ACCOUNTING COMPARISIONS

Diffrence between cash flow statement and profit loss account

Preparation under Indirect method:
I. Operating Activities
II. Investing Activities
III. Financing activities
2. Preparation under the Direct method
Illustration of an Indirect method:
Analyzing a P&L Statement
Sales
Sources of Income or Sales
Cost of Goods Sold
Net Income
What do you understand by outstanding assets and outstanding liabilities?
What is the difference between current and long-term liabilities?
What are the differences among fixed assets, floating assets, fictitious
assets and current assets ?
Is it necessary to deduct non trade investments while calculating capital
employed by liability side approach?
How do I set up a financial budget?
What is the difference between cash balance and cash reserves?
How does NPA affect banks?
What is working capital managment?
What is the difference between a case memo and an invoice?
What do you understand by errors in accounting? What are the different
types of errors with examples?
What is the effect of the sale of goods for cash to the gross profit ratio?
What is the introductory accounting treatment of bad debt recovery?
How do I check whether the company is performing well so that I can
invest in it? Is the company having any debt or is it in loss?
What is the conclusion of profit prior to incorporation?
What is meant by "virtually debt free" company
What is the meaning of profit?
Why is the 'total liabilities' of a company defined as its net worth plus
debt?
Are current liabilities short-term debt?
Is depreciation an asset or a liability?
How can poor cash flow affect a business?
What's the difference between profit and loss account and profit and loss
appropriation account?
Which section is similar to earnings?
What is the difference between capital and capital funds in accounting?
What is profit and loss appropriation account in account?
What is the difference between net profit and divisible profit?
What is the relationship between the profit sharing ratio and the working
efficiency ratio?
What is the difference between the concept of financial health and
financial sustainability?
What is the difference between free cash flow to equity and free cash flow
to firm?
How can I short stocks?
Is cash a payment instrument?
How do you calculate the capital reserve if not all the forfeited shares are
reissued?
What are some accounting and bookkeeping terms used in accounting?
How do banks get profit from its users?
Should CSR activities be forced upon private and profit-making
companies?
Why is interest on capital not subtracted from closing capital while
finding the opening capital?
What are the meanings and objectives of financial policy?
Why do your savings bank deposits actually result into a loss?
What are the advantages of using cash flow management in a business?
How do I decrease the degree of the total leverage of a company?
What is the difference between lending interest rate and real interest rate?
What is a suggested double entry system in accounting?
What is the explanation of the accounting standards concept?
What is difference between interest rate and rate of return?
What is the difference between commerce and accounting?
Why is the Sharpe ratio more popular than the Sortino ratio?
Which financial ratios or metrics you look while picking a stock?
What's the difference between trade and commerce?
Is there a difference between stable payout ratio and dividend payout
ratio?
What is business?
What is net worth?
What are the best Moral stories about finance?
What is a Deloitte company, what is auditing, can someone start a
company just to audit other companies, what is audit firms, How would
you explain this answer to a kid?
What is the difference between transfer payments and current transfers?
Are they in any way related?
What is small finance? How are they different than other commercial
banks?
Why does a company have a high profit margin but a low asset turnover?
How is a cost audit performed?
What is the difference between a ledger and a general ledger?
What are the two basic procedures for accounting for inventory?
What is the difference between investing in a mutual fund and in an IPO?
What is the difference between cash flow management and capital
management?
What are some examples of activities that have regular cash flows?
What is the difference between profit and accumulated profit?
What is the difference between outstanding expenses and prepayment
expenses, outstanding income and accrual income, interest on capital and
interest on drawing?
Comparision of companies by ratios analysis
Liquidity Ratio
I. Current ratio
Debt Ratio
Profitability/Performance
I. Net Profit Margin
II. Return on Asset (ROA)
III. Return on Equity (ROE)
Activity Ratio
I. Account Receivables Turnover
II. Average Collection Period
III. Inventory Turnover
IV. Inventory Turnover in days
V. Payable Turnover
VI. Payable Turnover in Days
VII. Operating Cycle
VIII. Cash Conversion Cycle
I. EPS
II. Payout Ratio
III. PE Ratio

Diffrence between cash flow statement and profit loss account

Cash Flow Statement:
1. Cash Flow Statement is a statement which shows the various activities
relating to cash, viz. operating, investing, and financing activities.

2. It is prepared in order to measure the cash-generating capacity of a firm.

3. It is prepared on the basis of various activities of a firm, viz. operating,

investing and financing activities.
4. Double Entry System is not followed here.

5. Nominal accounts are not recognized here like Income Statement.

6. Cash basis of accounting is followed while it is prepared

Profit and Loss Account:

1. Profit and Loss Account is a statement which is prepared in order to
show the operating result of a firm; to show the surplus or profit and deficit

or loss at the end of the accounting period.

2. It is prepared for ascertaining the net result of the operation

3. It is prepared on the basis of various nominal accounts and not on the

basis of various activities like Cash Flow Statement.

4 Double Entry System is strictly followed here.

5. It records only nominal accounts in the form of expenses or losses and

Income or gains.

6. Accrual basis of accounting is followed here at the time of its

preparation.

7. It presents the net operating result of a firm in the form of net profit/net
loss.
I should be able to answer the following questions after I review the cash
flow statement of a company:
 Did the company increase or decrease its cash and cash equivalents
during the period?
How much money did the company generate from its operations?
How much money did the company invest in its business?
Did the company sell any assets?
How much money did the company pay its shareholders and
lenders?
Did the company raise money from its shareholders and lenders?

The cash flow statement highlights the cash the company spent or
generated from its operating activities, investing activities and financing
activities.
Preparation under Indirect method:
I. Operating Activities
The cash flow from operating activities are derived under two stages;
A. Calculating the operating profit before changes in working capital
B. The effect of changes in working capital
Stage 1: Operating profit before changes in working capital can be
calculated as follows:

Net profit before Tax and extra ordinary Items xxx

Add: Non-cash and non-operating Items which have

already been debited to profit and Loss Account like;

Depreciation xxx

Amortisation of intangible assets xxx

Loss on the sale of Fixed assets xxx

 Loss on the sale of Long-term Investments xxx

Provision for tax xxx

Dividend paid xxx xxx

Less: Non-cash and Non-operating Items which have

already been credited to Profit and Loss Account like

Profit on sale of fixed assets xxx

Profit on sale of Long term investment xxx xxx

Operating profit before working Capital changes xxx

Stage 2: Effect of changes in Working Capital is to be taken into as

follows:
a. Current Assets
i. An increase in an item of current assets causes a decrease in cash inflow
because cash is blocked in current assets
ii. A decrease in an item of current assets causes an increase in cash inflow
because cash is released from the sale of current assets
b. Current Liabilities
i. An increase in an item of current liability causes a decrease in cash
outflow because cash is saved
ii. A decrease in an item of current liability causes an increase in cash
outflow because of payment of the liability
Thus, in a nutshell
Cash from operating activities = Operating profit before working
capital changes + Net decrease in current assets + Net Increase in
current liabilities – Net increase in current assets – Net decrease in
current liabilities
II. Investing Activities
The cash flow from investing activities is derived by adding all the cash
inflows from the sale or maturity of assets and subtracting all the cash
outflows from the purchase or payment for new fixed assets or
investments.
Cash flow arising from Investing activities typically are:
i. Cash payments to acquire Fixed Asset
ii. Cash receipts from disposal of fixed asset
iii. Cash payments to acquire shares or debenture investment
iv. Cash receipts from the repayment of advances and loans made to third
parties
Furthermore,
Examples of Cash inflow from investing activities are:
i. Cash sale of plant and machinery, land and Building, furniture, goodwill
etc
ii. Cash sale of investments made in the shares and debentures of other
companies
iii. Cash receipts from collecting the Principal amount of loans made to
third parties
Examples of Cash outflow from investing activities are:
i. Purchase of fixed assets i.e. land, Building, furniture, machinery etc
ii. Purchase of Intangible assets i.e. goodwill, trademark etc
iii. Purchase of shares and debentures
iv. Purchase of Government Bonds
v. Loan made to third parties
III. Financing activities
Cash flows from financing activities are the cash paid and received from
activities with non-current or long-term liabilities and shareholder’s
capital.
Cash flow arising from Financing activities typically are:
1. Cash proceeds from the issue of shares or other similar instruments
2. Cash proceeds from the issue of debentures, loans, notes, bonds, and
other short-term borrowings
3. Cash repayment of the amount borrowed
Examples of cash inflow from financing activities are:
i. The issue of Equity and preference share capital for cash only
ii. The issue of Debentures, Bonds and long-term note for cash only
Examples of cash outflow from financing activities are:
i. Payment of dividends to shareholders
ii. Redemption or repayment of loans i.e. debentures and bonds
iii. Redemption of preference share capital
iv. Buyback of equity shares

Illustration of Indirect method:

Net profit before Tax and extra ordinary Items xxx

Cash flow from Operating activities

Add: Non-cash and non-operating Items which have

already been debited to profit and Loss Account like;

Depreciation xxx

Amortisation of intangible assets xxx

Loss on the sale of Fixed assets xxx

Loss on the sale of Long-term Investments xxx

Provision for tax xxx

Dividend paid xxx xxx

Less: Non-cash and Non-operating Items which have

already been credited to Profit and Loss Account like

Profit on sale of fixed assets (xxx)

Profit on sale of Long term investment (xxx) (xxx)

Operating profit before working Capital changes (A) xxx

Changes in working capital:

Add: Increase in current liabilities xxx

Decrease in current assets xxx xxx

Less: Increase in current assets (xxx)

Decrease in current liabilities (xxx) (xxx)

Net increase / decrease in working capital (B) xxx

Cash generated from operations (C) = (A+B) xxx

Less: Income tax paid (Net tax refund received) (D) (xxx)

Cash flow from before extraordinary items (C-D) = xxx

(E)
Adjusted extraordinary items (+/–) (F) xxx

Net cash flow from operating activities (E+F) = (G) xxx

Cash flow from Investing activities

Proceeds from sale of fixed assets xxx

Proceeds from sale of investments xxx

Purchase of shares/debentures/fixed assets (xxx)

Net cash from investing activities (H) xxx

Cash flow from Financing activities

Proceeds from issue of shares xxx

Proceeds from issue of debentures xxx

Payment of dividend (xxx)

Net cash flow from financing activities (I) xxx

Net increase in cash and cash equivalents (G+H+I) = xxx

(J)

Cash and cash equivalents and the beginning of the xxx

period (K)
 Cash and cash equivalents and the end of the period xxx
(J+K)

2. Preparation under the Direct method

The fundamentals of preparation of cash flow statement under Direct
method is more or less same as in Indirect method with only a few
exceptions in terms of its presentation.
Illustration of an direct method:
The Cash flow statement under Direct method is prepared as follows:

Cash flow from Operating activities

Add: Operating cash receipts: (A)

Cash sales xxx

Cash received from customers xxx

Trading commission received xxx

Royalties received xxx xxx

Less: Operating cash payments: (B)

Cash purchase (xxx)

Cash paid to suppliers (xxx)

Cash paid for business expenses (xxx) (xxx)

Cash generated from operations (A-B) = (C) xxx

 Less: Income tax paid (Net of tax refund received) (xxx)
(D)

Cash flow before extraordinary items (C-D) = (E) xxx

Adjusted extraordinary items (+/–) (F) xxx

Net cash flow from operating activities (E-F) = (G) xxx

Cash flow from investing activities (calculation same xxx

as under indirect method) (H)

Cash flow from financing activities (calculation xxx

same as under indirect method) (I)

Net increase in cash and cash equivalents (G+H+I) = xxx

(J)

Cash and cash equivalents and the beginning of the xxx

period (K)

Cash and cash equivalents and the end of the period xxx
(J+K)

This information allows the analyst to answer such questions as:

Does the company generate enough cash from its operations to
pay for its new investments, or is the company relying on new
debt issuance to finance them?
Does the company pay its dividends to common stockholders
using cash generated from operations, from selling assets, or from
issuing debt?
The points given below are noteworthy, so far as the difference between
cash flow and income statement is concerned:
1. The major difference between an income
statement and cash flow statement is cash, i.e. the income
statement is based on an accrual basis (due or received) while the
cash flow statement is based on the actual receipt and payment
 of cash.
2. The income statement is classified into two main
activities operating and non-operating, whereas the cash flow
statement is divided into three activities operating, investing and
financing.
3. The income statement is helpful in knowing the
profitability of the company, but the cash flow statement is
useful in knowing the liquidity and solvency of business which
determines the present and future cash flows.
4. Incomes statement is based on accrual system of
accounting, wherein incomes and expenses of a financial year
are considered. On the other hand, cash flow statement is based
on cash system of account, which only considers actual money
inflows and outflows in a particular financial year.
5. The income statement by to taking into account
various records and ledger accounts. As against this, cash flow
statement is prepared considering the income statement and
balance sheet.
6. Depreciation is considered in the income
statement, but the same is excluded from cash flow statement
because it is a non-cash item.
Analyzing a P&L Statement
So now that you know what a P&L is and all of its different names, how do
you analyze it? Let’s start with a simple example:

Sales
This may seem obvious, but you should review your sales first since
increased sales is generally the best way to improve profitability. If you
see a month was particularly good, try to remember why so you can
duplicate what you did in the future.

In this example, we see that June was the best month in terms of sales,
gross profit, net income, and profit margin. Upon review of the other
numbers, we see that this could’ve been due to seasonality (see more
below) and/or an increased marketing expense.
Sources of Income or Sales
Another factor related to sales that you should analyze are your
sources of income.

Ask yourself if all of your sources of income make sense and are
profitable for your business. Are any of them overly time consuming
with very low margins? In this example, our sources of income include
selling lemonade and chips. Neither of these are negatively impacting
our business so we’ll keep them, but if the chips weren’t selling we may
eliminate them or change the type.

Cost of Goods Sold

Next you should review your cost of goods sold. It would make sense
for cost of goods sold to go up as revenue goes up since these expenses
are directly related to your product. The opposite would not make
sense and should be a red flag.

Additionally, when you review cost of goods sold you can ask yourself
questions like, “Is there any way I can reduce these expenses?” Finding
ways to decrease your cost of goods sold will ultimately increase your
bottom line and profit margin.

In this example, the business owner may want to consider purchasing

items that won’t go bad (chips, cups, and sugar) in bulk to reduce my
cost throughout the year and increase my yearly profit margin.

Net Income
Net income is your profit and is one of the most important parts of
your business if you want it to succeed and be sustainable over time.

You want to see your profit positive (also known as “in the black”) in
most cases. Some exceptions where it’s acceptable to see a loss is when
the company made a strategic investment during one period to
decrease costs or increase sales in a later period. For example, in our
lemonade stand example, the business owner could’ve decided to
purchase chips, sugar and cups in bulk for the entire year in the month
of April. If this was done it could bring the company into a loss for the
month, but that expense would be recouped with savings and higher
margins throughout the rest of the year.

What do you understand by outstanding assets and outstanding

liabilities?

An expenditure which have been incurred during the year but the benefit of
which will be enjoyed during the next year is called an outstanding asset.
Outstanding assets can be of three types: Prepaid, Expenses, Income
receivable and deferred revenue expenditure. The expenses which have
become due for payment and should have been paid during the current year
but have not been actually paid are called ‘outstanding liabilities’. If
outstanding liabilities are not charged to Profit and Loss Account, the final
account will not show the correct amount of profit or loss and the balance
sheet will also not depict the true financial position. Thus, it is the duty of
the auditor to verify all the items of the outstanding liabilities
Outstanding assets
Outstanding assets are those assets over which the company has no
immediate claim but which are recoverable at a later date or which cannot
be converted into cash immediately.
Following are a few examples of different classes of outstanding assets:

1. Income Receivable
2. Prepaid Expenses
3. Deferred Revenue Expenses

Outstanding liabilities
Outstanding liabilities
Outstanding liabilities are those liabilities which have not been paid at the
date of the balance-sheet.

What is the difference between current and long-term liabilities?

Business leaders love to talk about revenues, net profits and assets. After
all, those are all positive numbers on a balance sheet that can make a
company look great. They are also how a company defines profit and
growth. But without considering the debt, business leaders are ignoring key
indicators to the financial solvency of the company. Understand the
difference between current vs. long-term liabilities, so that you can
properly define needed working capital and ratios. Current liability
obligations play a different role than long-term liabilities.
Understanding Working Capital
Every business must have working capital. Working capital is a metric that
subtracts current assets from current liabilities. It is an indicator of the
financial strength of a company, because it defines whether a company has
enough cash or cash-equivalent assets to pay for its required liabilities.
When a company has too little working capital, it is flagged as having
liquidity issues. When a company has too much working capital, it is
deemed as running inefficiently, because it isn't effectively reallocating
capital into higher revenue growth. A company wants to be in a sweet spot
of having enough working capital to cover a fiscal cycle's worth of
financial obligations, known as liabilities. Business leaders must learn to
keep the business operating in the sweet spot of working capital.
Define Current Liabilities
Liabilities are a financial responsibility. Current liabilities are defined over
the course of a 12-month period, unless the company has elected a different
financial cycle. Current liabilities are found with information on the
balance sheet and income statement. These obligations include notes
payable, accounts payable, and accrued expenses.

1. Notes payable are any promissory, loan and mortgage note

payments. If the note has a term longer than 12 months, only
the payments required to pay the next 12 months are
considered for current liabilities.
2. Accounts payable are the monies owed to suppliers who
extend the company credit terms, when buying materials or
wholesale products. These often have terms of Net 30, Net 60
or Net 90 days, meaning that the net amount is due within 30,
60 or 90 days, respectively.
3. Accrued expenses are those expenses the company is already
obligated to pay but hasn't yet paid. This includes taxes,
payroll and loan interest.

Creditors may have a lien on some assets that are associated with
liabilities, such as real estate loans, inventory or other secured credit items.
Failure to pay not only affects the financial health of the company but also
can lead to foreclosure or seizure of assets needed for operations.
Define Long-Term Liabilities
Long-term liabilities are any debts and payables due at a future date that's
at least 12 months out. This is reflected in the balance sheet, and they are
obligations, but they do not pose an immediate threat to the financial
stability of a company's working capital. Long-term liabilities include
mortgage loans, debentures, long-term bonds issued to investors, pension
obligations and any deferred tax liabilities for the company. Keep in mind
that a portion of all long-term liabilities is counted in current liabilities,
namely the next 12 months of payments.
For example, a frame shop may have purchased a building that serves as
the storefront and framing facility. The building was purchased for
Rs500,000 with Rs100,000 as a down payment. The monthly obligations
are Rs1,500, including property taxes and interest. The building is an asset,
with a current value of Rs500,000. The mortgage note on the property is
Rs400,000, listed as a long-term liability. The current liabilities are the
payments due in the next 12 months ($1,500 x 12 = $18,000). This is part
of the required working capital needed to maintain the business operations.
Current vs. Long-Term Liabilities
The reason that current and long-term liabilities are treated differently, is
because of the immediate need a company has for cash. Most businesses
that don't have the adequate working capital for 12 to 24 months risk going
out of business. Those that remain in business must find ways to reduce
costs, often skimping on many of the necessary revenue-driving activities,
such as marketing or hiring sales staff.
Current liabilities factor into the working capital needs. Again, working
capital is the money needed to keep the lights on, and to run the day-to-day
operations of the company. Without it, the company must borrow more
money to stay afloat or downsize, perhaps even close.
Long-term liabilities are often considered a capital investment into the
long-term growth strategies of the company. Buying a new major piece of
machinery is an expense that might take time to pay off, but it will yield a
return on investment (ROI), which helps the company grow, with higher
production levels. Even a pension is considered to be an investment in the
workers of the company, creating loyalty, reducing turnover and improving
the corporate culture.
Reports and Company Financial Health
The current liabilities paint a clear picture of whether a company can afford
to stay in business or not. In contrast to current assets, a company with
liabilities exceeding the assets clearly has financial issues it must address.
However having too much in current assets just sitting around isn't good,
either. A company should look beyond the working capital dollar value and
consider the working capital ratio.
The working capital ratio is calculated, using the same current assets and
current liabilities.
Working Capital Ratio = Current Assets / Current Liabilities
By simply dividing the assets by the liabilities, you are left with a ratio.
Healthy companies have a ratio ranging between 1.2 and 2.0. A ratio below
this range flags a company for not having adequate cash resources to pay
upcoming liabilities. A company operating above that ratio range suggests
that the company is holding on to cash and isn't efficiently reallocating
funds so it can generate even more revenues.
A company with a higher working capital ratio could have a plan for those
assets, such as making a large capital investment into research and
development, thus retaining earnings, until it can do so without acquiring
more debt. But doing this for extended periods of time can become a
potential issue for analysts or investors looking to partner with the
company.
Analysts also look at the trends. Working capital ratios can be calculated
monthly, and they will show a trend of incline or decline. Obviously, a
company declining in the ratio is moving toward a bad financial direction.
If the ratio drops below 1.0, the company has negative operating capital,
meaning that it has more debt obligations and current

What are the differences among fixed assets, floating assets, fictitious
assets and current assets ?

