
√∑ (𝐎𝐄𝐢 − 𝐄(𝐎𝐄)) /𝐧
𝒊=𝟏
=
∑𝒏𝒊=𝟏 𝐎𝐄𝐢/𝐧

Debt Equity
Ratio Total Long Term debt
(F-45) total equity

Debt Equity EBIT=Earnings Before


Ratio EBIT Interest and Tax
(F-46) Debt Interest Charges

Growth RR=retention rate


(F-47) g= RR x ROE ROE= return on equity

Retention rate
(F-48) Dividends Declared
1−
Net Earnings

Valuation
Name of the Formula Explanation
Formula
Valuation of a
preferred Dividend kp=current market price
stock V=
kp
(F-49)
Valuation
through DDM Vj=Value of common stock j
𝒏
(Dividend Dt Dt=Dividend during period t
Vj= ∑ 𝐭
𝒊=𝟏 (1+k)
Discount K=Required rate of return on
Model) stock j
(F-50)
D/P=Expected dividend
Earning Price payout ratio
Earning multiplier =
Multiplier Earning ratio K= Expected required rate of
(F-51) D/P return on the stock
= g= Expected growth rate of
k−g
dividend for the stock

Valuation Vj=Value of stock j


through DDM Do(1 + g) Do(1 + g)𝟐 Do(1 + g)𝐧 D0=Dividend payment in the
assuming Vj = + + ⋯ … … … . . + current period
(1 + k) (1 + k)𝟐 (1 + k)𝐧
constant g=constant growth rate of
growth rate dividend
for an infinite k= Required rate of return on
period the stock j
(F-52) n=number of periods which is
assumed to be infinite
Constant
Growth FCFE FCFE=net income + depreciation expense – capital
Model expenditure – change in net working capital – principal debt
(F-53) repayments + new debt issues

Required rate D= dividend


of return D P= current market price
K= + g
𝐩
(equity) G= growth
(F-54)
Average
compound
Dividend n√𝐃𝐧/𝐃𝐨–1
Growth rate
(F-55)
Rj= Systematic risk of stock j
Systematic Rj=α+βjRm α =constant term
Risk (Beta) βj=Beta coefficient of stock j
(F-56) COVw,m
Here βj=
𝜎𝟐 𝐦

FCFE1= Expected free cash


Valuation FCFE1 flow to equity in period 1
Value=
𝒌−𝒈
through FCFE k= required rate of return on
(F-57)  equity for the firm
 g= growth rate of FCFE of the
firm
FCFF
Calculation FCFF=EBIT (1-tax rate) + Depreciation expense – Capital
(F-58) Expenditure –Change in working capital – change in other assets
Valuation FCFF1= Free cash flow of the
through FCFF firm in period 1
(F-59) FCFF1 WACC= Weighted average
Firm Value (Equity) =
𝐖𝐀𝐂𝐂−𝐠
cost of capital
g= Growth rate of FCFF of
the firm
Valuation V=market value of the firm
according to V=Vu+ Present value of interest tax shield Vu=market value of the firm
M&M theory if it were all equity
(F-60)

Portfolio Management
Name of the Formula Explanation
Formula
In Passive Management, total actual return = Risk free rate +
Total Actual Risk premium
Return
(F-61) In Active Management, total actual return = Risk free rate +
Risk premium+ Alpha

Convexity d2 P/di2 D= dividend


(F-62) Convexity= P= present value of cash flow
𝐏𝐕 𝐨𝐟 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰𝐚
t= period serial
𝒏
d2 P 1 CFt CF= cash flows of each
Here 2= 𝟐∑ (t 2 + 𝐭)
di (1+i) 𝒊=𝟏 (1+i)𝐭 period

Net Asset Value


(F-63) Total maket value of fund portfolio−Fund expenses
Fund-NAV=
𝐓𝐨𝐭𝐚𝐥 𝐒𝐡𝐚𝐫𝐞𝐬 𝐎𝐮𝐭𝐬𝐭𝐚𝐧𝐝𝐢𝐧𝐠