Classification of Assets: Convertibility

If assets are classified based on their convertibility into cash, assets are
classified as either current assets or fixed assets. An alternative expression
of this concept is short-term vs. long-term assets.
1. Current Assets
Current assets are assets that can be easily converted into cash and cash
equivalents (typically within a year). Current assets are also termed liquid
assets and examples of such are:

Cash
Cash equivalents
Short-term deposits
Stock
Marketable securities
Office supplies

2. Fixed or Non-Current Assets

Non-current assets are assets that cannot be easily and readily converted
into cash and cash equivalents. Non-current assets are also termed fixed
assets, long-term assets, or hard assets. Examples of non-current or fixed
assets include:

Land
Building
Machinery
Equipment
Patents
Trademarks

Classification of Assets: Physical Existence

If assets are classified based on their physical existence, assets are
classified as either tangible assets or intangible assets.
1. Tangible Assets
Tangible assets are assets that have a physical existence (we can touch,
feel, and see them). Examples of tangible assets include:

Land
Building
Machinery
Equipment
 Cash
Office supplies
Stock
Marketable securities

2. Intangible Assets
Intangible assets are assets that do not have a physical existence. Examples
of intangible assets include:

Goodwill
Patents
Brand
Copyrights
Trademarks
Trade secrets
Permits
Corporate intellectual property

Classification of Assets: Usage

If assets are classified based on their usage or purpose, assets are classified
as either operating assets or non-operating assets.
1. Operating Assets
Operating assets are assets that are required in the daily operation of a
business. In other words, operating assets are used to generate revenue
from a company’s core business activities. Examples of operating assets
include:

Cash
Stock
Building
Machinery
Equipment
Patents
Copyrights
Goodwill
2. Non-Operating Assets:
Non-operating assets are assets that are not required for daily business
operations but can still generate revenue. Examples of non-operating assets
include:

Short-term investments
Marketable securities
Vacant land
Interest income from a fixed deposit

Importance of Asset Classification

Classifying assets is important to a business. For example, understanding
which assets are current assets and which are fixed assets is important in
understanding the net working capital of a company. In the scenario of a
company in a high-risk industry, understanding which assets are tangible
and intangible helps to assess its solvency and risk. Determining which
assets are operating assets and which assets are non-operating assets is
important to understanding the contribution of revenue from each asset, as
well as in determining what percentage of a company’s revenues comes
from its core business activities.

Is it necessary to deduct non trade investments while calculating

capital employed by liability side approach?
FIRST METHOD: USING THE ASSET SIDE OF THE BALANCE
SHEET
In this method, we include:

1. All the fixed assets at their net values

after accounting for depreciation. In an inflationary scenario,
the replacement cost of these assets should be used as it
reflects their current market value better.
2. All investments made in the business.
3. All current assets viz. Sundry Debtors, Cash, Bank, Bills
Receivable and Stock etc.
4. Importantly, only business assets are considered. That means
although we do take into account the intangible assets
like goodwill, patents, and trademarks; fictitious assets are not
taken into account.

Finally, current liabilities are subtracted from the above to obtain Capital
Employed.
Let us make our concepts concrete with an example. Consider the
following balance sheet:

1. Particulars

Rs.
I. Equity and Liabilities
1. Shareholder’s Funds
a) Share Capital
400000
b) Reserves and Surplus
100000
2. Non-Current Liabilities
Long Term Borrowings
150000
3.Current Liabilities
50000
Total
700000
II. Assets
1. Non-Current Assets
a) Fixed Assets
400000
b) Non-current Investments
100000
2. Current Assets
200000
Total
700000
 1. Fixed Assets + Non-current Investments + Current Assets –
Current Liabilities

= 400000+100000+200000-50000
= 650000
SECOND METHOD: USING THE LIABILITIES SIDE OF THE
BALANCE SHEET
Alternatively, we can compute the capital employed by using the liabilities
side of the balance sheet. We proceed as follows:

1. Include Share capital (Equity + Preference)

2. Include Reserves and Surplus (e.g. General reserve, Capital
reserve, Profit & Loss account etc.).
3. Include Long-Term Borrowings like Debentures and other
loans.

Going back to our example balance sheet and using this approach, we
evaluate the Capital Employed as:
Capital Employed
Capital Employed is the total amount of investment made for running the
business. It should not be confused with the term “Capital”. “Capital”
represents funds contributed by the owner (s) in a business, whereas
“Capital Employed” has a wider meaning. It includes funds coming from
both the owners and lenders, i.e., it covers both equity and debt.
There is no universal definition of the term “Capital Employed”. However,
the general intuition is that it is the investment made in a business for
earning profits. In one sense, it reflects the total funds put to use (i.e.
“employed”) for running the show. In other words, it is the value of assets
that provide the business its ability to earn revenues. More technically, it is
the amount of capital utilized for acquisition of Profits or Assets.

How do I set up a financial budget?

Follow these steps to put a solid budget plan into action.

Every great financial plan starts with a sound budget. If you’re trying to
pay off bills or save for a dream vacation, a budget is your first step toward
making your financial goals a reality. Follow these steps for setting up a
realistic budget that gets you where you want to go.
1. CALCULATE EXPENSES
Your first order of business is finding out exactly how much you’re
spending each month. Do this by consulting your bank statements, receipts
and financial files. Because some expenses are intermittent, such as
insurance payments, you’ll get the most accurate financial picture if you
calculate an average for six months to a year. Add up everything you spent
for the last six to 12 months and then divide by the amount of months,
which will give you your average monthly expenses.
Remember that being thorough when you add up expenses is important in
creating a realistic budget. A forgotten bill really throws a wrench into your
savings plan. When calculating your expenses, also factor in unexpected
bills, such as unplanned car repairs. A good rule of thumb is to add an extra
10 percent to 15 percent. So if you’ve determined that you spend $1,500 a
month, add $150 to $225.
2. DETERMINE YOUR INCOME
Once you’ve figured out how much money you need to stay afloat
financially each month, it’s time to determine your actual income. Besides
your regular salary, get an accurate picture by adding in any extra funds
that come your way throughout the year, such as cash gifts, sale of items
online or via garage sales, and don’t forget other income sources like
alimony, child support, interest, dividends and rental income.
3. SET SAVINGS AND DEBT PAYOFF GOALS
In order to determine realistic savings and debt payoff goals, you must find
out if you have a budget shortfall or overage. Do this by subtracting your
monthly expenses from your income. If you determine you’re making more
money than you’re spending, congratulations. This amount can be
earmarked for savings and to pay off debt.
But if you determine you’re spending more than you’re making, it’s time to
do some cutting so you have something to save and don’t go further into
debt. The best way to figure out where you can cut from your expenses is
to track your spending and record every expense for a month. Seemingly
insignificant items such as a cup of coffee add up over time. For instance,
even if you spend just $5 a week on snacks, that adds up to $260 a year,
which is not insignificant.
One you have a clear picture of where all of your money goes, be merciless
in cutting expenses until your budget is in the black. Cut enough so that
you have 10 percent to 20 percent of your income left over each month to
add to your savings account. If you are unable to cut a sufficient amount
from your budget, consider ways you can increase your income.
4. RECORD SPENDING AND TRACK PROGRESS
The best way to stay on top of your budget is to record all of your expenses
and income. Having to input expenses will cause you to think twice before
splurging, and it’s especially satisfying and motivating to record when
you’ve met a savings goal.
5. BE REALISTIC
Aim for sticking to your budget most of the time, and you’re bound to
reach your financial goals. Breaking your budget occasionally is OK,
providing you get right budget

What is the difference between cash balance and cash reserves?

Net cash balance is positive, if money is available; or negative if the

account has been overdrawn, whereas Cash reserves refers to a type of
short-term, highly liquidatable investment that earns a low rate of return
where individuals keep money that they want to have quick access to.

What is a cash reserve?

A cash reserve is an emergency fund for your business. You can use a
reserve to meet unplanned, short-term financial needs. Instead of incurring
debt from a credit card or loan, you can pay for unexpected costs with
money from your cash reserve. Usually, you save money for your reserve
in a business bank account.
To start your cash reserve, open a new bank account. Your cash reserve
account should be separate from your general business bank account and
other specific accounts, like a payroll account.
How much goes in a cash reserve?
Now that you can answer what are cash reserves, you may be wondering
how much to put into them.
When it comes to putting money into your reserve, not putting in enough
can leave you high and dry when an emergency comes your way. At the
same time, putting too much in can be costly for your business.
Long story short: you need enough money in an emergency cash reserve to
cover unexpected costs, but you also don’t want to forget about investing
in your business.
So, how much is just right?
Most financial experts suggest that cash reserves cover three to six months
of expenses. But, there’s no one-size-fits-all amount. To figure out your
cash reserve’s sweet spot, look at your financial needs.
Your business’s expenses and earnings can show you how much you should
put into your cash reserve account.
When coming up with a cash reserve fund amount, look at your:

How does NPA affect banks?

NPA IMPACT
The problem of NPAs in the Indian banking system is one of the foremost
and the most formidable problems that had impact the entire banking
system. Higher NPA ratio trembles the confidence of investors, depositors,
lenders etc. It also causes poor recycling of funds,which in turn will have
deleterious effect on the deployment of credit.
The non-recovery of loans effects not only further availability of credit but
also financial soundness of the banks.
Profitability: NPAs put detrimental impact on the profitability as banks
stop to earn income on one hand and attract higher provisioning compared
to standard assets on the other hand. On an average, banks are providing
around 25% to 30% additional provision on incremental NPAs which has
direct bearing on the profitability of the banks.
Asset (Credit) contraction: The increased NPAs put pressure on recycling
of funds and reduces the ability of banks for lending more and thus results
in lesser interest income. It contracts the money stock which may lead to
economic slowdown.
Liability Management: In the light of high NPAs, Banks tend to lower the
interest rates on deposits on one hand and likely to levy higher interest
rates on advances to sustain NIM. This may become hurdle in smooth
financial intermediation process and hampers banks’business as well as
economic growth.
Capital Adequacy: As per Basel norms, banks are required to maintain
adequate capital on risk-weighted assets on an ongoing basis. Every
increase in NPA level adds to risk weighted assets which warrant the banks
to shore up their capital base further. Capital has a price tagranging from
12% to 18% since it is a scarce resource
. Shareholders’ confidence: Normally, shareholders are interested to
enhance value of their investments through higher dividends and market
capitalization which is possible only when the bank posts significant
profits through improved business. The increased NPA level is likely to
have adverse impact on the bank business as well as profitability thereby
theshareholders do not receive a market return on their capital and
sometimes it may erode their value of investments. As per extant
guidelines, banks whose Net NPA level is 5% & above are required to take
prior permission from RBI to declare dividend and also stipulate cap on
dividend payout.
credibibility of banking system is also affected greatly due to higher level
NPAs because it shakes the confidence of general public in the soundness
of the banking system. The increased NPAs may pose liquidity issues
which is likely to lead run on bank by depositors.
Thus, the increased incidence of NPAs not only affects the performance of
the banks but also affect the economy as a whole. In a nutshell, the high
incidence of NPA has cascading impact on all important financial ratios of
the banks viz.,
Net Interest Margin, Return on Assets, Profitability, Dividend Payout,
Provision coverage ratio, Credit contraction etc., which may likely to erode
the value of all stakeholders including Shareholders, Depositors,
Borrowers, Employees and public at large
Underlying reason for NPA in India
An internal study conducted by RBI shows that in the order of prominence
,the following factor contribute to NPAs.
Internal Factor Diversion of funds for
- Expansion/diversification /modernization -
Taking up new project -
Helping /promoting associate concerns time/cost overrun during the project
implementation stage
Business Failure Inefficiency in management Slackness in credit
management and monitoring Inappropriate Technology/technical problem
Lack of coordination among lenders External Factor Recession
Input/power storage
Price escalation Exchange rate fluctuation Accidents and natural
calamities, etc.
Changes in government policies in excise/ import duties, pollution control
orders, etc.
Some other factors also affected to NPA which are mention below in detail:
Why assets become NPA?
A several factors is responsible forever increasing size of NPAs in PSBs.
The Indian banking industry has one of the highest percents of NPAs
compared to international levels.
A few prominent reasons for assets becoming NPAs are as under :
Lack of proper monitoring and follow-up measures.•
Lack of sincere corporate culture. Inadequate legal provisions on
foreclosure and bankruptcy.•
Change in economic policies/environment.•
Non transparent accounting policy and poor auditing practices.•
Lack of coordination between banks/FIs.•
Directed landing to certain sectors.•
Failure on part of the promoters to bring in their portion of equity from
their own sources or public issue due to market turning unfavorable.•
Criteria for classification of assets•

What is working capital managment?

Working capital is part of the total assets of the company. Generally, it is

the difference between current assets and current liabilities
IMPORTANCE OF WORKING CAPITAL
Working capital is a vital part of a business and can provide the following
advantages to a business:
HIGHER RETURN ON CAPITAL
Firms with lower working capital will post a higher return on capital.
Therefore, shareholders will benefit from a higher return for every dollar
invested in the business.
IMPROVED CREDIT PROFILE AND SOLVENCY
The ability to meet short-term obligations is a pre-requisite to long-
term solvency. And it is often a good indication of counterparty’s credit
risk. Adequate working capital management will allow a business to pay on
time its short-term obligations. This could include payment for a purchase
of raw materials, payment of salaries, and other operating expenses.
HIGHER PROFITABILITY
According to research conducted by Tauringana and Adjapong Afrifa, the
management of account payables and receivables is an important driver of
small businesses’ profitability.
HIGHER LIQUIDITY
A large amount of cash can be tied up in working capital, so a company
managing it efficiently could benefit from additional liquidity and be less
dependent on external financing. This is especially important for smaller
businesses as they typically have limited access to external funding
sources. Also, small businesses often pay their bills in cash from earnings
so efficient working capital management will allow a business to better
allocate its resources and improve their cash management.
INCREASED BUSINESS VALUE
Firms with more efficient working capital management will generate more
free cash flows which will result in higher business valuation
and enterprise value.
FAVORABLE FINANCING CONDITIONS
A firm with a good relationship with its trade partners and paying its
suppliers on time will benefit from favorable financing terms such as
discount payments from its suppliers and banking partners.
UNINTERRUPTED PRODUCTION
A firm paying its suppliers on time will also benefit from a regular flow of
raw materials, ensuring that the production remains uninterrupted and
clients receive their goods on time.
ABILITY TO FACE SHOCKS AND PEAK DEMAND
Efficient working capital management will help a firm to survive through a
crisis or ramp up production in case of an unexpectedly large order.
COMPETITIVE ADVANTAGE
Firms with an efficient supply chain will often be able to sell their products
at a discount versus similar firms with inefficient sourcing

What is the difference between a case memo and an invoice?

Key Differences Between Invoice and Cash Memo

The difference between invoice and cash memo can be drawn clearly on
the following grounds:

1. An instrument indicating the payment due against any goods

sold or services rendered is invoice. Conversely, an instrument
indicating cash payment made for the merchandise is known as
a cash memo.
2. An Invoice is raised before the payment while cash memo is
raised when the payment is made.
3. An Invoice is issued for the credit transaction as a proof of
amount due, whereas cash memo is issued for cash transaction
as a proof of the amount received.
4. Signature of the seller or his agent is there in the invoice. On
the other hand signature of cashier is found in the cash memo
5. Definition of Invoice

An Invoice is a non-negotiable instrument which indicates the indebtedness

of the purchaser to the seller. The seller gives it to the buyer for making a
request for payment for the goods sold or services rendered to him. It is
used to record day to day the sale transaction.

1. A typical invoice may contain the following details:

Date of issue of invoice

Invoice Number
Name and address of buyer
Name and Address of Seller
Unit Price of Goods
Quantity
Discount (if any, but only trade discount)
Tax (VAT or Service tax as the case may be)
Total Amount due
Signature of the seller or his authorized agent.

Definition of Cash Memo

Cash Memo is also a non-negotiable commercial instrument indicating, the
cash has been received from the purchaser for the goods sold to him. It
works as a proof of cash payment made. When the cash is received for the
sold goods, no debit is raised against it. The cash memo contains the
following description:

Date
Serial Number
Name and address of supplier
Name and address of buyer
Unit price of goods
Quantity
Discount (if any, both for trade and cash discount)
Tax (VAT or Service tax as the case may be)
Total Amount Received
Signature of the cashier
.courtesy ;kpu diffrences

What do you understand by errors in accounting? What are the

different types of errors with examples?

What is an accounting error?

An accounting error is a non-fraudulent discrepancy in financial
documentation. The term is used in financial reporting.
Types of accounting errors include:

Error of omission -- a transaction that is not recorded.

Error of commission -- a transaction that is calculated
incorrectly. One example of an error of commission is
subtracting a figure that should have been added.
Error of principle -- a transaction that is not in accordance with
generally accepted accounting principles ( GAAP). One
example of an accounting error of principle is an expenditure
that is placed in an inappropriate category.
If a company discovers that an accounting error significantly affected a
previous report, it usually issues a restatement of the original release.

What is the effect of the sale of goods for cash to the gross profit ratio?

The following data relates to a small trading company. Compute the gross
profit ratio (GP ratio) of the company.

Gross sales: 1,000,000

Sales returns: 90,000
Cost of goods sold: 675,000

Solution:
With the help of above information, we can compute the gross profit ratio
as follows:
= (235,000* / 910,000**)
= 0.2582 or 25.82%
*Gross profit = Net sales – Cost of goods sold
= 910,000 – 675,000
= 235,000
**Net sales = Gross sales – Sales returns
= 1,000,000 – 90,000
= 910,000
The GP ratio is 25.82%. It means the company may reduce the selling price
of its products by 25.82% without incurring any loss.
Significance and interpretation:
Gross profit is very important for any business. It should be sufficient to
cover all expenses and provide for profit.
There is no norm or standard to interpret gross profit ratio (GP ratio).
Generally, a higher ratio is considered better.
The ratio can be used to test the business condition by comparing it with
past years’ ratio and with the ratio of other companies in the industry. A
consistent improvement in gross profit ratio over the past years is the
indication of continuous improvement . When the ratio is compared with
that of others in the industry, the analyst must see whether they use the
same accounting systems and practices. there is n odiffrencebetween cash
and credit for sales to affect gp ratio.

What is the introductory accounting treatment of bad debt recovery?

Recovery of Bad Debts – Concept, Accounting Journal Entries and Solved

Example:
Some times business receives a pleasant surprise, when it recovers the bad
debts which were previously written off as bad debts. This is recorded
as bad debt recovery. However, if the amount recovered is less than the
original bad debt amount, the receivable account should not be re-instated
for the remaining balance.
Journal Entry 1 (a):
Recording receipt of cash from a trade receivable whose account was
previously written off as bad:
Debit (Dr) Cash
Credit (Cr) Trade receivables
Journal Entry 1 (b):
Cancelling the entry previously made to write off a trade receivable’s
account as bad:
Debit (Dr) Trade receivables
Credit (Cr) Bad debts recovery
Journal Entry 2:
On recovery of bad debts, there is a little point in reviewing the “dead” or
“written off” account of trade receivable. Normally no entry is passed in
the written off trade receivable’s account. So instead of passing two
separate entries, one single entry is passed to record bad debts recovery:
Debit (Dr) Cash
Credit (Cr) Bad debts recovery
Solved Example:
The accountant of Mitchel and Michael Ltd. has prepared the following
aged trade receivables schedule or (aging schedule of trade receivables) as
at 31 Dec. 2018. The policy applied by Mitchel and Micheal for
the provision for doubtful debts is on a sliding scale basis and is given as
follows:

On 1 January 2018, the provision for doubtful debts account had a balance
of 500. On 17 July, Harrison Jim, whose debt of 600 had been written off
completely in 2017 returned and paid his debt in full.
On 2 Dec. 2018, Bay Ltd. a trade receivable, ceased trading and Mitchel
and Michael received payment of 0.60 in the $1 in final settlement of his
debt of 500. The remainder of the debt was written off in full at that date.
John , a trade receivable of 320, has recently been declared bankrupt. This
amount had been included in the aged trade receivables schedule above as
being outstanding over 100 days. It is to be written off in full immediately
from the aged trade receivables’ schedule.
460 are other total bad debts written off during the year.
Required:
Prepare the following ledger accounts for the year ended 31 Dec. 2018:
(a) Bad debts (b) Provision for doubtful debts (c) Bad debts recovery
account
Solution:
(a) Bad Debts Account

(b) Provisions for Doubtful Debts Account

Working: Provision required on 31 Dec. 2018 = [(19600 x 1%) + (8400 x

2%) + (3650 x 4%) + {(1320 – 320) x 10%}] = $610
(c) Bad Debts Recovery Account

How do I check whether the company is performing well so that I can

invest in it? Is the company having any debt or is it in loss?
before investing into a company share we must verify the following ratios
whether the company is performing well.
Price to Cash Flow Ratio
Some investors prefer to focus on a financial ratio known as the "price to
cash flow ratio" instead of the more famous "price-to-earnings ratio" (or
p/e ratio for short). Sit back, relax, and grab a cup of coffee because you're
about to learn everything you ever wanted to know about this often
overlooked stock valuation tool.
Price to Earnings Ratio—The P/E Ratio
The price to earnings ratio, also known as the p/e ratio, is probably the
most famous financial ratio in the world. It is used as a quick and dirty way
to determine how "cheap" or "expensive" the stock is. The best way to
think of it is how much you are willing to pay for every 1 in earnings a
company generates. Learn how to calculate it, and much more.
The PEG Ratio
While the price to earnings ratio (or p/e ratio for short) is the most popular
way to measure the relative valuation of two stocks, the PEG ratio goes one
step further. It stands for the price-to-earnings-to-growth ratio. As you can
tell by its title, the PEG ratio factors in a company's growth.
Asset Turnover Ratio
The asset turnover financial ratio calculates the total sales generated by
each rupee of assets a company owns. In other words, it measures how
efficiently a company has been using its assets.
Current Ratio
Like the price to earnings ratio, the current ratio is one of the most famous
of all financial ratios. It serves as a test of a company's financial strength
and relative efficiency. For instance, you can tell if a company has too
much, or too little, cash on hand.
Debt to Equity Ratio
The debt to equity ratio is important because investors like to compare the
total equity (net worth) of a company to its debt obligations. For instance,
if you own 100 million worth of hotels and have 30 million in debt, you are
going to be less concerned than if you have the same 30 million in debt
with only 40 million worth of real estate. Learn how to calculate the debt to
equity ratio and why it is important.
Gross Profit Margin
The gross profit margin lets you know how much profit is available as a
percentage of sales to pay payroll costs, advertising, sales expenses, office
bills, etc. It's one of the most important financial ratios you can learn.
Interest Coverage Ratio
The interest coverage ratio is an important financial ratio for firms that use
a lot of debt. It lets you know how much money is available to cover all of
the interest expense a company incurs on the money it owes each year.
Inventory Turnover Ratio
If you need to know how many times a business turns its inventory over a
period of time, you'll need to use the inventory turnover ratio. It allows you
to see if a company has too many of its assets tied up in inventory and is
heading for financial trouble. An extremely efficient retailer, for instance,
is going to have a higher inventory turnover ratio than a less efficient
competitor.
Net Profit Margin Ratio
The net profit margin ratio tells you how much money a company makes
for every 1 in revenue. Companies with higher net profit margins can often
offer better benefits, heftier bonuses, and fatter dividends.
Operating Profit Margin Ratio
Operating income, or operating profit as it is sometimes called, is the total
pre-tax profit a business generated from its operations. It is what is
available to the owners before a few other items need to be paid such as
preferred stock dividends and income taxes.
Quick Test Ratio
The Quick Test Ratio (also called the Acid Test or Liquidity Ratio) is the
most excessive and difficult test of a company's financial strength and
liquidity.
Receivable Turns
When you are analyzing a business or a stock, common sense tells you that
the faster a company collects its accounts receivables, the better. The
sooner customers pay their bills, the sooner a company can put the cash in
the bank, pay down debt, or start making new products. There is also a
smaller chance of losing money to delinquent accounts. Fortunately, there
is a way to calculate the number of days it takes for a business to collect its
receivables - it's called receivable turns or receivable turnover, and it's a
useful financial ratio to learn.
Return on Assets (ROA) Ratio
Where asset turnover tells an investor the total sales for each Rs 1 of
assets, return on assets, or ROA, tells an investor how much profit a
company generated for each Rs1 in assets. The return on assets figure is
also a sure-fire way to gauge the asset intensity of a business. For example,
does the company in which you are researching have to spend large sums
of money on expensive machinery before it can manufacture and sell a
product to generate a return? It is one of the most important financial ratios
you can know.
Return on Equity (ROE) Ratio
One of the most important profitability metrics is a return on equity (or
ROE for short). Return on equity reveals how much profit a company
earned in comparison to the total amount of shareholder equity found on
the balance sheet.
Advanced Return on Equity: The DuPont Model
Once you know how to calculate the return on equity financial ratio
mentioned above, you need to go even further and break it down into the
various components. This is called the DuPont analysis. By learning it, you
can actually see what it is that makes a company profitable. It is, and
remains, the secret to understanding most great fortunes.
Working Capital Per Rs of Sales
The working capital per Rs of sales financial ratio is important because it
lets you know how much money a company needs to keep on hand to
conduct business. Generally speaking, the more working capital a company
needs, the less valuable it is because that's money the owners can't take out
of the business in the form of dividends.
5 Types of Ratios
Different financial ratios give a picture of different aspects of a company's
financial health, from how well it uses its assets to how well it can cover its
debt. One ratio by itself may not give the full picture unless viewed as part
of a whole.
Because they measure data that changes over time, ratios are by nature
time-sensitive, so you should account for that when evaluating them. You
can use this to your advantage and compare ratios from one time period to
another to get an idea of a company's growth or changes over time.
Liquidity
Liquidity ratios demonstrate a company's ability to pay its debts and other
liabilities. If it does not have enough short-term assets to cover short-term
obligations, or it does not generate enough cash flow to cover costs, it may
face financial problems.
Liquidity ratios are extra important with penny stocks specifically since the
smaller and newer companies often have tremendous difficulties paying all
of their bills before their businesses become stable and established.
Some liquidity ratios include:

Current ratio
Quick ratio
Cash ratio
Operating cash flow margin.

The current ratio, for example, is current assets divided by current

liabilities, and it gives you an idea of how well the company can meet its
obligations in the next 12 months.
The cash ratio will tell you the amount of cash a company has compared to
its total assets.
The quick ratio will compare a company's cash, marketable securities, and
receivables against its liabilities, giving you a better picture of how well it
can make payments on its current obligations.
Activity
Activity ratios demonstrate a company's efficiency in operations. In other
words, you can see how well the company uses its resources, such as assets
available, to generate sales.
A few examples of activity ratios investors should apply in their research
include:

Inventory turnover
Receivables turnover
Payables turnover
Working capital turnover
Fixed asset turnover
Total asset turnover

Inventory turnover is expressed as the cost of goods sold for the year
divided by average inventory. This ratio can indicate how efficient the
company is at managing its inventory as it relates to its sales.
Receivables turnover, as another example, indicates how quickly net sales
are turned into cash; it's expressed as net sales divided by average accounts
receivable.
Leverage
Leverage, or solvency, ratios demonstrate a company's ability to pay its
long-term debt. These ratios examine a company's dependence on debt for
its operations and the likelihood it can repay its obligations.
Leverage ratios are also referred to as:

Debt ratios
Debt-to-equity ratios
Interest-coverage ratios

The debt ratio compares a business's debt to its assets as a whole. A debt-
to-equity ratio looks at a company's overall debt as compared to its
investor-supplied capital; with this ratio, a lower figure is generally safer
(although too low can indicate an excessively cautious, risk-averse
company).
Interest-coverage ratios show how well a company can handle the interest
payments on its debts.
Performance
Performance ratios tell investors about a company's profit, which explains
why they are frequently referred to as profitability ratios.
Performance ratios tell a clear picture of a company's profitability at
various stages of its operations. Examples include:

Gross profit margin

Operating profit margin
Net profit margin
Return on assets
Return on equity

For example, the gross profit margin will show the gross sales compared to
profits; this number is found by subtracting the cost of goods sold from the
total revenue and then dividing by total revenue.
Another ratio, operating profit margin, shows a company's operating profits
before taxes and interest payments, and is found by dividing the operating
profit by total revenue.
When looking at penny stock companies, it may be difficult or impossible
to find profitability ratios, as many companies of this type have not yet
achieved profitable operations and you cannot divide a number by zero.
Valuation
Since valuation ratios rely on a company's current share price, they provide
a picture of whether or not the stock makes a compelling investment at
current levels. How much cash, working capital, cash flow, or earnings do
you get for each dollar invested? These ratios may also be called market
ratios, as they evaluate a company's attractiveness on the market.
Some valuation ratios include:

Price/Earnings (P/E)
Price/Cash Flow
Price/Sales (P/S)
Price/Earnings/Growth Rate (PEG).
Using Ratios in Financial Analysis
Examining and comparing financial ratios gives you points of comparison
between companies. It also lets you track a given company's performance
over time.
It's important not to base decisions on any particular ratio, but rather take
them together and analyze them as a whole. As such, analyzing ratios can
make all the difference in your investment results, giving you the detailed
information you need and helping you spot potential problem areas before
you invest.

What is the conclusion of profit prior to incorporation?

Ascertainment of Profit or Loss Prior to Incorporation

Following steps are taken for calculating the profit or loss prior to
Incorporation :
1st Step : Make Trading Account of Whole Period
First of all, we have to make trading account for calculating gross profit of
whole period. We will not make different trading account for prior and
after incorporation because after calculating gross profit of a year, we can
divide it prior incorporation on the basis of time.
2nd Step : Calculate Time Ratio and Sale Ratio
Time and sale ratios are two very important ratio which can be used for
allocation of gross profit and other items of profit and loss account into
prior and after to incorporation. Suppose, if After buying company, if it
was incorporate after 4 months from 1st Jan. 2010, then time ratio will be 4
months : 8 months or 1:2
If before incorporation sale is Rs. 1,00,000 and after incorporation sale is
Rs. 3,00,000, then sale ratio is 1:3
3rd Step : Make Profit and loss account prior and after incorporation in
different Columns
a) Gross profit will divide on the basis of sale ratio
b) All expenses which are relating to sale will be divide on the basis of sale
ratio
c) All fixed charges like salaries, rent, audit fees, insurance, depreciation,
administrative expenses will divide on the basis of time ratio. All expenses
which done after incorporation will be charged totally to after
incorporation.
Example
Subhash ltd. was incorporated on 1st march, 2010 and received its
certificate of commencement of business on 1st April, 2010. The company
bought the business of M/S small and co. with effect from 1st Nov. 2009.
From the following figures relating to the year ending 31st oct. 2010, find
out the profits available for dividends.
a) Sales for the year were Rs. 6,00,000 out of which sales up to 1st march ,
were Rs. 2,50,000
b) Gross profit for the year was Rs. 1,80,000
c) The expenses debited to the profit and loss account were :
rent 9000
salaries 15000
director's fees 4800
interest on debentures 5000
discount on sales 3600
depreciation 24000
general expenses 48000
advertising 18000
stationery expenses 3600
commission on sales 6000
bad debts 500 relate to debts created prior to incorporation 1500
interest to vendor on purchase consideration up to 1st may 2010
Solution

Working Notes :
a) Sales ratio is 250000 : 350000 or 5:7
b) time ratio except for interest to vendor 4 months : 8 months or 1:2
c) time ratio for interest to vendor 4 months : 2 months or 2:1
d) Director fees and interest on debentures relate to post - incorporation
period.

In fundamental analysis of a company, a few listed companies are shown

as virtually debt free. What does it mean by a virtually debt-free
company? How can one evaluate that information?
What is meant by "virtually debt free" company?
Company has cash reserves in excess of the loans it has taken. Companies
take loan for saving tax or for maintaining some working capital cash flow
obligations. Such comes are called virtually debt free because they can
offset their cash reserves with outstanding loan at any point of time.
Cupid is virtually debt free.
Cash Reserves of Rs. 25.01 cr vs Borrowings of 0.88 + Other Liabilities of
13.66 cr
How to find if a company is in debts or debt free?
1. The Balance Sheet of the company is the best source to determine the
extent and type of loans they have taken.
2. Quarterly Reports tells us how the company is repaying and how much
interest it is paying (and if the burden is reducing or not)
So, broadly speaking the sources for the information are from quarterly /
annual reports which will be uploaded on company website and on stock
exchange websites.

What is the meaning of profit?

The surplus remaining after total costs are deducted from total revenue,
and the basis on which tax is computed and dividend is paid. It is the best
known measure of success in an enterprise.
Profit is reflected in reduction in liabilities, increase in assets, and/or
increase in owners' equity. It furnishes resources for investing in future
operations, and its absence may result in the extinction of a company. As
an indicator of comparative performance, however, it is less valuable than
return on investment (ROI). Also called earnings, gain, or income.
Profit in Maths is considered as the gain amount from any business
activity. Whenever a shopkeeper sells a product, his motive is to gain some
benefit from the buyer in the name of profit. Basically, when he sells the
product more than its cost price, then he gets the profit on it but if he has to
sell it for less than its cost price, then he has to suffer the loss.
The concept of profit and loss is basically defined in terms of business.
Any financial benefit gained in business goes to the owner of the business.
Let us learn in this article how to calculate the profit amount and
percentage with the help of formulas and related topics.
Profit Formula
Profit is explained better in terms of cost price and selling price. Cost price
is the actual price of the product or commodity and selling price is the
amount at which the product is sold. So, if the selling price of the
commodity is more than the cost price, then the business has gained its
profit. Therefore formula to calculate the profit is;
Profit or Gain = Selling Price – Cost Price
But, when the product is sold at selling price lesser than the cost price, it is
termed as loss. Therefore,
Loss = Cost Price – Selling Price
Profit Percentage
Once the profit is calculated we can also derive the percentage profit e
have gained in any business by the formula given here;
P% = (P/CP) × 100
Where P is the profit and CP is the cost price.

Why is the 'total liabilities' of a company defined as its net worth plus
debt?

Total liabilities are the aggregate debt and financial obligations owed by a
business to individuals and organizations at any specific period of
time. Total liabilities are reported on a company's balance sheet and are a
component of the general accounting equation: Assets = Liabilities +
Equity.
Short-Term v. Long-Term Liabilities
Liabilities are usually reported in businesses as either short-term liabilities
(or current liabilities) and long-term liabilities. Short-term liabilities are
liabilities that come due within a year. Examples of short-term obligations
include: wages and salaries, sales taxes, federal income taxes, state income
taxes, payroll taxes and retirement benefits.
Short term liabilities also include:

Accounts payable, which is money that is owed to suppliers

for goods and services
Short-term notes payable or the financing obligations that you
have to pay in a year, usually with interests; the term 'note'
 refers to a promissory note, which is a special type of loan
agreement
Accrued expenses the expenses that you owe but you have yet
to have received an invoice for payment
Unearned revenues, which is revenue you have received but
have yet to deliver the goods or perform the services to earn
the revenue
Dividends payable, the dividends owed to shareholders but not
yet paid
Advances, the money received on a contract for services you
have yet to provide
Deposits, the money received as deposits
Long-term liabilities

Long-term liabilities, or noncurrent liabilities, are debts and other non-debt

financial obligations with a maturity beyond one year. They can
include debentures, loans, deferred tax liabilities, and pension obligations.
Less liquidity is required to pay for long-term liabilities as these
obligations are due over a longer timeframe. Investors and analysts
generally expect them to be settled with assets derived from
future earnings or financing transactions. One year is generally enough
time to turn inventory into cash.
Other liabilities
When something in financial statements is referred to as “other” it typically
means that it is unusual, does not fit into major categories and is
considered to be relatively minor. In the case of liabilities, the “other” tag
can refer to things like intercompany borrowings and sales taxes.
Investors can discover what a company’s other liabilities are by checking
out the footnotes in its financial statements.
Advantages of Total Liabilities
In isolation, total liabilities serve little purpose, other than to potentially
compare how a company’s obligations stack up against a competitor
operating in the same sector.
However, when used with other figures, total liabilities can be a
useful metric for analyzing a company's operations. One example is in an
entity's debt-to-equity ratio. Used to evaluate a company's
financial leverage, this ratio reflects the ability of shareholder equity to
cover all outstanding debts in the event of a business downturn. A similar
ratio called debt-to-assets compares total liabilities to total assets to show
how assets are financed.

Are current liabilities short-term debt?

Current liabilities are a company's short-term financial

obligations that are due within one year or within a normal
operating cycle.
Current liabilities are typically settled using current assets,
which are assets that are used up within one year.
Examples of current liabilities include accounts payable, short-
term debt, dividends, and notes payable as well as income
taxes owed.

Examples of Current Liabilities

Below is a list of the most common current liabilities that are found on the
balance sheet:

Accounts payable
Short-term debt such as bank loans or commercial paper issued
to fund operations
Dividends payable
Notes payable—the principal portion of outstanding debt
Current portion of deferred revenue, such as prepayments by
customers for work not completed or earned yet
Current maturities of long-term debt
Interest payable on outstanding debts, including long-term
obligations
Income taxes owed within the next year
 Short-term debt, also called current liabilities, is a firm's
financial obligations that are expected to be paid off within a
year.