Treynor’s Avg Ri=Average rate of


composite ⃑⃑ i−RFR
R ⃑⃑⃑⃑⃑⃑⃑⃑⃑ return for portfolio i
Ti=
performance βi Avg RFR= Average rate of
measure return on a risk-free
(F-64) investment rate
βj=beta of the portfolio
Avg Ri=Average rate of
⃑⃑ i−RFR
R ⃑⃑⃑⃑⃑⃑⃑⃑⃑ return for portfolio i
σi=
Sharpe ratio 𝜎𝑖 Avg RFR= Average rate of
(F-65) return on a risk-free
investment rate
σi =standard deviation of the
portfolio
Semi-deviation 𝒏 n=the number of stocks of
(F-66) 𝟐 portfolio falling below the
√1/n ∑(𝐑𝐢𝐭 − ⃑𝐑
⃑ 𝐢)
expected return
⃐⃑⃑
𝑹<𝑹
Time Value of Money
Name of the Formula Explanation
Formula
Future Value of FVn= Future Value at the end of period n
a single cash PV= present value of the cash flow
flow FVn = PV(1 + k)n n= number of periods
(F-67) k= interest rate
Future Value of n= number of periods
annuity (1+k)n −1 k= interest rate
FVIFAk,n=
(F-68) 𝐤

Present Value of FV=future value


a single future n= number of periods
cash flow FV k= interest rate
PVn=(1+𝑘)𝑛
(F-69)
Present Value of n= number of periods
annuity (1+k)n −1 k= interest rate
PVIFAk,n=
(F-70) 𝐤(1+k)n

Effective annual k= interest rate


interest rate k m=number of compounding periods
(F-71) (1 + )m − 1
m

Short term/ working capital management


Name of the Formula Explanation
Formula
m
Effective annual k= interest rate
k −1
interest rate (1 + ) m=number of
m
(F-72) compounding
periods
Yields (rate of
return on Interest 365
Yield= ( )( )
marketable Market Price Days to maturity

securities)
(F-73)

Cost of trade
𝑬𝑰𝑹
credit
(F-74)
𝒄𝒂𝒔𝒉 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕 𝒓𝒂𝒕𝒆 𝟑𝟔𝟎 𝒅𝒂𝒚𝒔
= 𝐱 𝒙𝟏𝟎𝟎
𝟏𝟎𝟎 − 𝒄𝒂𝒔𝒉 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒓𝒂𝒕𝒆 𝒄𝒓𝒆𝒅𝒊𝒕𝒑𝒆𝒓𝒊𝒐𝒅 − 𝒄𝒂𝒔𝒉𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕 𝒑𝒆𝒓𝒊𝒐𝒅

Cost of
Commercial 𝑷𝒂𝒓𝒗𝒂𝒍𝒖𝒆 − 𝑺𝒂𝒍𝒆 𝒗𝒂𝒍𝒖𝒆 𝟑𝟔𝟎 𝒅𝒂𝒚𝒔
Paper 𝑬𝑰𝑹 = 𝐱 𝒙𝟏𝟎𝟎
𝑺𝒂𝒍𝒆𝒗𝒂𝒍𝒖𝒆 − 𝒇𝒍𝒐𝒂𝒕𝒊𝒐𝒏𝒄𝒐𝒔𝒕 𝒎𝒂𝒕𝒖𝒓𝒊𝒏𝒚𝒑𝒆𝒓𝒊𝒐𝒅
(F-75)

Short Term loan Total interest paid 365


Effective Yield x
Principal amount Term of loan in days
(F-76)
Leverage
Name of the Formula Explanation
Formula
Degree of
Operating Percent change in EBIT
DOL=
Leverage Percent change in Slaes
fixed operating costs
(DOL) =1 + EBIT
(F-77)
Degree of
Financial Percent change in EPS
DFL=
(DFL) Percent change in EBIT

(F-78)
Degree of
Combined Percent change in EPS
DCL=Percent change in Slaes
(DCL)
(F-79)

Corporate finance and merger/acquisition


Name of the Formula Explanation
Formula
Asset Beta
(F-80) βAsset
𝐷𝑒𝑏𝑡 𝐸𝑞𝑢𝑖𝑡𝑦
= x βDebt x 𝑥β
𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦 𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦 equity

Equity Beta Debt


(F-81) βEquity = βAsset (1 + )
Equity

Present value TC=corporate tax rate


of tax shield 𝑇𝐶 𝑟𝐵 𝐵 rB= interest rate
(F-82) 𝑟𝐵 B= borrowed amount

Float
(difference
between firm’s Float= firm’s bank cash – firm’s book cash
bank cash and
book cash)
(F-83)
Synergy VAB=Value of both firm A
(F-84) Synergy = VAB − (VA + VB ) and B after acquisition
VA=Value of firm A
VB=Value of firm B
NPV of a
merger NPV of a merger to acquirer=Synergy - Premium
(F-85)
Z Score
Model: EBIT Net Working Capital
Z= 3.3Total Assets + 1.2 Total Assets
+
Predicting Sales Market Value of Equity
Corporate 1.0 + 0.6 +
Total Assets Book Value of Debt
bankruptcy Accumulated Retained Earnings
1.4 Total Assets
(F-86)