Common types of short-term debt include short-term bank loans, accounts

payable, wages, lease payments, and income taxes payable.

Is depreciation an asset or a liability?

Accumulated depreciation is the grand total of all depreciation expense that

has been recognized to date on a fixed asset. As such, it is considered
a contra asset account, which means that it contains a negative balance that
is intended to offset the asset account with which it is paired, resulting in
a net book value. Accumulated depreciation is classified separately from
normal asset and liability accounts, for the following reasons:

It is not an asset, since the balances stored in the account do

not represent something that will produce economic value to
the entity over multiple reporting periods. If anything,
accumulated depreciation represents the amount of economic
value that has been consumed in the past.
It is not a liability, since the balances stored in the account do
not represent an obligation to pay a third party. Instead,
accumulated depreciation is used entirely for internal record
keeping purposes, and does not represent a payment obligation
in any way.

If you must make a choice between classifying accumulated depreciation

as an asset or liability, it should be considered an asset, simply because that
is where the account is reported in the balance sheet. If it were to be
categorized as a liability, this would create the incorrect impression that the
business has a liability to a third party.
How can poor cash flow affect a business?

1. Increased interest and bank charges – When having to source

funding externally from lending institutions extra costs will be
involved. These extra costs will affect your profit and cash
flow. Bank fees and interest can accumulate very quickly if
you go outside their credit terms. Ensure you have the best
overdraft and loan for your business.
2. Missed opportunities – Poor cash flow may lead to you
having to pass up on great opportunities to grow your business,
e.g. you may not be able to invest in the machine that will
make production more efficient or will have to pass on a
supplier’s special.
3. Poor relationships with suppliers – Being constantly late
with payments to your suppliers may cause tension in your
relationship with them. This may lead to poor service or losing
them as a supplier altogether. Always pay on the day the bill is
due.
4. Poor relationships with customers – Contacting customers
for overdue invoices when you are stressed may lead to you
saying things that you wished you didn’t. Ensure you have a
debtor collection policy and that it is followed.
5. Employee morale – The culture of the business comes from
the management. If the manager is stressed and worried this
will reflect in the staff morale – especially if they are worried
about their long term future.
6. Stress – The stress from the lack of cash can influence all
areas of your life and business. Stress affects three areas of
your life: physical, mental and behavioural. If stress isn’t
managed effectively it can have significant impact on a
person’s health.
7. Solvency – The extreme cost of lack of cash flow is that you
go out of business.
8. Restricted Growth – Your business can not grow if you don’t
have the resources to assist that growth. There is no point
increasing sales if you don’t have the personnel or resources to
fulfil the extra orders.
What's the difference between profit and loss account and profit and
loss appropriation account?

P&L vs P&L Appropriation Account

The difference between P&L and P&L appropriation account is that while
P&L account records the profit for the year, P&L appropriation account
records the uses of the profit by distinguishing the activities for which the
profits will be distributed to. P&L is predominantly important in income
and expenses management to improve profit levels. Appropriation account
helps to evaluate how effectively the net income is utilized for future
projects and investments; thus this is a forward-looking statement.
What is P&L Account?
P&L, an abbreviation for profit and loss account, indicates the amount of
profits made during an accounting year. The final figure in the account is
the net profit, derived after deducting all the expenses incurred for business
operations; this is the profits available for shareholders. This account does
not provide an indication as to how the earned funds will be spent and for
which purpose they will be used. P&L account is known as the ‘income
statement’ according to more recent accounting terminology and is a
published financial statement.
What is P&L Appropriation Account?
P&L Appropriation Account is a separate account that shows how funds
transferred from the P&L Account will be spent. If the business made a
loss for the period, then there will be no use in creating a P&L
Appropriation Account. Below are the common ways in which funds will
be allocated in the P&L Appropriation Account.
Funds Assigned for Dividends
Dividends are the annual return for shareholders for their capital
investment. While the company may decide not to pay a dividend in certain
years, this is generally one of the expenses that take priority.
New Investment Projects
New investment projects require a significant amount of capital
investments where companies have to accumulate funds over a period of
time.
Retained Earnings
Retained Earnings contains a portion of profits that will be reinvested in
the business in any required manner. Companies commonly use these funds
to purchase assets and inventory, pay off outstanding debts and to make
short-term investments. In some years dividends, will not be paid and
respective funds will also be transferred to retained earnings.
P&L appropriation account provides vital information for shareholders that
indicate the use of funds by the business. By looking at this account,
shareholders can understand the portion of profits dedicated to dividends
and other investment decisions.
The profit and loss appropriation account is similar to any other general
ledger account. It consists of a debit column and a credit column. The
debits include items such as the funds that are transferred back to the P&L
account at the end of the financial year. Other debits include money put in
the general company reserve accounts, accounts designated for dividend
payments and payments made on items such as income taxes.
When funds are added to the P&L Appropriation Account, these are
designated as a credit in the records. The primary entry in the account
comes in the form of the surplus money transferred to the account from the
profit and loss account at the end of the previous accounting period. Net
profit at the end of the current year is also added to this account. Funds
used for other capital projects are also credited in this account.
Which section is similar to earnings?

Profits and earnings are primarily synonyms differentiated by

the adjectives that describe them.
Gross profit, operating profit, and net profit are three main
measures analysts evaluate on an income statement.
The net earnings are found on the bottom line of an income
statement.
Net earnings show the total accounting earnings a company
has achieved after subtracting all expenses.
The net earnings value carries over into the balance sheet and
cash flow statement for a company’s reporting period.

Profits and earnings are primarily synonyms differentiated by the

adjectives that describe them.
Profit
The gross profit margin, operating profit margin, and net profit margin are
three key profit measures. Analysts use this data to analyze a company’s
income statement and operating activities. The adjectives "gross,"
"operating," and "net" describes three distinctly different profit measures
that help to identify the strengths and weaknesses of a company.
Earnings
Earnings are most commonly associated with a company’s bottom line
results. The bottom line shows how much a company has earned after
subtracting all of its expenses. This measure can be referred to as net profit,
net earnings, or net income.
Overall, it is the net value a company has achieved from operating
activities for a specific reporting period. Companies also portray their net
earnings by dividing it over shares outstanding in identifying earnings per
share (EPS) value.
The net earnings of a company theoretically reflect an accounting value
earned for a specific period. After the net earnings are calculated this value
flows through to the balance sheet and cash flow statement.
On the balance sheet, net earnings are included as retained earnings in the
equity section. Retained earnings for the balance sheet are calculated as
beginning retained earnings + net income – dividends. On the cash flow
statement, the net earnings begin the top line of the operating activities
section.

What is the difference between capital and capital funds in

accounting?

What Is Capital Funding?

Capital funding is the money that lenders and equity holders provide to a
business for daily and long-term needs. A company's capital funding
consists of both debt (bonds) and equity (stock). The business uses this
money for operating capital. The bond and equity holders expect to earn a
return on their investment in the form of interest, dividends, and stock
appreciation.
What Is Capital?
Capital is a term for financial assets, such as funds held in deposit accounts
and/or funds obtained from special financing sources. Capital can also be
associated with capital assets of a company that requires significant
amounts of capital to finance or expand.
Capital can be held through financial assets or raised from debt or equity
financing. Businesses will typically focus on three types of business
capital: working capital, equity capital, and debt capital. In general,
business capital is a core part of running a business and financing capital
intensive assets.
Capital assets are assets of a business found on either the current or long-
term portion of the balance sheet. Capital assets can include cash, cash
equivalents, and marketable securities as well as manufacturing equipment,
production facilities, and storage facilities.

What is profit and loss appropriation account in account?

Profit and loss Appropriation account is an extension of Profit and Loss

account. All the appropriations i.e. the distributions payable to the partners
as per partnership deed are recorded in this account.
This account is credited with the amount of net profit and debited with the
amount of net loss.
The debit side of this account records:

Interest on Capital
Salary, Fees, Commission, Bonus etc.
Transfer to Reserves
Distribution of profit among partners
The credit side of this account records:

Interest on drawings
Distribution of loss among partners.

FEATURES OF PROFIT AND LOSS APPROPRIATION ACCOUNT

Profit and Loss Appropriation account is prepared in accordance with the
partnership deed. The features of Profit and Loss Appropriation Account
are as follows:

Prepared after preparing Profit and Loss Account.

It is prepared for the appropriations or distributions among the
partners.
Not required as per the provisions of Income Tax Law.
Prepared in accordance with the provisions of partnership
deed.
Reserves required for the future are created from this account.
It is prepared by only partnership firms.

PURPOSE OF PROFIT AND LOSS APPROPRIATION ACCOUNT

To know the distribution of profit among partners.

To show how much is payable to partners in the form of salary,
bonus, fees, commission , interest on capital etc. these all are
debited to Profit and Loss Appropriation Account.
To show interest on drawings at the debit side of the Profit and
Loss Appropriation Account.
To create reserve from the profits for future.
To distribute the profits among the partners in profit ratio.
What is the difference between net profit and divisible profit?

Difference between profit and divisible profit must be clearly understood.

All the profits are not divisible. Only those profits, which can be legally
distributed amongst the shareholders are divisible profits. Divisible profits
should be ascertained having regard to the provisions of section 205 of the
companies act and in each the provisions of memorandum and articles of
association and their validity must be considered. Dividend must also not
be paid so as to deprive the creditors or debenture holders of their security.
DISTRIBUTION OF DIVIDEND (DIVISIBLE PROFIT)

1. Dividend can be distributed out of the profits of the

company.
 2. The capital of the shareholders should in no case be used for
the purpose of distribution as dividends.
3. The companies act does not lay down that the capital should
remain intact but the law does not permit any part of the capital
to be returned to shareholders in the form of dividends or
otherwise.
4. Depreciation on fixed assets must be provided as per section
205 before computing divisible profits.
5. A company may pay dividends out of the profits of the
current year without making good a loss of fixed capital
provided there are sufficient assets to pay off liabilities.
6. Depreciation on floating assets must also be provided before
computing divisible profits.
7. Dividend may also be paid out of the profits of the previous
years.
8. A company may distribute capital profits if (a) It is
permitted by the articles of the company. (b) Such capital
profits have been actually realized. (c) If the surplus remains
after the revaluation of all the other assets.
9. A company can not pay dividends if the security of the
creditors is doubted in any way.
10. All those auditors and directors who are parties
to the improper payment of a dividend are criminally liable,
but if they acted honestly and bona fide, they are not guilty.
11. A company need not distribute the whole of the
profits amongst its shareholders.

What is the relationship between the profit sharing ratio and the
working efficiency ratio?
Efficiency ratios and profitability ratios are tools used in fundamental
analysis. These ratios help investors with their investment decisions, and
each indicates something different about a business. Profitability ratios
depict how much profits a company is generating, whereas efficiency ratios
measure how efficient a company utilizes its resources to generate a profit.
Profitability ratios measure a company's ability to generate profits within a
specified context. Profitability ratios measure the overall performance of a
company through profits. Profitability ratios are used to compare a
company's ability to generate profits relative to its industry, or the same
ratios can be compared within the same company for different periods. One
ratio used to measure a company's profitability is return on equity (ROE),
which measures the amount a company generates with the funds raised
from shareholders' equity. It is calculated by dividing net income by
shareholders' equity.
For example, an investor can compare the return on investment (ROI) of a
company with the average ROE of its industry. He can also compare the
ROE for the current fiscal period to a past fiscal period to evaluate how
well a company is doing.
On the other hand, efficiency ratios are used to measure how well a
company is using its assets and liabilities to generate income. Efficiency
ratios are more specific than profitability ratios, using specific
measurements of a company to gauge its efficiency. Ratios that are used to
measure a company's efficiency include the asset turnover ratio, which
measures the amount of revenue a company generates per dollar of assets.
It is calculated by dividing a company's sales by its total assets. This
reveals how well a company is using its assets to generate sales.
NEW PROFIT SHARING RATIO
When a new partner is admitted then the calculation of new profit sharing
ratio becomes necessary. The reason behind that is the new partner acquires
his share of profit from the old partners. Hence, old partners’ shares reduce.
1. When only the ratio of new partner is given: In this case in the absence
of any other agreement, it is presumed that the old partners will continue to
share the remaining profits in the same ratio in which they were sharing
before the admission of the new partner.
Example: X, Y and Z are partners in proportion of 3/6, 2/6 and 1/6
respectively. P was admitted in the firm as a new partner with 1/6th share.
Calculate the new profit sharing ratios of the partners.
Solution:
Let total profit be = 1
Share given to P = 1/6
Remaining Share = 1 – 1/6 = 5/6
Now the old partners will share this remaining profit in their old profit
sharing ratios. Hence,
X’s share = 3/6 of 5/6 = 5/12
Y’s share = 2/6 of 5/6 = 5/18
Z’s share = 1/6 of 5/6 = 5/36
Thus, the new profit sharing ratio will be
X:Y:Z:P
5/12 : 5/18 : 5/36 : 1/6 =
15 : 10 : 5 : 6
What Does an Efficiency Ratio Tell You?
Efficiency ratios, also known as activity ratios, are used by analysts to
measure the performance of a company's short-term or current
performance. All these ratios use numbers in a company's current assets or
current liabilities, quantifying the operations of the business.
An efficiency ratio measures a company's ability to use its assets to
generate income. For example, an efficiency ratio often looks at various
aspects of the company, such as the time it takes to collect cash from
customers or the amount of time it takes to convert inventory to cash. This
makes efficiency ratios important, because an improvement in the
efficiency ratios usually translates to improved profitability.
These ratios can be compared with peers in the same industry and can
identify businesses that are better managed relative to the others. Some
common efficiency ratios are accounts receivable turnover, fixed asset
turnover, sales to inventory, sales to net working capital, accounts payable
to sales and stock turnover ratio.
Efficiency Ratios for Banks
The efficiency ratio also applies to banks. For example, a bank efficiency
ratio measures a bank's overhead as a percentage of its revenue. Like the
efficiency ratios above, this allows analysts to assess the performance of
commercial and investment banks. For a bank, an efficiency ratio is an
easy way to measure the ability to turn assets into revenue.
The Efficiency Ratio for Banks Is:expenses/revenue (not including interest)
Since a bank's operating expenses are in the numerator and its revenue is in
the denominator, a lower efficiency ratio means that a bank is operating
better.
An efficiency ratio of 50% or under is considered optimal. If the efficiency
ratio increases, it means a bank's expenses are increasing or its revenues
are decreasing.
For example, Bank X reported quarterly earnings and it had an efficiency
ratio of 57.1%, which was lower than the 63.2% ratio it reported for the
same quarter last year. This means the company's operations became more
efficient, increasing its assets by $80 million for the quarter.

What is the difference between the concept of financial health and

financial sustainability?
conceptually financial health is about current financial situations while
sustainability is about future viability. this term sometimes use
interchangably
FINANICIAL HEALTH refers to the condition of th organization's finance,
i.e. performance evaluated by performance evakuation ratios. Wheras
sustainability, itbrefers to long_term conituous positive performance. The
two terms are not ibterchangeable.
If the ratio of own money to borrowed money in a firm is 1:3 and current
ratio is 1.33, then the unit is healthy by all means. Provided current assets
are not older than 90 days.Sustainability is reflected in cash flows being
able to maintain above ratios all along
Current ratio as such has nothing with financial health, because it's optimal
value depends of net working capital that is needed. .Financial health is
mainly used in short-term focus, while financial sustainability is long term
view.
Financial health looks at balance sheet of an individuals; in other words to
ensure that his or her assets are more than the liabilities.Financial
sustainability focus more on financial instruments that will give continuous
stream of income to the investors.
Sustainability itself means something having positive future orientation
without jeopardizing the resources at the cost of time
to come.Financial Health is the scenario depicted by Assets/Liabilities in
the current period,whereas, the implications of our present financial
decisions which are basically irreversible determine the financial
sustainability.
Four main areas of financial health that should be examined are liquidity,
solvency, profitability and operating efficiency. ... Standalone numbers
such as total debt or net profit are less meaningful than financial ratios that
connect and compare the various numbers on a company's balance sheet or
income statement. Similarly, several sustainability indicators varying in
how closely they are related to the sustainability definition (the infinite and
finite horizon gaps), whether they take account of the future evolution of
spending (the primary gap and the tax gap) and what target value of debt is
set at the end of a finite horizon.

How are companies able to give huge discounts as much as 50%? Do

they have such huge margins or increase the prices?

Planning before discounting

Discounts, loyalty offers and bulk buy pricing is common business
practice, and can help you:

move stock
attract new customers
reach sales targets during a slow sales period.

Before you start cutting your sales price in half though – in the hope of
drumming up sales – do some planning to make sure you're still making a
profit for the extra orders coming in.
It's important to:
 know your current profit margin, markup and breakeven point
calculate the best discount price to still make a profit
prepare a marketing plan to encourage new customers and
bring inactive customers back
find out what your competitors are offering and their current
pricing
review other options for promoting sales offers without
reducing the price
decide how long the sales price will be offered
review your accounts for any regular times of the week, month
or year your business has a sales dip.
How discounting affects your sales targets

Whenever you alter the sales price (and markup) of your goods and
services, it's important to understand how this will affect your profit
margins and sales targets.
To successfully run a sale without making a loss, you should know
your gross margin, markup and breakeven figures and how the discounted
price will affect your profit.
From the table below, you can use your gross margin figure (top row) to
see how much your sales volume will need to increase (middle cells) when
using different discount amounts (in the left hand column).
For example, if your gross margin is 40 percent and you decide to discount
your goods or services by 5 percent, you'll need to increase your sales
volume by 14.3 percent in order to make a profit.
Use the following simple calculation to find where profit really starts:

Breakeven value needed before net profit = Overhead

expenses/ (1 – (Cost of Goods Sold / Total Sales))
Breakeven number of units to be sold before net profit =
Overhead expenses / (Unit selling price – unit cost to produce)

Example: J Tyres

Breakeven value: 15,600/(1-(31,200/52,000)) =39,000

Breakeven number of units to sell: 15,600/(52-31.20) = 750
J Tyres will need to sell 39,000 worth of stock – or 750 units – before the
business earns any profit (before tax).
 Benefits of discounting

Along with increased order numbers and more money, discounting benefits
include:

attracting new customers without a large marketing campaign

– you can also take the opportunity to sign new customers up
to your newsletter
encouraging undecided customers to purchase goods –
especially if the discount has a limited time offer
clearing last season's stock – or out-dated models
free advertising on sales websites
new sales from inactive customers.
Calculating your price of goods to earn a profit

There are two margins that need to be considered when monitoring your
profitability – gross margin and net margin.
Knowing these figures helps set prices for goods and calculates your sales
targets. Figures used in the examples below are included in the example
profit and loss statement that you'll find in the Financial Statements
template above.
Gross margin
Definitions

Gross margin is money left after subtracting the cost of the

goods sold from the net sales and can be a dollar value (gross
profit) or a percentage value – gross margin is not commonly
used for service businesses as they usually don't have cost of
goods
Net sales are the total value of sales for a given period less any
discounts given to customers and commissions paid to sales
representatives.