Put- Call C= Call price


Parity K= strike price
(F-86) c+Ke-rT=p+S0 r= required risk-free rate
T= maturity
P= Put price
S0= current price of underlying

Cost management/ managerial accounting


Name of the Formula Explanation
Formula
Total cost in Q=order quantity
EOQ Model QC DA C=carrying cost per
Total cost= 𝟐 + Q
(F-87) unit
D=Total demand
A=cost per order
EOQ- Q=EOQ units
Economic D=Demand in units
Order Quantity (typically on an annual
F-87* basis)
S=Order cost (per
purchase order)
H=Holding costs (per
unit, per year)
Profit
(F-88)
Profit = (Sales − Variable expenses)
− Fixed expenses
= (CMratio x Sales) − Fixed expenses
Contribution Contribution margin Contribution-margin =
margin ratio CM ratio =
Sales
(CM ratio) Sales- Variable
(F-89) = 1 − variable expense ratio expenses
Change in
contribution CM ratio x Change in sales
margin
(F-90)
Change in CM ratio x Change in Sales – Change in fixed
Profit expenses
Variable
expense ratio Variable expenses
(F-91) Sales
Units sales to Unit CM= Price per
break even Fixed expenses unit- Variable cost per
(F-92) Unit CM unit
Dollar Sales to
Break Even Fixed expenses
(F-93) CM ratio
Unit sales to
attain target Target profit + Fixed expenses
profit Unit CM
(F-94)
Dollar sales to
attain target Target profit + Fixed expenses
profit CM ratio
(F-95)
Margin of
safety Margin of safety in dollars
percentage Total budgeted (or actual)sales in dollars
(F-96)
Margin of
safety in Total Sales – Break Even Sales
Dollars
(F-97)
Degree of
Operating Contribution Margin
Leverage Net Operating Income
(DOL)
(F-98)
Direct Cost
(F-99) Direct raw materials + direct labor cost+ other direct
costs
Production cost Factory costs= factory
(F-100) Direct cost + factory costs rent+ factory
electricity bills +
factory machine costs
+ salary of supervisors

Depreciation
Name of the Formula Explanation
Formula
Straight-Line Cost= Acquisition cost+
Depreciation Dep. Expense = (Cost – Salvage value) / Useful life Installation cost+
Method transportation cost
(F-101)

Double declining Dep. Expense = Beginning book value x Rate of N= number of years as
balance method depreciation useful life
(F-102)
Where, Rate= (1/N) x 2 x 100 N= life in years
r = salvage value
Or, Rate= c= cost

Units of Dep. Expense = (Number of units produced in the


Production period /number of units will be produced in the total
Depreciation life of the equipment) x (Cost – Salvage value)
Method
(F-103)
Sum-of-the-
Years-Digits Dep. Expense = (Remaining life / Sum of the years
Depreciation digits) x (Cost – Salvage value)
Method
(F-104)

Duration, risk management and profitability formula for banks


Name of the Formula Explanation
Formula
Operating
Efficiency Ratio Total Operating Expenses
(F-105) Total Operating Revenues
Duration Gap:
the difference Dollar weighted duration of asset portfolio –
between average dollar weighted duration of bank liabilities
duration of
assets and
average duration
of liabilities
(F-106)
Provision for loss Provision for loan losses
ratio x 100
Total loans and leases
(F-107)
Dollar Gap ratio IRSA= Interest rate
(F-108) IRSA − IRSL sensitive assets
x 100 IRSL= Interest rate
Total Assets
sensitive liabilities
Net interest
income (NII) Interest income – Interest expense
(F-109)
Net interest Net interest income (NII)
margin Earning Assets
(F-110)
RSA= Risk sensitive
Gap RSA – RSL assets
(F-111) RSL= Risk sensitive
liabilities
Relative Gap Gap
Ratio Total Assets
(F-112)
Interest Sensitive RSA= Risk sensitive
Ratio RSA assets
(F-113) RSL RSL= Risk sensitive
liabilities
Change in net RSA= Risk sensitive
interest income RSA due to ∆i − RSL due to ∆i assets
(F-114) RSL= Risk sensitive
liabilities
∆= Change
∆𝐍𝐞𝐭 𝐖𝐨𝐫𝐭𝐡 ∆i DGAP= Duration gap
∆Net Worth ≅ −DGAP x TA I= interest rate
(F-115) 1+i
TA= Total Assets
∆= Change
Manufacturing/ Production related Formula
Name of the Formula Explanation
Formula
Cost of Goods Direct Materials Used+ Direct Labor
Manufactured Used+ Manufacturing Overhead+
Beginning Work in Process (WIP)
Inventory - Ending Work in Process (WIP)
Inventory
Prime cost = Direct material consumed + Direct
labour
Conversion Cost = Direct material + Factory
overhead
Factory cost = Direct material + Direct labour + Factory
overhead
Cost of Goods sold = Direct material consumed + Direct
labour + Factory overhead + WIP
opening – WIP closing + Opening
finished goods – Closing finished goods