Formulas
Gross profit and margin can be calculated as follows:
 Gross Profit (dollar value) = Net Sales less Cost of Goods Sold
Gross Margin (percentage value) = (Gross Profit dollars / Net
Sales dollars) x 100

Once you have your gross margin, you can calculate your net margin.
Example: JTyres

Gross Profit: 52,000 - 31,200 = 20,800

Gross margin: 20,800/52,000 x 100 = 40%

J Tyres has a gross profit of 20,800. The business's overhead expenses must
be less than this to earn a profit.
Net margin
Definition
Net margin is your profit before you pay any tax (tax is not included
because tax rates and tax liabilities vary from business to business).
Formula
Net margin is your gross margin less your business overhead expenses, and
can be calculated as follows:

Net Profit (value) = Net Sales less total of both Cost of Goods
Sold and Overhead Expenses

or

Net Profit (value) = Gross Profit less Overhead Expenses

Net Margin (percentage Value) = (Net Profit / Net Sales) x 100

If the net margin is 10 percent, then for every Rs of goods sold you will
make 10 pai in profit before tax – after all the cost of goods and overhead
expenses have been paid.
Example: J Tyres

Net profit: 20,800 - 15,600 = 5,200

Net margin: 5,200/52,000 x 100 = 10%
J Tyres will earn 10 percent of 52, or 5.20 from every tyre sold.
Markup
Definition
Markup is the amount of money above the cost of purchase or manufacture
you sell your goods for. The price of goods sold needs to cover the cost of
goods plus overhead expenses, and allow for profit to be earned.
Markup is generally used when referring to the sale of products rather than
services.
Formula

Markup percentage value = (Sales less Cost of Goods Sold /

Cost of Goods Sold) x 100

or

Markup percentage value = (Gross Profit/Cost of Goods Sold)

x 100

Example: JTyres
66.67% = (52,000 - 31,200/31,200) x 100
J Tyres markup percentage is 66.67%.
To reach the gross profit of 20,800 by selling tyres bought for 31.20, J will
multiply his unit cost price by the markup percentage (31.20 x 1.6667 = 52
).
Each tyre will have a minimum price of Rs52 each to earn enough money
to cover business expenses.
Calculating your breakeven point
Definition
The break even calculation identifies the number of sales to be made, (in
Rs or units), before all the business expenses are covered and profit begins
(before tax).
If you know the unit's sale price and cost price and the business operating
expenses you can calculate the number of units you need to sell before you
start making a profit.
Breakeven analysis is helpful information when preparing and
updating your business plan and can be used to set sales targets.
Formula

Use the following simple calculation to find where profit really

starts:
Breakeven dollar value needed before net profit = Overhead
expenses/ (1 – (Cost of Goods Sold / Total Sales))
Breakeven number of units to be sold before net profit =
Overhead expenses / (Unit selling price – unit cost to produce)

Example: J Tyres

Breakeven dollar value: 15,600/(1-(31,200/52,000)) = 39,000

Breakeven number of units to sell: 15,600/(52-31.20) = 750

Joe's Tyres will need to sell 39,000 worth of stock – or 750 units – before
the business earns any profit (before tax).

What is the difference between free cash flow to equity and free cash
flow to firm?

Key differences between FCFF vs FCFE

Both FCFF vs FCFE are popular choices in the market; let us discuss some
of the major Difference Between FCFF and FCFE:

FCFF is the amount left over for all the investors of the firm,
both bondholders and stockholders while FCFE is the residual
amount left over for common equity holders of the firm
FCFF excludes the impact of leverage since it does not take
into consideration the financial obligations while arriving at
the residual cash flow and hence is also referred to as
unlevered cash flow. FCFE includes the impact of leverage by
subtracting net financial obligations, hence it is referred to as
levered cash flow
FCFF is used in DCF valuation to calculate enterprise value or
the total intrinsic value of the firm. FCFE is used in DCF
valuation to compute equity value or the intrinsic value of firm
available to common equity shareholders
While doing DCF valuation, FCFF is paired with a weighted
average cost of capital to maintain consistency in
incorporating all the capital suppliers for enterprise valuation.
In contrast, FCFE is paired with the cost of equity to maintain
consistency in incorporating the claim of only the common
equity shareholders
 FCFF

Free cash flow refers to the cash available to investors after paying for
operating and investing expenditure. The two types of free cash flow
measures used in valuation are Free cash flow to the firm (FCFF) and Free
cash flow to equity (FCFE).
Usually, when we talk about free cash flow we are referring to FCFF. FCFF
is usually computed by adjusting operating EBIT for non-cash expenses
and fixed and working capital investments.
FCFF= Operating EBIT- Taxes + Depreciation/Amortization (non-cash
expenses)- fixed capital expenditure-Increase in net working capital

FCFE

FCFF= Net Income + Interest expense adjusted for tax + Non-cash expense
– fixed capital expenditure-Increase in net working capital
When we do DCF using FCFF, we arrive at enterprise value by discounting
the cash flows with the weighted average cost of capital (WACC). Here the
costs of all the sources of capital are captured in the discount rate since
FCFF takes into consideration the entire capital structure of the company.
Since this cash flow includes the impact of leverage, it is also referred to as
levered cash flow. Thus if the firm has common equity as the only source
of capital, its FCFF and FCFE are equal.
FCFE is usually computed by adjusting post-tax operating EBIT for a non-
cash expense, interest expense, capital investments, and net debt
repayments.
FCFE=Operating EBIT- Interest- Taxes+ Depreciation/Amortization (non-
cash cost)– fixed capital expenditure-Increase in networking capital-net
debt repayment
Where net debt repayment= principal debt repayment –new debt issue

How can I short stocks?

What is Short Covering?
Short covering, also called “buying to cover”, refers to the purchase
of securities by an investor to close a short position in the stock market.
The process is closely related to short selling. In fact, short covering is part
of short selling, which involves the risky practice of borrowing and selling
stocks in the hope of buying them back at a lower price, thus
generating profits.
Short Positioning Cycle

1. Opportunity – An investor sees an opportunity that the price

of a given stock in the market will soon fall.
2. Opens short position – An investor borrows the shares of the
company at the current price.
3. Selling the stocks – The investor sells the borrowed shares.
This is selling short.
4. Waiting period – The incubation period in which the investor
must wait for the stock prices to drop before closing a short
position.
5. Closing a short position – Once the stock price drops, the
investor buys back the exact number of shares borrowed.
6. Revenues – In the previous phase, there are two things
happening in the market. One, the stock prices may fall as
anticipated. The outcome will naturally lead to profits since the
trader will exit the short position lower. The difference
between the entry and exit is the profit. However, should the
stock price rise, the trader will incur a loss since he must pay a
higher price to buy the stocks back.

Example: Short Covering

Let’s take the example of Joe, a savvy equity trader. He’s been in the stock
trade long enough to understand the way the stock market works. Recently,
he’s been tracking the stock performance of XYZ Company. According to
his research and trading experience, the stock of XYZ is likely to fall soon.
Joe borrows 1,000 shares to open a short position with the stock trading at
Rs 30. He sells them at the current market price of Rs30.The price hits
what he anticipated, Rs20 per share. So, he buys the 1,000 shares at a
 current price of Rs20 to close the short position. According to the math, J
will generate a revenue of Rs10,000 (Rs30,000 – Rs20,000). He sold his
borrowed stocks at Rs30,000 (1,000 shares x Rs30) and bought them at
Rs20,000 (1,000 shares x Rs20,000).

Is cash a payment instrument?

What are payment instruments?

In the expression “payment instruments”, the word instrument immediately
catches our attention. Let’s look at its definition and see how to combine it
with payment. An instrument is defined as a means whereby something is
achieved, performed, or furthered. It can be compared to a tool that aids in
accomplishing a task. Tools make things very easy. You can do gardening
or cooking without tools, spending huge amount of time to eventually
achieve pretty limited results. But how easy things are when you have the
proper tools. Likewise, payment instruments facilitate payments and make
fund transfers easy between the end parties involved.
Payment instruments can be divided in two categories: cash payment
instruments and non-cash payment instruments. Cash is money in the
physical form of currency, such as banknotes and coins. We are all used to
it and use it, but it is probably the less understood payment instrument as
we will see in future articles. Cash, unlike non-cash payment instruments,
can be used anonymously on the part of both payer and payee and that
makes it truly unique.
Non-cash payment instruments are multiple: Checks, Cards, Credit
Transfers, Direct Debits, e-Money, Bitcoin, Ripple, etc. As providers of
most of these payment instruments, banks and other financial institutions
play a crucial role in payments. They hold depository accounts opened by
End parties, consumers and businesses. Nowadays, a payment consists
most of the time in transferring monetary value stored in depository
accounts from one end party to another.
How do you calculate the capital reserve if not all the forfeited shares
are reissued?

If any surplus is left over in Forfeiture a/c even after filling of gap between
Reissue price and paid up price of forfieted shares...then such amt can be
transferred to Capital Reserve... Example..If a share of Rs.10 was forfeited
on non-payment of final call money of Rs.2..the paid-up value of share of
Rs.8 (10-2) will be transferred to Share forfeiture a/c..if tht share is
reissued for Rs.6..then Rs.4 from Share forfeiture a/c has to used to fill the
gap as to make the share equal to Rs.10(original face value).Now
Remaining balance of Rs.4(8-4) in Forfeiture a/c has to transferred to
Capital reserve.. Journal entry is:
SHARE FORFEITURE A/C DR
To CAPITAL RESERVE A/C Cr
if part of shares forfeited are reissued then prportionate amount of shares
forfeited will be calculated and loss on reissue of those forfeited shares will
be deducted and balance will be transferred to capital reserve
If all the forfeited shares are reissued,the Share Forfeited Account will
show a zero balance because of the amount of this account after adjusting
the discount allowed on the reissue will be transferred to capital reserve
account.But incase,only a part of forfeid are reissued and others remain
cancelled;the amount forfeited shares not reissued will remain in the shares
forfeited account.Thus;
Total forfeited amount / x Number of shares reissued
Total number of shares forfeited
What are some accounting and bookkeeping terms used in accounting?

Basic Bookkeeping Terms and Phrases

Get a firm understanding of key bookkeeping and accounting terms and
phrases before you begin work as a bookkeeper. Bookkeepers use specific
terms and phrases everyday as they track and record financial transactions
— from balance sheets and income statements to accounts payable and
receivable. The following sections list bookkeeping terms that you’ll use
on a daily basis.
Balance sheet terminology
Here are a few terms you’ll want to know when working with balance
sheets:

Balance sheet: The financial statement that presents a snapshot

of the company’s financial position as of a particular date in
time. It’s called a balance sheet because the things owned by
the company (assets) must equal the claims against those
assets (liabilities and equity).
Assets: All the things a company owns in order to successfully
run its business, such as cash, buildings, land, tools,
equipment, vehicles, and furniture.
Liabilities: All the debts the company owes, such as bonds,
loans, and unpaid bills.
Equity: All the money invested in the company by its owners.
In a small business owned by one person or a group of people,
the owner’s equity is shown in a Capital account. In a larger
business that’s incorporated, owner’s equity is shown in shares
of stock.Another key Equity account is Retained
Earnings, which tracks all company profits that have been
reinvested in the company rather than paid out to the
company’s owners. Small businesses track money paid out to
owners in a Drawing account, whereas incorporated businesses
dole out money to owners by paying dividends.

Income statement terminology

Here are a few terms related to the income statement that you’ll want to
know:

Income statement: The financial statement that presents a

summary of the company’s financial activity over a certain
period of time, such as a month, quarter, or year. The statement
starts with Revenue earned, subtracts the Costs of Goods Sold
and the Expenses, and ends with the bottom line — Net Profit
or Loss.
Revenue: All money collected in the process of selling the
company’s goods and services. Some companies also collect
revenue through other means, such as selling assets the
 business no longer needs or earning interest by offering short-
term loans to employees or other businesses.
Costs of goods sold: All money spent to purchase or make the
products or services a company plans to sell to its customers.
Expenses: All money spent to operate the company that’s not
directly related to the sale of individual goods or services.

Other common bookkeeping terms

Some other common terms used in bookkeeping include the following:

Accounting period: The time period for which financial

information is being tracked. Most businesses track their
financial results on a monthly basis, so each accounting period
equals one month. Some businesses choose to do financial
reports on a quarterly or annual basis. Businesses that track
their financial activities monthly usually also create quarterly
and annual reports.
Accounts payable: The account used to track all outstanding
bills from vendors, contractors, consultants, and any other
companies or individuals from whom the company buys goods
or services.
Accounts receivable: The account used to track all customer
sales that are made by store credit. Store credit refers not to
credit card sales but rather to sales in which the customer is
given credit directly by the store and the store needs to collect
payment from the customer at a later date.
Depreciation: An accounting method used to track the aging
and use of assets. For example, if you own a car, you know
that each year you use the car its value is reduced (unless you
own one of those classic cars that goes up in value). Every
major asset a business owns ages and eventually needs
replacement, including buildings, factories, equipment, and
other key assets.
General Ledger: Where all the company’s accounts are
summarized. The General Ledger is the granddaddy of the
bookkeeping system.
Interest: The money a company needs to pay if it borrows
 money from a bank or other company. For example, when you
buy a car using a car loan, you must pay not only the amount
you borrowed but also interest, based on a percent of the
amount you borrowed.
Inventory: The account that tracks all products that will be
sold to customers.
Journals: Where bookkeepers keep records (in chronological
order) of daily company transactions. Each of the most active
accounts — including cash, Accounts Payable, and Accounts
Receivable — has its own journal.
Payroll: The way a company pays its employees. Managing
payroll is a key function of the bookkeeper and involves
reporting many aspects of payroll to the government, including
taxes to be paid on behalf of the employee, unemployment
taxes, and workman’s compensation.
Trial balance: How you test to be sure the books are in balance
before pulling together information for the financial reports
and closing the books for the accounting period.
Accounting Terms

Accounting Equation - The Accounting Equation is Assets = Liabilities +

Equity. With accurate financial records, the equation balances.
Accounting - Accounting keeps track of the financial records of a business.
In addition to recording financial transactions, it involves reporting,
analyzing and summarizing information.
Accounts Payable - Accounts Payable are liabilities of a business and
represent money owed to others.
Accounts Receivable - Assets of a business and represent money owed to a
business by others.
Accrual Accounting - Records financial transactions when they occur
rather than when cash changes hands. For example, when goods are
received without payment, an Accounts Payable is recorded.
Accruals - Accruals acknowledge revenue when it is earned and expenses
when they are incurred even though a cash transaction may not be
involved.
Amortization - Reduces debts through equal payments that include interest.
Asset - Items of value that are owned.
Audit Trail - Allow financial transactions to be traced to their source.
Auditors - Examine financial accounts and records to evaluate their
accuracy and the financial condition of the entity.
Balance Sheet - Provides a snapshot of a business' assets, liabilities, and
equity on a given date.
Bookkeeping - Recording of financial transactions in an accounting
system.
Budgeting - Budgeting involves maintaining a financial plan to control
cash flow.
Capital Stock - Total amount of common and preferred stock issued by a
company.
Capital Surplus - The amount in excess of par value for shares of common
stock.
Capitalized Expense - Accumulated expenses that are expensed over time.
Cash Flow - The difference in money flowing in and out. A negative flow
indicates more money going out than coming in. A positive flow shows
more money coming in than going out.
Cash-Basis Accounting - Records when cash is received through revenues
and disbursed for expenses.
Chart of Accounts - An organization's list of accounts used to record
financial transactions.
Closing the Books/Year End Closing - Closing the Books occurs at the end
of the annual period and allows for a start with a clean book at the
beginning of the next year.
Cost Accounting - Used internally to determine the cost of operations and
to establish a budget to increase profitability.
Credit - Entered in the right column of accounts. Liability, equity and
revenue increase on the credit side.
Debit - Entered in the left column of accounts. Assets and expenses
increase on the debit side.
Departmental Accounting - Shows individual departments' income,
expenses and net profit.
Depreciation - The decrease in an asset's value over time.
Dividends - Profits returned to the shareholders of a corporation.
Double-Entry Bookkeeping - Requires entries of debits and credits for each
financial transaction.
Equity - Represents the value of company ownership.
Financial Accounting - The accounting branch that prepares financial
reporting primarily for external users.
Financial Statement - Financial Statements detail the financial activities of
a business.
Fixed Asset - Used for a long period of time, e.g. - equipment or buildings.
General Ledger - Where debit and credit transactions are recorded.
Goodwill - Intangible asset a business enjoys like its reputation or brand
popularity.
Income Statement - A Financial Statement documents the difference in
revenue and expenses resulting in income.
Inventory Valuation - A valuation method modified for use in real estate
and business appraisals.
Inventory - Inventory consists of raw materials, work in progress, and
finished goods.
Invoice - An Invoice shows the amount of money owed for goods or
services received.
In The Black - Makes reference to a profit on the books; opposite of “in the
red.” Black Friday sales are known for the profit retailers are adding to
their books.
In The Red - Makes reference to a loss on the books; opposite of “in
the black.” In the days of handwritten accounting, ledger entries
written in black meant there was a profit, but those in red meant there
was a loss.
Job Costing - Job Costing tracks costs of a particular job against its
revenues.
Journal - The first place financial transactions are entered. They are entered
chronologically.
Liability - Liabilities are the obligations of an entity, usually financial in
nature.
Liquid Asset - Consist of cash and other assets that can be easily converted
to cash.
Loan - A monetary advance from a lender to a borrower.
Master Account - A Master Account has subsidiary accounts. Accounts
Receivable could be a master account for various individual receivable
accounts.
Net Income - Net Income equals revenue minus expenses, taxes,
depreciation and interest.
Non-Cash Expense - Does not require cash outlay, e.g. - depreciation.
Non-operating Income - Income not generated from the business. An
example might be the sale of unused equipment.
Note - A Note is a document promising to repay a debt.
Operating Income - Determined by subtracting operating expenses from
operating revenue. Interest and income tax expenses are not included.
Other Income - Non-recurring income, e.g. - interest.
Payroll - An account listing employees and any wages and salaries due
them.
Posting - Refers to the recording of ledger entries.
Profit - Profit is revenue minus expenses. Reductions for taxes, interest,
and depreciation are included.
Profit/Loss Statement - A financial report issued by a company on a regular
basis that discloses earnings, expenses and net profit for a given time
period.
Reconciliation - The act of proving an account balances; debits and credits
equal. An example of reconciling an account is to verify that the bank
statement matches the checkbook balance, making allowances for
outstanding checks and deposits.
Retained Earnings - Money left after all the bills have been paid and all the
shareholder dividends have been distributed; often reinvested in the
business.
Revenue - The actual amount of money a company brings in during a
particular time period; gross income.
Shareholder Equity - A company’s total assets less its total liabilities;
owner’s equity; net worth. Shareholder equity comes from the start-up
capital of the business plus retained earnings amassed over time.
Single-Entry Bookkeeping - An accounting process that uses on one entry,
instead of debit and credit entries. Small businesses using cash accounting
system benefit from the ease of this system, which is much like keeping a
checkbook.
Statement of Account - A written document that shows all charges and
payments; accounts receivable statement; accounts payable statement.
Generally, a monthly accounts receivable statement is sent to a charge
customer; and reconciled by an accounts payable clerk for payment.
Subsidiary Accounts - Accounts that are under a control account; they must
equal the main account balance. Examples of subsidiary accounts may be
“Office Supplies,” or “Cleaning Supplies,” under the control account called
“Supplies.”
Supplies - Consumable materials used in business and replenished as
needed. Supplies are not inventory for sale; rather they are used to carry
out business activities.
Treasury Stock - Shares a company retains or buys back once offered to the
public for purchase.
Write-down/Write-off - An accounting transaction that reduces the value of
an asset.
How do banks get profit from its users?

There are three main ways banks make money:

Net interest margin

Interchange
Fees

Net interest margin

When you deposit money into your bank account, you’re giving your bank
permission to use your money to make loans. Your bank loans your money
out to others at a cost to the lendee, in the form of an interest rate (think:
mortgages, student loans, car loans, credit cards, etc.). Banks collect
money off the interest paid by borrowers, and a small amount of that
interest is given back to customers’ bank account. This is partially due to
customers’ expectation that they will see a return when they “invest” their
savings with a bank, as well as the bank’s way of saying thank you for the
investment. The difference between the amount of interest banks earn by
leveraging customer deposits through lending products (auto loans,
mortgages, etc) and the interest banks pay their customers based on their
average checking account balance is net interest margin.
Even though your money is being loaned out to other people, you can
withdraw all of your money out of our bank account right now without a
problem. This is because banks are required to keep a minimum fraction of
customer deposits on hand at the bank, known as the reserve requirement.
In the U.S., the reserve requirement is set by the Federal Reserve.
Interchange
Interchange is the money banks make from processing credit and debit
transactions. Each time you swipe your card at a store, the store, or
merchant, pays an interchange fee. The majority of money from
interchange goes to your bank–the consumer’s bank–and a little goes to the
merchant’s bank. Because merchants have no control over interchange fees,
there’s been some recent legislation that’s capped interchange fees on debit
cards.
Fees
While late fees, overdraft fees, and ATM fees are relatively well known,
there’s also a host of other fees that banks may charge customers.
Main points about how Banks Earn Money:
Banks are companies (normally listed on the stock market) and are
therefore owned by, and run for, their shareholders. Banks need to make
enough money to pay their employees, maintain the buildings and run the
business.
There are three main ways banks make money: by charging interest on
money that they lend, by charging fees for services they provide and by
trading financial instruments in the financial markets.
Retail and commercial banks need lots of customers to deposit their money
with them, as the banks use these deposits to earn enough money to stay in
business.
To encourage people to keep their money in a bank, the bank will pay them
a small amount of money (interest). This interest is paid from the money
the bank earns by lending out the deposited money to other customers.
Banks also lend to each other on a huge scale. Most of this lending is on a
short-term basis, usually no longer than three months, often just overnight
If a bank has a surplus of liquid (available) assets then the bank can make
money by lending these assets to other banks in the interbank market. As
money flows in and out, banks will both lend and borrow money on the
interbank market as needs require.
The banks lend money to customers at a higher rate than they pay to
depositors or than they borrow it. The difference, known as the margin or
turn, is kept by the bank. For example, if a bank pays 1% interest on
deposits, they may charge 6% interest on loans.
Lending takes the form of overdrafts, bank loans, mortgages (loans secured
on property) and credit card facilities. The bank will work out the cost of
making the funds available to the borrower and add a profit margin.
Loans approved by banks will vary in size, and may have fixed or variable
interest rates but, in all cases, the bank will lend the money to the customer
at a higher rate than they borrow it.
Deposits are the banks' liabilities. If everyone was to demand their money
back at once, the bank would not be able to pay. Because they lend money
out, banks are required to carry a cushion of capital so they have sufficient
money to pay those customers likely to withdraw their money at any time.
Another way banks make money is through charging fees. Most retail and
commercial banks will charge for specific services, for example, for
processing cheques, for other transactions and for unauthorised borrowing
e.g. if a client exceeds an overdraft limit.
Investment banks earn huge fees for advising large companies and public
institutions on issuing bonds and shares (securities), and from underwriting
these issues.
Investment banks charge fees for advising clients wanting to bid for other
companies in mergers and acquisitions, or management buy-outs. These
deals can be very complex and provide an important source of income as
well as an opportunity to underwrite shares related to these deals.
Investment banks also make their money by trading securities in the
secondary markets. Their aim is to sell these securities for more than they
pay for them or purchase them for less than they sold them. The difference,
called the turn, is kept by the bank.

Should CSR activities be forced upon private and profit-making

companies?

Corporate Social Responsibility Under Section 135 of Companies Act

2013
CSR implies a concept, whereby companies decide voluntarily to
contribute to a better society and a cleaner environment – a concept,
whereby the companies integrate social and other useful concerns in their
business operations for the betterment of its stakeholders and society in
general in a voluntary way.
Applicability
The provisions of CSR applies to

every company
its holding company
its subsidiary company
foreign company

Having in the preceding financial year

Net Worth > 500 Crore

Turnover > 1000 Crore
Net Profit > 5 Crore
Importance of Corporate Social Responsibility

Corporate Social Responsibility (CSR) is an immense term which is used

to explain the efforts of a company in order to improve society in any other
way.

CSR improves the public image by publicizing the efforts

towards a better society and increase their chance of becoming
favorable in the eyes of consumers.
CSR increases media coverage as media visibility throws a
positive light on the organization.
CSR enhances the company’s brand value by building a
socially strong relationship with customers
CSR helps companies to stand out from the competition when
companies are involved in any kind of community.
List of Permitted Activities To Be included in accordance with
Schedule VII of the Companies Act, 2013

The Board shall ensure that the activities included by a company in its CSR
Policy fall within the purview of the activities included is schedule VII.
Some activities are specified in Schedule VII as the activities which may
be included by companies in their Corporate Social Responsibility Policies.
These activities are related to :
CSR Activities
1
abolishing poverty, malnourishment and hunger, improvising health care
which includes preventive health care and sanitation and making available
safe drinking water
2
improvement in education which includes special education and
employment strengthening vocation skills among children, women, elderly
and the differently abled and livelihood enhancement projects
3
improving gender equality, setting up homes and hostels for women and
orphans
4
introducing the measures for reducing inequalities faced by socially and
economically backward groups
5
Safeguarding environmental sustainability, ecological balance, protection
of flora and fauna, animal welfare, agroforestry, conservation of natural
resources and maintaining a quality of soil, air and water which also
includes a contribution for rejuvenation of river Ganga
6
protection of national heritage, art and culture including restoration of
buildings and sites of historical importance and works of art; setting up
public libraries; promotion and development of traditional arts and
handicrafts
7
areas for the advantage of skilled armed forces, war widows and their
dependents
8
training to stimulate rural sports, nationally recognized sports, Paralympic
sports and Olympic sports
9
contribution to the Prime Minister’s National Relief Fund or any other fund
set up by the Central Government for socio-economic development
providing relief and welfare of the Scheduled Castes, the Scheduled and
backward classes, minorities and women
10
contributions or funds provided to technology incubators which are
approved by the Central Government
11
rural development projects
12
disaster management, including relief, rehabilitation and reconstruction
activities
13
slum area development where ‘slum area’ shall mean any area declared as
such by the Central Government or any State Government or any other
competent authority under any law for the time being in force

Reason For Introduction of CSR for Companies

We live a dynamic life in a world that is growing more and more complex.
Global scale environment, social, cultural and economic issues have now
become part of our everyday life. Boosting profits is no longer the sole
business performance indicator for the corporate and they have to play the
role of responsible corporate citizens as they owe a duty towards the
society.
The concept of Corporate Social Responsibility (CSR), introduced
through Companies Act, 2013 puts a greater responsibility on companies in
India to set out clear CSR framework.
Many corporate houses like TATA and Birla have been engaged in doing
CSR voluntarily. The Act introduces the culture of corporate social
responsibility (CSR) in Indian corporate requiring companies to formulate
a CSR policy and spend on social upliftment activities
CSR is all about corporate giving back to society. The Company
Secretaries are expected to be known about the legal and technical
requirements with respect to CSR in order to guide the management and
Board

Why is interest on capital not subtracted from closing capital while

finding the opening capital?

In accounting, drawings mean the withdrawal of cash, merchandise or

another item from business by the owner for his personal use. Sometimes,
drawings are treated just like a loan to the owner and interest at normal rate
is charged thereon.
Accounting Treatment
The amount of interest charged on drawings is an indirect income of the
business and on the other hand, it is a personal expense of the owner.
Interest on Drawings has the following two effects on final accounts:
 1. It is an Income of the business, therefore; it will be recorded
on the credit side of Profit and Loss Account.
2. On the other hand, it is a personal expense of the owner,
therefore; it will be added in the Drawings Account in Balance
Sheet and ultimately will be deducted from the Capital.

Adjusting Entry
The interest on drawings is an income for the business and is, therefore,
credited in the books of the business. The proper journal entry to record
interest on drawings is given below:

Example
On January 1, 2016, Mr. Black withdraws $2,000 cash from business for
his personal use. The amount is not returned to business till the end of
the accounting period; December 31, 2016. The interest on drawings is to
be charged @ 10% p.a.
What adjusting entry should be made to record the interest on drawings at
the end of the accounting period.
Solution

Interest on drawings: 2,000 × 0.1 = 200

In our example, we have computed interest on drawings for the full year
because the money has been drawn for a full year. If the date on which the
amount is withdrawn is not given in the question, the interest on drawings
will be computed on the whole amount for six months assuming that the
money is drawn throughout the year.
Adjusting entry for interest on capital

Sometimes the owner of the business regards his capital as an investment

on which he should receive interest. Interest at a normal rate is calculated
on owner’s capital and is charged to the income statement (or profit and
loss account) for the purpose of ascertaining what extra income is derived
from the business over and above the usual rate of interest on capital
employed. The capital invested in the business is treated as a loan granted
to the business.
Accounting Treatment
The amount of interest charged on capital is an indirect expense of the
business and on the other hand, it is an income of the owner. Interest on
Capital has the following two effects on final accounts:

1. It is an expense of the business, therefore; it will be recorded

on the debit side of Profit and Loss Account.
2. On the other hand, it is an income of the owner, therefore; it
will be added in the Capital Account in Balance Sheet.

Adjusting Entries
The interest on capital is an expense to business and the following
adjusting entry would be made to record it:

Example
Mr. White had a capital balance of $50,000 on January 1, 2016. Interest is
allowed on capital at the rate of 10%. Make adjusting entries on December
31, 2016.
Solution
At December 31, 2016, the following adjusting entry will be made to
record interest on White’s capital:

Interest on capital: $50,000 × 0.1 = $5,000

hence interest on capital is added with the capital account to arrive the
opening capital

What is the role of revenue and capital items in the financials of a

company?

Capital and Revenue Items:

In order to know the fair performance and financial standing of a
business; the nature of business transactions taking place during the year
has to be analyzed. The accounting transactions may be divided into two
categories:
(1) Capital transactions (relating to capital items)
(2) Revenue transactions (relating to revenue items)
Definition of Capital Items:
Capital items are those items which have long term effects on business,
(normally more than one year). There are two main types of of capital
items; (i) capital expenditure and (ii) capital receipt. For example, fixed
assets; tangible or intangible assets; (land, building, machinery, legal
rights, etc) are capital items.
Definition Revenue Items:
Revenue items are those items having short term effects on
business, (normally less than one year). There are two main types of
revenue items; (i) revenue expenditure and (ii) revenue receipts. For
example, repairs, wages, salaries, fuel, etc., are revenue items.
Treatment of Capital and Revenue Items in Financial Statements:
Capital expenditure = Shown as a non-current asset in the balance sheet.
Revenue expenditure = Shown as an expense in the income statement.
Capital receipt = Shown as a liability or reduce the value of a capital
expenditure.
Revenue receipt = Shown as income in income statement
Solved Example and Problem 1:
Which of the following expenditures are capital or revenue,
(a) Cost of overhauling and painting a recently bought old van.
(b) Cost of pulling down an old building in order to replace it by a new
one.
(c) The cost of removing plant and machinery to new site.
(d) Payment made to purchase an existing business.
(e) Carriage paid on purchase of goods.
State with reasons whether the above items of expenditures are capital or
revenue in nature:
Solution (1):
(a) Capital Expenditure = When a second hand asset is purchased then any
expenditure incurred to put it into working order will be treated as capital
expenditure.
(b) Capital Expenditure = This is a capital expenditure as it is a part of the
total cost of the building.
(c) Capital Expenditure = The removal of the business to the new site will
enhance the income earning capacity of the business; this expense will be
treated as capital expenditure.
(d) Capital Expenditure = Purchase of business means purchase of its
assets and liabilities; therefore, it is a capital expenditure.
(e) Revenue Expenditure = The expenditure is related to purchase of goods
for resale, which itself is a revenue expense, therefore, carriage is also a
revenue expense.
Solved Example and Problem 2:
The following transactions are taken from the books of H. Hanson for the
first week of January 2019:
(a) Cost of the air-conditioning the office of director.
(b) Wages paid to business’ workers for extension of its building.
(c) Expenditure incurred on renewal of patent’s right.
(d) The freight, carriage and the installation charges cost on new machine
amounting to $400.
(e) Wages paid for manufacture of goods.
(f) Legal expenses incurred for debt collection.
(g) Legal expenses incurred in purchasing a landed property.
Classify with reasons that which of the above items are capital expenditure
and which are revenue expenditure?
Solution (2):
(a) Capital Expenditure = The benefit of this expenditure will be available
for a number of years; therefore, it is capital expenditure.
(b) Capital Expenditure = The wages paid to workmen employed for
extension of building is a capital expenditure, because wages have been
incurred in extension of a non-current asset.
(c) Revenue Expenditure = Expenditure incurred on renewal of patent is
revenue expenditure as it is of recurring nature and it has been incurred in
the ordinary course of business.
(d) Capital Expenditure = Amount expended on freight and carriage and
installation charges of the new machine into working condition.
(e) Revenue Expenditure = Wages paid for manufacture of goods is
revenue expenditure as it has been incurred connection with the
manufacture of goods for resale.
(f) Revenue Expenditure = Legal costs incurred on debt collection is a
revenue expenditure; being incurred to avoid a revenue expense of bad
debts.
(g) Capital Expenditure = Legal expenses incurred in purchasing landed
property are capital expenditures, as part of the cost of a non-current asset
purchased.

What are the meanings and objectives of financial policy?

Generally following are the objectives of a fiscal policy in a developing

economy:
1. Full employment
2. Price stability
3. Accelerating the rate of economic development
4. Optimum allocation of resources
5. Equitable distribution of income and wealth
6. Economic stability
7. Capital formation and growth
8. Encouraging investment
The fiscal policy is designed to achieve certain objectives as follows:-
1. Development by effective Mobilisation of Resources: The principal
objective of fiscal policy is to ensure rapid economic growth and
development. This objective of economic growth and development can be
achieved by Mobilisation of Financial Resources. The central and state
governments in India have used fiscal policy to mobilise resources.
The financial resources can be mobilised by:-a. Taxation: Through
effective fiscal policies, the government aims to mobilise resources by way
of direct taxes as well as indirect taxes because most important source of
resource mobilisation in India is taxation.b.
Public Savings: The resources can be mobilised through public savings by
reducing government expenditure and increasing surpluses of public sector
enterprises.c.
Private Savings: Through effective fiscal measures such as tax benefits, the
government can raise resources from private sector and households.
Resources can be mobilised through government borrowings by ways of
treasury bills, issuance of government bonds, etc., loans from domestic and
foreign parties and by deficit financing.
2. Reduction in inequalities of Income and Wealth:
.3. Price Stability and Control of Inflation:
.6. Reducing the Deficit in the Balance of Payment:
8. Development of Infrastructure:
9. Foreign Exchange Earnings:
General objectives of Fiscal Policy are given below:
1 To maintain and achieve full employment.
2. To stabilize the price level.
3. To stabilize the growth rate of the economy.
4. To maintain equilibrium in the Balance of Payments.
5. To promote the economic development of underdeveloped countries.

Why do your savings bank deposits actually result into a loss?

If you think you’re saving well enough by putting your money in the
bank’s savings account, you’re mildly, if not wildly, mistaken. The money
in your bank is actually making you a loss. Sure, the money does earn
interest, but the purchasing power of your money actually decreases over
time.
Savings account losses
As per the latest data from the Open Government Data Platform:
 The Consumer Price Index (CPI), a measure of retail inflation,
is 3.6% higher than the previous year’s figure
This means an average person would have to spend 3.6% more
money now to buy the same amount of goods and services one
bought a year ago
With most banks offering an interest rate of 3.5–4% per year,
your money’s actual buying power is either reducing, or barely
remaining above the mark
Added to this, any interest above ten thousand rupees is added
to your income and is taxed at the prevailing income tax rate.
If you earn between rupees 5–10 lakh per annum, that’s 20%
income interest on your savings income. Taking 20% off a
paltry 3.5–4% savings interest leaves one with 2.8–3.2%,
ensuring you invariably make a loss
Even if you fall under the 2.5–5 LPA income slab, effective
gains after taxes would be between 2.8–3.8%, depending on
your final income after adding savings interest. Also, retail
inflation rates are at their lowest this year with the average
retail inflation rate over the past five years at 6.75%

FIXED/RECURRING DEPOSIT LOSSES

Think you can beat inflation with a fixed or recurring deposit? You’d still
lose money. Or at best, barely beat inflation as most banks offer a 6–7%
interest rate on deposits. The five year average retail inflation rate is
6.75%. Further, you can’t withdraw your money at will without forfeiting
interest or earning a lower interest in addition to paying indemnity of 0.5–
1% after a lengthy process.
Again, any interest income beyond ₹10,000 is taxed as income, just like a
regular savings account. Now that you’ve seen how your wealth is
squandered with bank deposits, here’s what you can do to grow your
wealth in the true sense of the term.
GROWING WEALTH WITH DEBT FUNDS

A debt fund may be long term/short term or ultra-short term

investment, also called liquid debt
These are low risk investments. Returns are more or less
 assured, so you can sit back and relax
Liquid debt carries very low risk, and most offer return 7–8%
returns. You can withdraw money any time, and some fund
houses even offer instant transfer of money
Though a low risk investment, long term debt funds are
slightly volatile. While returns are usually consistent, they
could vary depending on market conditions. The return is
usually between 10–15%
Interest from debt funds are classed as long term capital gains
if held for more than 3 years and are charged a tax rate of 20%
after indexation, a process that takes retail inflation into
account to calculate effective profit
Any investment redeemed within 3 years is added to income
and is taxed at prevailing income tax rates
Thus, it makes much more sense to invest money in liquid debt
or in short/long term debt as opposed. The returns could easily
be twice as much as that of bank deposits if you invest in debt
funds.

INVESTING IN EQUITY FOR GREATER RETURNS

Though investing in equity directly or in equity oriented mutual funds
carries some risk, you can mitigate risks with diversification and make
more or less consistent profits. Equity funds generally offer returns
between 15–20% and a well performing fund could offer even higher
returns. Hybrid funds, a category of mutual funds that balance equity and
debt investments, offer decent returns at a risk intermediate between equity
and debt investments.
Short-term Capital Gains stay taxed at 15%, while you pay Long-Term
Capital Gains on amounts greater than ₹1,00,000 in a financial year. The
catch here is that no taxes need to be paid on gains made from these funds
if you hold the investment beyond a year and if the gains are till ₹ 1,00,000
for a financial year. So all your returns are yours to keep. Take that,
inflation!
Now that you know how your money in the bank actually diminishes over
time and how to beat inflation, make your money work as hard for you as
you work for it.
What are the advantages of using cash flow management in a business?

The fact is that one of the earliest lessons I learned in business was that
balance sheets and income statements are fiction, cashflow is
reality.” Chris KEEPING THE CASH FLOWING – FIVE PRINCIPLES

1. Without cash your business will not survive

2. You need to understand your key cashflow drivers
3. Managing cashflow is all about your business processes
4. Treating the symptoms of poor cashflow without fixing the
underlying causes is time consuming and frustrating
5. You need to be prepared to make process changes in your
business
6. Cash is king.