SL Ratio Formula Purpose or Use


Liquidity Ratios
F-121 Current ratio Current assets Measures capacity to pay
Current liabilities short-term debt. (Standard 2:1)
F-122 Current Assets = Cash + bank c/a + short term investment + receivables
+ prepaid expense + closing stock
F-123 Current Liabilities
= Payables + expense payable + unearned revenue + short term debt
+ bank overdraft
F-124 Acid-test (quick) ratio Quick assets Measures immediate capacity
Current liabilities to pay short-term debt
(Standard 1:1)
F- Quick Asset = Current assets − Prepaid expense − Closing stock
124*
F-125 Working capital ratio Working Capital
Current liabilities
Working Capital = Current assets – Current liabilities
Profitability Ratios
F-126 Gross Profit margin Gross Profit Measures gross income
Net Sales generated by each dollar of
sales. (The Higher, the better)
F-127 Net Profit margin Net Profit Measures net income
Net Sales generated by each dollar of
sales. (The Higher, the better)
F-128 Return on assets Net Profit Measures overall profitability
(ROA) Average Assests of assets. (The Higher, the
better)
F-129 Return on equity Net Profit Measures profitability of
(ROE) Shareholder ′ s equity owners’ investment. (The
Higher, the better)
F-130 Earnings per share Net Profit − preferred dividends Measures net income earned
(EPS) Number of common share on each share of common
stock. (The Higher, the better)
F-131 Price-earnings (P-E) Market price per share Measures how much investors
ratio Earning per share are willing to pay for one unit
earning of the company.
F-132 Pay-out ratio Dividend per share (DPS) Cash Dividends Measures percentage of
or,
Earning per share (EPS) Net income
earnings distributed as cash
dividends
Solvency Ratios
F-133 Debt to assets ratio Total Debt Measures the percentage of
Total Assets total assets provided by
creditors. (The Lower, the
better)
F-134 Debt to equity ratio or, Total Debt Measures the contribution of
Leverage ratio Total Equity creditors relative to the
contribution of the
stockholders.
Lower ratios (0.4 or lower) are
considered better debt ratios
F-134 Interest coverage ratio Earning Before Interest and Tax Measures ability to meet
or, Times interest interest expense interest payments as they come
earned due. (The Higher, the better)
Activity/Efficiency Ratios
F-135 Stock or inventory Cost of Goods Sold (COGS) Measures how many times a
turnover Average Inventory company has sold and
replaced inventory during a
given period.
The higher, the more efficient.
F-136 Inventory period or, 360 How many days it takes for a
Days Inventory Inventory turnover company to convert its
Outstanding inventory into sales each time
F-137 Debtor/receivable Credit Sales Measures the number of times
turnover or, Days Sales Average Account Receivable per year a business collects its
Outstanding cash from its receivables. The
ratio is intended to evaluate the
ability of a company to
efficiently issue credit to its
customers and collect funds
from them in a timely manner.
The higher, the more efficient.
F-138 Account receivable 360 How many days it takes for a
period or, Days Sales Debtor or receivable turnover company to convert its
Outstanding receivables into cash each time
F-139 Creditor or Payable Credit Purchase Measures the speed at which
turnover Average Account Payable the payments for credit
purchases are made to the
creditors.
Generally lower is good, but
there should be a limit
otherwise credit worthiness
may go down.
F-140 Account payable 360 How many days it takes for a
period or, Days Creditor or payable turnover company to pay its creditors
Payable Outstanding each time
F-141 Asset turnover Net Sales Measures how efficiently
Average Assets assets are used to generate
sales

Capital budgeting Formula


Name of the Formula Explanation
Formula
Pay-Back A is the last period number with a
Period (PBP) negative cumulative cash flow;
F-142 B is the absolute value (i.e. value
without negative sign) of cumulative
net cash flow at the end of the period
A; and
C is the total cash inflow during the
period following period A
NPV: (Net R is the net cash inflow expected to be
Present received in each period;
Value i is the required rate of return per
F-143 period (i.e. the hurdle rate, discount
rate);
n are the number of periods during
which the project is expected to
operate and generate cash inflows.
Internal rate R1= Lower discount rate
of return R2+ Higher discount rate
(IRR) NPV1= NPV at lower discount
F-144 rate
NPV2= NPV at higher discount
rate
Accounting
rate of
return
(ARR)
F-145
Profitability
Index (PI)
F-146

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