Cashflow planning is best practice in any business and critical to survival

and growth. Setting cashflow targets and regularly monitoring your actual
cashflow against your forecast will enable you to predict large cash
outflows and respond to changes in your business.
Inadequate cashflow is a symptom of management problems in a business,
NOT the cause. Helping you look ahead with confidence and putting in
place basic cashflow maximisation strategies is core to our purpose as your
business development accountants.

1. BENEFITS OF CASHFLOW MANAGEMENT

Helps to ensure business success and longevity

Assists with bank lending requirements
Identifies ways to avoid late payment penalties and interest
from ATO and suppliers and dishonour bank fees
Improves communication and relationships with your
financiers and suppliers
Gives you an understanding of cash and liquidity for better
decision making
Helps you understand the key cashflow drivers and the Cash
Conversion Cycle in your business
Enables you to predict and plan for large cash outflows
Teaches you how to monitor your actual cashflow against
forecast in your accounting or reporting software
Provides peace of mind that your cashflow needs are known
and properly funded
Improves business processes that maximise cashflow, profit
and business value
Drives your business to achieve your goals in a controlled and
managed way
How do I decrease the degree of the total leverage of a company?

What is the Degree of Total Leverage?

The degree of total leverage is a ratio that compares the rate of change a
company experiences in earnings per share (EPS) to the rate of change it
experiences in revenue from sales.
The degree of total leverage can also be referred to as the “degree of
combined leverage” because it considers the effects of both operating
leverage and financial leverage.
Components of the Degree of Total Leverage
The two leverages that degree of total leverage accounts for are as follows:

1. Operating leverage – This part of a company’s fixed costs

reveals how effectively revenue from sales is translated
into operating income. A business with a high level of
operating leverage can increase its bottom line significantly
with just a relatively small increase in revenues because it has
effectively leveraged its operating costs so as to maximize
profits.
2. Financial leverage – Financial leverage is a metric used to
evaluate the extent to which a company uses debt to increase
its assets and net income. Examining a company’s financial
leverage shows the impact on earnings per share of changes in
EBIT that result from taking on additional debt.

Calculating Degree of Total Leverage

The degree of total leverage can be explained or calculated simply as:
Degree of total leverage = Degree of operating leverage x Degree of
financial leverage =
The degree of operating leverage is equivalent to:
Contribution margin (Total sales – Variable costs) / Earnings before interest
and taxes (EBIT)
The degree of financial leverage is equivalent to:
Earnings before interest and taxes (EBIT) / EBIT – interest expenses
Example of Degree of Total Leverage
Let’s put the degree of total leverage into practice by looking at an
example. Assume that Company ABC’s current EPS is Rs3, and it is trying
to determine what its new EPS will be in the event that it experiences a
10% increase in sales revenue.
For our example, also assume the following for Company ABC:

Contribution margin is Rs15 million

Fixed costs are Rs3 million
Interest expenses are Rs1.5 million

The first step in determining Company ABC’s new EPS is to calculate the
percentage of response that the current EPS will experience with a 1%
change in revenue from sales, which is also equal to the degree of
operating leverage. The calculation should look something like this:
Rs15m/Rs15m – Rs3m (1.25) x Rs15m – Rs3m / Rs15m – Rs3m – Rs1.5m
(1.14) =
1.25 x 1.14 = 1.43%
The degree of total leverage for Company ABC is 1.43%. The figure can
then be used to help the company determine what its new EPS will be if it
sees a 10% increase in sales revenue. The calculation for the new EPS
should look like this:
Rs3 (current EPS) x (1 + 1.43 x 10%) = Rs3.49
Final Word
Determining a company’s degree of total leverage is important because it
helps the company establish the type or percentage of change it can expect
in its EPS in relation to an increase in sales revenue.
Understanding the changes or growth in earnings per share is important for
any company because it helps corporate management evaluate the
company’s performance and because it shows the income the company is
earning for its shareholders.

What is the difference between lending interest rate and real interest
rate?

Don’t Forget Inflation!

The nominal interest rate (or money interest rate) is the percentage increase
in money you pay the lender for the use of the money you borrowed. For
instance, imagine that you borrowed Rs100 from your bank one year ago at
8% interest on your loan. When you repay the loan, you must repay the
Rs100 you borrowed plus Rs8 in interest—a total of Rs108.
But the nominal interest rate doesn’t take inflation into account. In other
words, it is unadjusted for inflation. To continue our scenario, suppose on
your way to the bank a newspaper headline caught your eye stating:
“Inflation at 5% This Year!” Inflation is a rise in the general price level. A
5% inflation rate means that an average basket of goods you purchased this
year is 5% more expensive when compared to last year. This leads to the
concept of the real, or inflation-adjusted, interest rate. The real interest rate
measures the percentage increase in purchasing power the lender receives
when the borrower repays the loan with interest.. In our earlier example,
the lender earned 8% or Rs8 on the Rs100 loan. However, because inflation
was 5% over the same time period, the lender actually earned only 3% in
real purchasing power or Rs3 on the Rs100 loan.
The diagram below illustrates the relationship between nominal interest
rates, real interest rates, and the inflation rate. As shown, the nominal
interest rate is equal to the real interest rate plus the rate of inflation

Interest Rates in the Real World

Advertised interest rates that you may see at banks or other financial
service providers are typically nominal interest rates. This means its up to
you to estimate how much of the interest rate a bank may pay you on a
savings deposit is really an increase in your purchasing power and how
much is simply making up for yearly inflation.
Know Your Rate
As with any investment or loan, it’s simply important to understand the
interest rate that you are paying or receiving. With this knowledge, you
will be able to compare it with other investments or loans and make sure
you are getting a deal that is right for you and your financial situation.

What is a suggested double entry system in accounting?

Modern Approach of Classification

Accounting for financial transactions can be classified into two types of
approaches. One is the Traditional Approach and another one is the Modern
Approach. Traditional Approach is also known as the British Approach.
While the Modern Approach is also known as the American Approach. Let
us learn more about it.
Modern Approach to Accounting
Under the Modern Approach, the accounts are not debited and credited.
Hence, the Accounting Equation is used to debit or credit an account. Thus,
it is also known as the Accounting Equation Approach.
The Basic Accounting Equation is: Assets = Liabilities + Capital (Owner’s
Equity)
Furthermore, it can be expanded as Assets = Liabilities + Capital +
Revenues – Expenses
Also, Profit = Revenues – Expenses
The Accounting Equation should remain balanced every time. Because we
know that each transaction has a Dual aspect. Thus, each transaction will
either affect the debit side and credit side. Also, a transaction may affect
two accounts on the debit side or two accounts on the credit side.
Also, the profits will increase the Capital and losses will decrease it.
Classification of Accounts under the Modern Approach
Under the Modern Approach the accounts can be classified as follows:
I. Assets Accounts
Assets are the properties, possessions or economic resources of a business.
They help in business operations and help in earning revenues. They can be
measured in terms of money.
Assets can be tangible or intangible. Also, assets can be classified as Fixed
Assets and Current Assets. Fixed Assets are held for the long-term.
They help in carrying out the normal operations of the business. For
example, land, building, furniture, machinery, vehicles, etc. Current Assets
are held for short-term. They are realizable within a year usually. For
example, debtors, bills receivable, bank balance, cash, stock, etc.
II. Liabilities Accounts
Liabilities are the amounts that an entity owes to the outsiders. These are
the obligations or the debts payable by the business. Liabilities can also be
classified as Long-term and Current.
Long-term Liabilities are payable after a period of one year. For example,
debentures, bank loans, etc. Current liabilities are payable within one year.
For example, creditors, bills payable, rent outstanding, bank overdraft, etc.
III. Capital Accounts
The money brought into the business by the owner is called Capital or
Owner’s Equity. The Capital can be brought in cash or assets by the owner.
Capital is an obligation of the business that has to be paid back to the
owner. Because business is a separate entity from its owner.
Therefore, the Capital is shown on the liabilities side of the Balance Sheet.
The capital account is shown after deducting the Drawings by the owner.
Drawings are the amount of cash, goods or assets taken by the owner for
personal use from the business.
IV. Revenue Accounts
Revenue is the amount earned by the business by selling goods or
rendering of services. Also, it includes other incomes such as rent received,
the commission received, interest received, dividend earned, etc. All items
of revenue are also clubbed together under the Modern Approach.
V. Expenses Accounts
All costs incurred or money spent by a business in order to earn revenues is
called expenses. It is noteworthy here that when the benefits of the money
spent are exhausted within a period of one year, it is called an Expense.
While in case the benefit lasts for more than a year it is called Expenditure.
Therefore, the purchase of goods is expenditure while the cost of goods
sold is an expense. For example, rent paid, salary paid, electricity charges,
interest paid, etc. are expenses. While the purchase of assets, purchase of
short-term investments, etc. fall under the category of expenditure.
Rules of Debit and Credit under the Modern Approach
Asset Accounts
Debit the increase; Credit the decrease
Liabilities Accounts
Credit the Increase; Debit the decrease
Capital Accounts
Credit the Increase; Debit the decrease
Revenue Accounts
Credit the Increase; Debit the decrease
Expense Accounts
Debit the increase; Credit the decrease

What is the explanation of the accounting standards concept?

First-time Adoption of Indian Accounting Standards

You need to ensure that an entity’s first Ind AS financial statements, and its
interim financial reports for part of the period covered by those financial
statements, contain high-quality information that:

It is transparent for users and comparable overall periods

presented
Provides a suitable starting point for accounting in accordance
with Indian Accounting Standards and
 Can be generated at a cost that does not exceed the benefits.

Share-based Payment
The objective of Share-based payment is to specify the financial reporting
by an entity when it undertakes a share-based payment transaction. In
particular, it requires an entity to reflect in its profit or loss and financial
position the effects of share-based payment transactions, including
expenses associated with transactions in which share options are granted to
the employees.
Business Combinations
In this Accounting Standard, it is to improve the relevance, reliability, and
comparability of the information that a reporting entity provides in its
financial statements about a business combination and its effects
In order to accomplish that, this Ind AS establishes principles and
requirements for how the acquirer:

recognizes and measures in its financial statements the

identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree;
recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase1; and
determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects
of the business combination

Insurance Contracts
Here, it is to specify the financial reporting for insurance contracts by any
entity that issues such contracts (described in this Ind AS as an insurer). It
requires:

Limited improvements to accounting by insurers for insurance

contracts.
the disclosure that identifies and explains the amounts in an
insurer’s financial statements arising from insurance contracts
and helps users of those financial statements understand the
 amount, timing and uncertainty of future cash flows from
insurance contracts.

Non-current Assets Held for Sale and Discontinued Operations

This Indian standard has to specify the accounting for assets held for sale
and the presentation and disclosure of discontinued operations. In
particular, it requires:

Assets that meet the criteria to be classified as held for sale to

be measured at the lower of carrying amount and fair value
costs less to sell, and depreciation on such assets to cease; and
Assets that meet the criteria to be classified as held for sale to
be presented separately in the balance sheet and the results of
discontinued operations to be presented separately in the
statement of profit and loss.

Exploration for and Evaluation of Mineral Resources

This Indian Standard requires:

Limited improvements to existing accounting practices for

exploration and evaluation expenditures.
Entities that recognize exploration and evaluation assets to
assess such assets for impairment in accordance with this Ind
AS and measure any impairment in accordance with Ind AS
36, Impairment of Assets.
Disclosures that identify and explain the amounts in the
entity’s financial statements arising from the exploration for
and evaluation of mineral resources and help users of those
financial statements understand the amount, timing and
certainty of future cash flows from any exploration and
evaluation assets recognized.

Financial Instruments: Disclosures

The objective of this Standard is to require entities to provide disclosures
in their financial statements that enable users to evaluate:

the significance of financial instruments for the entity’s

 financial position and performance; and
the nature and extent of risks arising from financial
instruments to which the entity is exposed during the period
and at the reporting date, and how the entity manages those
risks.

Operating Segments
An entity shall disclose information to enable users of its financial
statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates
Financial Instruments
The objective of this Standard is to establish principles for presenting
financial instruments as liabilities or equity and for offsetting financial
assets and liabilities and for their assessment of the amounts, timing, and
uncertainty of an entity’s future cash flows.
Consolidated Financial Statements
The objective of this statement is to present the financial statements of a
parent and its subsidiary (ies) as a single economic entity. In other words,
the holding company and its subsidiary (ies) are treated as one entity for
the preparation of these statements. Consolidated profit / loss account and
consolidated balance sheet are prepared for disclosing the total profit / loss
of the group and total assets and liabilities of the group. As per this
accounting standard, the consolidated balance sheet if prepared should be
prepared in the manner prescribed by this statement.
Joint Arrangements
The objective of this IAS is to establish principles for financial reporting
by entities that have an interest in arrangements that are controlled jointly.
Disclosure of Interests in Other Entities
In this standard the objective is you have to evaluate:

The nature of, and risks associated with, its interests in other
entities; and
The effects of those interests on its financial position, financial
 performance
and cash flows.

Fair Value Measurement

Fair value is a market-based measurement and not an entity-specific
measurement. For some assets and liabilities, observable market
transactions or market information might be available. The objective of fair
value measurement in both cases is the same—to estimate the price at
which an orderly transaction to sell the asset or to transfer the liability
would take place between market participants at the measurement date
under current market conditions.
Regulatory Deferral Accounts
The financial reporting requirements for regulatory deferral account
balances that arise when an the entity provides goods or services to
customers at a price or rate that is subject to rate regulation.
In order to meet this objective, the Standard requires:

Limited changes to the accounting policies that were applied in

accordance with previous generally accepted accounting
principles (previous GAAP) for regulatory deferral account
balances, which are primarily related to the presentation of
these accounts; and
Disclosures that:identify and explain the amounts recognized
in the entity’s financial statements that arise from rate
regulation; andhelp users of the financial statements to
understand the amount, timing and uncertainty of future cash
flow from any regulatory deferral account balances that are
recognized.

Revenue from Contracts with Customers

The objective of this Standard is to establish the principles that an entity
shall apply to report useful information to users of financial statements
about nature, the amount, timing, and uncertainty of revenue and cash
flows arising from a contract with a customer.
Presentation of Financial Statements
This Standard prescribes the basis for the presentation of general purpose
financial statements to ensure comparability both with the entity’s financial
statements of previous periods and with the financial statements of other
entities. It sets out overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for
their content.
Inventories
The objective of this standard is to formulate the method of computation of
cost of inventories / stock, determine the value of closing stock / inventory
at which the inventory is to be shown in balance sheet till it is not sold and
recognized as revenue.
Cash Flow Statements
Cash flow statement is additional information to the user of the financial
statement. This statement exhibits the flow of incoming and outgoing cash.
It assesses the ability of the enterprise to generate cash and to utilize the
cash. Also, it is one of the tools for assessing the liquidity and solvency of
the enterprise.
Accounting Policies, Changes in Accounting Estimates and Errors
The objective of this Standard is to prescribe the criteria for selecting and
changing accounting policies, together with the accounting treatment and
disclosure of changes in accounting policies, changes in accounting
estimates and corrections of errors. The Standard is intended to enhance the
relevance and reliability of an entity’s financial statements, and the
comparability of those financial statements over time and with the financial
statements of other entities.
Events after the Reporting Period
This standard prescribes:

When an entity should adjust its financial statements for events

after the reporting
period
The disclosures that an entity should give about the date when
the financial
statements were approved for the issue and about events after
 the reporting period.

The Standard also requires that an entity should not prepare its financial
statements on a going concern basis if events after the reporting period
indicate that the going concern the assumption is not appropriate.
Income Taxes
This accounting standard prescribes the accounting treatment for taxes on
income. Traditionally, the amount of tax payable is determined on the
profit / loss computed as per income tax laws. According to this accounting
standard, tax on income is determined on the principle of accrual concept.
According to this concept, the tax should be accounted in the period in
which corresponding revenue and expenses are accounted for. In simple
words tax shall be accounted on an accrual basis; not on liability to pay
basis.
Property, Plant, and Equipment
This Standard prescribes the accounting treatment for property, plant, and
equipment so that users of the financial statements can discern information
about an entity’s investment in its property, plant and equipment and the
changes in such investment. The principal issues in accounting for
property, plant, and equipment are the recognition of the assets, the
determination of their carrying amounts and the depreciation charges and
impairment losses to be recognized in relation to them.
Accounting for Leases
A lease is an arrangement by which the lesser gives the right to use an asset
for a given period of time to the lessee on rent. It involves two parties, a
lessor and a lessee and an asset which is to be leased. The lessor who owns
the asset agrees to allow the lessee to use it for a specified period of time in
return for periodic rent payments.
Employee Benefits
Accounting Standard has been revised by ICAI and is applicable in respect
of accounting periods commencing on or after 1st April 2006. the scope of
the accounting standard has been enlarged, to include accounting for short-
term employee benefits and termination benefits.
Accounting for Government Grants and Disclosure of
Government Assistance
Government Grants are assistance by the Govt. in the form of cash or kind
to an enterprise in return for past or future compliance with conditions.
Government assistance, which cannot be valued reasonably, is excluded
from Govt. grants. Those transactions with Government, which cannot be
distinguished from the normal trading transactions of the enterprise, are not
considered as Government grants.
The following matters shall be disclosed:

The accounting policy adopted for government grants,

including the methods of presentation adopted in the financial
statements.
The nature and extent of government grants recognized in the
financial statements and an indication of other forms of
government assistance from which the entity has directly
benefited.
Unfulfilled conditions and other contingencies attaching to
government assistance that has been recognized.

The Effects of changes in Foreign Exchange Rates

Effect of Changes in Foreign Exchange Rate is applicable in Respect of
Accounting Period commencing on 01-04-2004 and is mandatory in nature.
This accounting Standard applicable to accounting for the transaction in
Foreign currencies in translating in the Financial Statement Of foreign
operation Integral as well as non- integral and also accounting for forward
exchange. Effect of Changes in Foreign Exchange Rate, an enterprise
should disclose the following aspects:

Amount Exchange Difference included in Net profit or Loss;

Amount accumulated in foreign exchange translation reserve;
Reconciliation of opening and closing balance of Foreign
Exchange translation reserve;

Borrowing Costs
Borrowing costs that are directly attributable to the acquisition,
construction bor production of a qualifying asset form part of the cost of
that asset. Other borrowing costs are recognized as an expense.
Related Party Disclosure
Sometimes business transactions between related parties lose the feature
and character of the arms-length transactions. Related party relationship
affects the volume and decision of business of one enterprise for the
benefit of the other enterprise. Hence disclosure of related party transaction
is essential for a proper understanding of financial performance and
financial position of the enterprise.
Separate Financial Statements
It is to prescribe the accounting and disclosure requirements for
investments in subsidiaries, joint ventures, and associates when an entity
prepares separate financial statements.
Accounting for Investments in Associates in consolidated financial
statements
This prescribes the accounting for investments in associates and to set out
the requirements for the application of the equity method when accounting
for investments in associates and joint ventures.
Financial Reporting in Hyperinflationary Economies
This Standard shall be applied to the financial statements, including the
consolidated financial statements, of any entity whose functional currency
is the currency of a hyperinflationary economy.
Financial Instruments: Presentation
The objective of this Standard is to establish principles for presenting
financial instruments as liabilities or equity and for offsetting financial
assets and financial liabilities. It applies to the classification of financial
instruments, from the perspective of the issuer, into financial assets,
financial liabilities and equity instruments; the classification of related
interest, dividends, losses and gains; and the circumstances in which
financial assets and financial liabilities should be offset.
Earnings per Share
Earning per share (EPS)is a financial ratio that gives information regarding
earning available to each equity share. It is a very important financial ratio
for assessing the state of the market price of a share. This accounting
standard gives a computational methodology for the determination and
presentation of earning per share, which will improve the comparison of
EPS. The statement is applicable to the enterprise whose equity shares or
potential equity shares are listed in the stock exchange.
Interim Financial Reporting (IFR)
Interim financial reporting is the reporting for periods of less than a year
generally for a period of 3 months. As per clause 41 of the listing
agreement, the companies are required to publish the financial results on a
quarterly basis.
Impairment of Assets
It is to prescribe the procedures that an entity applies to ensure that its
assets are carried at no more than their recoverable amount. An asset is
carried at more than its recoverable amount if its carrying amount exceeds
the amount to be recovered through use or sale of the asset. If this is the
case, the asset is described as impaired and the Standard requires the entity
to recognize an impairment loss. The Standard also specifies when an
entity should reverse an impairment loss and prescribes disclosures.
Provisions, Contingent Liabilities, And Contingent Assets
The objective of this standard is to prescribe the accounting for Provisions,
Contingent Liabilities, Contingent Assets, Provision for restructuring cost.
Intangible Assets
An Intangible Asset is an Identifiable non-monetary Asset without physical
substance held for use in the production or supplying of goods or services
for rentals to others or for administrative purpose.
The accounting treatment for intangible assets that are not dealt with
specifically in another Standard. This Standard requires an entity to
recognize an intangible asset if, and only if, specified criteria are met. The
Standard also specifies how to measure the carrying amount of intangible
assets and requires specified disclosures about intangible assets.
Investment Property
The objective of this Standard is to prescribe the accounting treatment for
investment property and related disclosure requirements.
Agriculture
Agricultural activity is the management by an entity of the biological
transformation and harvest of biological assets for sale or for conversion
into agricultural produce or into additional biological assets.
The objective of this Standard is to prescribe the accounting treatment and
disclosures
related to agricultural activity

What is difference between interest rate and rate of return?

What is ROI?
ROI (Return on Investment) measures the gain or loss generated on an
investment relative to the amount of money invested. ROI is usually
expressed as a percentage and is typically used for personal financial
decisions, to compare a company's profitability or to compare the
efficiency of different investments.
ROI Calculation and Formula
Want to know how to calculate ROI? The return on investment formula is:
ROI = (Net Profit / Cost of Investment) x 100
The ROI calculation is flexible and can be manipulated for different uses.
A company may use the calculation to compare the ROI on different
potential investments, while an investor could use it to calculate a return on
a stock.
For example, an investor buys Rs1,000 worth of stocks and sells the shares
two years later for Rs1,200. The net profit from the investment would be
Rs200 and the ROI would be calculated as follows:
ROI = (200 / 1,000) x 100 = 20%
The ROI in the example above would be 20%. The calculation can be
altered by deducting taxes and fees to get a more accurate picture of the
total ROI.
[Easily calculate your return on investment with the CAGR calculator]
The same calculation can be used to calculate an investment made by a
company.
What is the Rate of Return?
A rate of return is measure of profit as a percentage of investment.
How Does the Rate of Return Work?
Let's say A opens a demat account. He invests Rs 500 in the venture, and
the share makes about Rs10 a day, or about Rs3,000 a year (he takes some
days off).
In its simplest form, A rate of return in one year is simply the profits as a
percentage of the investment, or 3,000/500 = 600%.
There is one fundamental relationship you should be aware of when
thinking about rates of return: the riskier the venture, the higher the
expected rate of return.
For example, investing in a restaurant is much riskier than investing in
Treasury bills. One is backed by the full faith and credit of the United
States government; the other is backed by your cousin's sofa. Accordingly,
the risk that you'll lose your money is much higher in the restaurant
scenario, and to induce and reward you to make the investment, the
anticipated returns have to be much higher than the 1% that the Treasury
bill would pay. Inversely, the safer the investment, the lower the expected
rate of return should be.
Why Does the Rate of Return Matter?
If only it were that simple. Rates of return often involve incorporating
other factors, including the bites that inflation and taxes take out of profits,
the length of time involved, and any additional capital an investor makes in
the venture. If the investment is foreign, then changes in exchange rates
will also affect the rate of return.
Compounded annual growth rate (CAGR) is a common rate of return
measure that represents the annual growth rate of an investment for a
specific period of time.
The formula for CAGR is:
CAGR = (EV/BV)^(1/n) - 1
where:
EV = The investment's ending value
BV = The investment's beginning value
n = Years
For example, let's assume you invest 1,000 in the Company XYZ mutual
fund, and over the next five years, the portfolio looks like this:
End of Year Ending Value
1 750
2 1,000
3 3,000
4 4,000
5 5,000
Using this information and the formula above, we can calculate that the
CAGR for the investment is:

1. CAGR = (Rs5,000/Rs1,000)^(1/5) - 1 = .37972

= 37.97%

2.

The simple ROI on this investment would be:

1. (5000 - 750)/750 * 100 = 566.67%

What is the difference between commerce and accounting?

Accountancy vs Commerce
Accountancy and Commerce are two subjects that are often confused in
terms of their content and meaning. Accountancy is the process of
communicating financial information about a business firm to related
people such as managers and shareholders.
On the other hand commerce is the exchange or barter of goods and
services from the place of production to the place of consumption.
Commerce is done to satisfy human wants.
The communication in accountancy is generally in the form of financial
statements. It is important to know that the information regarding
statements is selected as according to its relevance to its users such as
managers and shareholders. On the other hand commerce consists in the
trading of entities with economic value such as goods, information,
services and money.
It is important to know that there are several branches or fields of
accounting such as cost accounting, financial accounting, forensic
accounting, fund accounting, management accounting and tax accounting.
On the other hand commerce includes several systems that are in use in any
given country. These systems include economic, legal, cultural, political,
social and technological to name a few.
Accountancy is defined as ‘the profession or duties of an accountant’. It is
interesting to note that accountancy has a special definition according to
the American Institute of Certified Public Accountants (AICPA). It says
accountancy is ‘the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which
are, in part at least, of financial character, and interpreting the results
thereof’.
On the other hand commerce is a system that has its bearing on the
economic status of a country or a state for that matter. In short it can be
said that commerce has its influence on the business prospects of a given
country. Experts call commerce as the second wing of business which
includes barter of goods from producers to users.
on the contrary accountancy is described as the language of business since
it is the way by which financial information pertaining to a business firm is
reported to different groups of people that are directly or indirectly
associated with the firm. The direct users are the managers and the
shareholders whereas the indirect users are the general public and the
potential investors.
It is important to understand that commerce implies the abstract ideas of
buying and selling whereas accountancy implies the process of reporting
the financial statements.

Why is the Sharpe ratio more popular than the Sortino ratio?

Sharpe Ratio:

The Sharpe ratio is popularly known as the reward-to-variability ratio, is

the most common portfolio management metric. It is a measure of the risk-
adjusted return of a financial portfolio. It is a measure of an excess
portfolio compared to the risk–adjusted returns. It helps to study the risk–
adjusted performance of a mutual fund. It is defined as the excess returns
of the scheme, divided by the standard deviation scheme return over a
certain period. The basic formula for the Sharpe ratio is:
Sharpe Ratio : R(p)- R (f)/ S(p)
Where R(p) = Portfolio return
R( f) = Risk free rate of return
S(p)= Standard deviation of the portfolio.
For instance, if two funds offer similar returns, then one with the higher
standard deviation will have a lower Sharpe ratio. To better understand the
relevance of it, let’s suppose there are two funds A and B. Where Fund A
provides a return of 10% a year, while Fund B provides a return of 8%
yearly. If the risk-free interest rate (mainly considered as government fixed
deposit) is 4% and the standard deviation is 8% and 4%. Then the Sharpe
ratio will be 0.75 and 1. Now, looking for this perspective, despite Fund A
has a higher return, Fund B has a better risk–adjusted front.

Sortino Ratio:

It is basically a tool that measures the performance of the

investment relative to the downward deviation. Unlike Sharpe, this doesn’t
consider the total volatility of the investment. This is well suited for the
retail investor as they are more concerned about the downside risk of
investment. The Sortino ratio formula will be:
Sortino Ratio: R- R(f)/SD
Where, R = Expected returns
R (f) = Risk free rate of return
SD= Standard Deviation of the Negative Asset return
To better understand this, let suppose scheme A has an annualised return of
15% and the downside deviation of the scheme is 13%. Consider a scheme
B which has generated annualised returns of 10% and its downside
deviation is 4%. Let’s assume that risk free returns be 7%. The Sortino
ratio of scheme A will be ( 15%-7%)/13% is equal to 0.61% and the
Sortino ratio of scheme B will be ( 10%-7%)/13% is equal to 0.75%.
Despite the fact the A has better returns, but Scheme B has a better Sortino
ratio. Hence B will be a better investment option than A.
Despite both ratios are used for fund analysis or performance metric, fund
manager mainly uses the Sharpe ratio as a metric to measure low volatility
investment portfolio, while the Sortino variation is used to evaluate high-
volatility portfolios.

Which financial ratios or metrics you look while picking a stock?

Price to Earnings Ratio—The P/E Ratio

The price to earnings ratio, also known as the p/e ratio, is probably the
most famous financial ratio in the world. It is used as a quick and dirty way
to determine how "cheap" or "expensive" the stock is. The best way to
think of it is how much you are willing to pay for every Rs1 in earnings a
company generates. Learn how to calculate it, and much more.
The PEG Ratio
While the price to earnings ratio (or p/e ratio for short) is the most popular
way to measure the relative valuation of two stocks, the PEG ratio goes one
step further. It stands for the price-to-earnings-to-growth ratio. As you can
tell by its title, the PEG ratio factors in a company's growth.
Asset Turnover Ratio
The asset turnover financial ratio calculates the total sales generated by
each dollar of assets a company owns. In other words, it measures how
efficiently a company has been using its assets.
Current Ratio
Like the price to earnings ratio, the current ratio is one of the most famous
of all financial ratios. It serves as a test of a company's financial strength
and relative efficiency. For instance, you can tell if a company has too
much, or too little, cash on hand.
Debt to Equity Ratio
The debt to equity ratio is important because investors like to compare the
total equity (net worth) of a company to its debt obligations. For instance,
if you own Rs100 million worth of hotels and have Rs30 million in debt,
you are going to be less concerned than if you have the same Rs30 million
in debt with only Rs40 million worth of real estate. Learn how to calculate
the debt to equity ratio and why it is important.
Gross Profit Margin
The gross profit margin lets you know how much profit is available as a
percentage of sales to pay payroll costs, advertising, sales expenses, office
bills, etc. It's one of the most important financial ratios you can learn.
Interest Coverage Ratio
The interest coverage ratio is an important financial ratio for firms that use
a lot of debt. It lets you know how much money is available to cover all of
the interest expense a company incurs on the money it owes each year.
Inventory Turnover RatioIf
you need to know how many times a business turns its inventory over a
period of time, you'll need to use the inventory turnover ratio. It allows you
to see if a company has too many of its assets tied up in inventory and is
heading for financial trouble. An extremely efficient retailer, for instance,
is going to have a higher inventory turnover ratio than a less efficient
competitor.
Net Profit Margin Ratio
The net profit margin ratio tells you how much money a company makes
for every Rs1 in revenue. Companies with higher net profit margins can
often offer better benefits, heftier bonuses, and fatter dividends.
Operating Profit Margin Ratio
Operating income, or operating profit as it is sometimes called, is the total
pre-tax profit a business generated from its operations. It is what is
available to the owners before a few other items need to be paid such as
preferred stock dividends and income taxes.
Return on Assets (ROA) Ratio
Where asset turnover tells an investor the total sales for each Rs1 of assets,
return on assets, or ROA, tells an investor how much profit a company
generated for each Rs1 in assets. The return on assets figure is also a sure-
fire way to gauge the asset intensity of a business. For example, does the
company in which you are researching have to spend large sums of money
on expensive machinery before it can manufacture and sell a product to
generate a return? It is one of the most important financial ratios you can
know.
Return on Equity (ROE) Ratio
One of the most important profitability metrics is a return on equity (or
ROE for short). Return on equity reveals how much profit a company
earned in comparison to the total amount of shareholder equity found on
the balance sheet.

What's the difference between trade and commerce?

Definition of Trade
In trade, the ownership of goods or services is transferred from one
person to the another in consideration of cash or cash equivalents. Trade
can be done between two parties or more than two parties. When the
buying and selling take place between two persons, it is called bilateral
trade whereas when it is done between more than two persons, then it is
called multilateral trade.
Earlier the trade was little cumbersome since it followed the barter system
where goods were exchanged in return of other goods or commodities. It is
hard to evaluate the exact value because of the different commodities type
involved in the exchange. With the advent of money, this process became
more convenient for both the sellers and buyers.
Trade can be domestic as well as foreign. Domestic trade means within the
border of the country, and foreign trade means across the borders. Foreign
trade is done through investment in securities or funds and can be termed
as imports and exports.
Definition of Commerce
Commerce includes all the activities that help in facilitating the
exchange of goods and services from the manufacturer or the producer to
the ultimate consumers. Majorly the activities are transportation, banking,
insurance, advertising, warehousing, etc. that act as an aide in the
successful completion of the exchange.
Once the products are manufactured these cannot reach directly to the
customer, the same has to pass through a series of activities.The first
wholesaler will purchase the product, and with the use of transportation,
the goods will be made available to the stores and at the same banking and
insurance service will be availed by him to have protection against the loss
of goods. The retailer will then sell to the ultimate consumer. All these
activities come under the commerce head.
In short, it can be said that commerce is the branch of business that helps to
overcome all the hindrances that arise in the facilitation of exchange. Its
major function is to satisfy human wants both basic and secondary by
making the goods available to different parts of the country. No matter
where the goods have been manufactured the commerce has made it
possible to reach the world – wide.
Key Differences between Trade and Commerce
Following are the major differences between trade and commerce:

1. Trade is selling and buying of goods and services between

two or more parties in consideration of cash and cash
equivalents.Commerce includes the exchange of goods and
services along with activities viz. banking, insurance,
advertising, transportation, warehousing, etc. to complement
the exchange.
2. Trade is a narrow term that merely includes the selling and
buying whereas commerce is a wider term that includes
exchange as well as the several revenues generating activities
that complete the exchange.
3. Trade is generally done to satisfy the need of both the seller
and the buyer which is more of a social perspective. Whereas
the commerce is more economical in nature because of the
involvement of several parties whose primary aim is to
generate the revenue.
4. Trade is generally a single time transaction between the
parties that may or may not reoccur. Whereas in commerce the
transactions are regular and occur again and again.
5. The trade involves two parties the seller and the buyer who
facilitates the exchange without employing anyone in between.
Whereas in commerce exchange is done with the support of
several departments thereby giving them employment
opportunities.
6. Trade provides a link between the seller and the buyer, the
direct parties involved in the exchange. Whereas the commerce
provides a link between manufacturer and the ultimate
customer, who are not direct parties, with the help of several
aides of distribution.
7. Trade represents both the side of demand and supply where
both the parties know what is demanded and what is to be
supplied. Whereas in commerce only the demand side is
known i.e. what is demanded in the market and then making
that available through various channels of distribution.
8. Trade requires more capital because the stock has to be kept
ready that is entitled to the sale and also the cash has to be kept
 ready for the immediate payment. Whereas in commerce the
capital required is less because there are different parties
involved who have to manage their resources individually
without imposing a burden on one.

Conclusion
Hence it can be concluded that trade is the branch of commerce that deals
in only the exchange of goods and services whereas commerce are the
comprehensive term that includes all the major activities that facilitate the
exchange and generates the revenue for all. Thus, we can say commerce is
the branch of business that keeps everything together and makes the
successful completion of the distribution of goods and services.

Is there a difference between stable payout ratio and dividend payout

ratio?

Dividend Payout Ratio Formula

There are several formulas for calculating DPR:
1. DPR = Total dividends / Net income
2. DPR = 1 – Retention ratio (the retention ratio, which measures the
percentage of net income that is kept by the company as retained earnings,
is the opposite, or inverse, of the dividend payout ratio
3. DPR = Dividends per share / Earnings per share
Example of the Dividend Payout Ratio
Company A reported a net income of Rs20,000 for the year. In the same
time period, Company A declared and issued Rs5,000 of dividends to its
shareholders. The DPR calculation is as follows:
DPR = Rs5,000 / Rs20,000 = 25%
Therefore, a 25% dividend payout ratio shows that Company A is paying
out 25% of its net income to shareholders. The remaining 75% of net
income is kept by the company for growth and is called retained earnings.
What Is the Dividend Yield?
The dividend yield shows how much a company has paid out in dividends
over the course of a year. The yield is presented as a percentage, not as an
actual dollar amount. This makes it easier to see how much return per
dollar invested the shareholder receives through dividends.
The yield is calculated as follows:

How to calculate dividend yield.

For example, a company that paid out Rs10 in annual dividends per share
on a stock trading at Rs100 per share has a dividend yield of 10%. You can
also see that an increase in share price reduces the dividend yield
percentage and vice versa for a decline in price.
However, dividend yields can be misleading on their own. Some
companies pay out dividends even when they are operating at a short-term
loss. Others may pay out dividends too aggressively, failing to reinvest
enough capital into their business to maintain profitability down the road.
This is where the dividend payout ratio can come in handy.
When comparing the two measures of dividends, it's important to know
that the dividend yield tells you what the simple rate of return is in the
form of cash dividends to shareholders, but the dividend payout
ratio represents how much of a company's net earnings are paid out as
dividends. While dividend yield is the more commonly known and
scrutinized term, many believe the dividend payout ratio is a better
indicator of a company's ability to distribute dividends consistently in the
future. The dividend payout ratio is highly connected to a company's cash
flow.
Current shareholders and potential investors would do well to evaluate both
the yield and payout ratio.
KEY TAKEAWAYS

Analyzing the dividends that companies pay out to

shareholders can be important in understand a firm's health and
in valuing its shares.
The dividend yield compares the amount of the dividend paid
to the share price of the company's stock.
The dividend payout ratio instead compares the dividend
amount to the company's earnings per share.
courtesy investopedia

What is business?

The simple meaning of business is to providing good services to your

customers to earn money.A good business is only established when owner
goal is to "facilitate people by given them best quality product" and will
achieve people believe,satisfaction on his selling product.
A business is an organization where people work together. In a business,
people work to make and sell products or services. Other people buy the
products and services. The business owner is the person who hires people
for work. A business can earn a profit for the products and services it
offers. The word business comes from the word busy, and means doing
it works on regular basis.
Most businesses are created for commerce. There are big and small
businesses. For example, one person can open a small barber-shop. A big
business, like Microsoft, employs thousands of people all over the world.
Some businesses need fixed locations. Examples are an office, store,
or farm. For some businesses the worker goes to different locations.
Examples are carpenters or electricians. They usually bring everything they
need for work in their truck.
Business can also mean the work or current state of a business. A business
owner might say: "I am doing a lot of business" or "My business is good"
or "Business is bad".
The term can also be used in a more general way. As a noun, it can be used,
for example, to speak about a broad area of activity
According to Stenford“Business is all those activities involved in providing
the goods and services needed or desired by people”. It means
a business activities called that activities ,which provide goods or services
required and desired by persons of our society .

We have three businessmen. For instance we have to calculate their net

worth based on their businesses barring other things. Which all business
aspects to be considered to get their exact net worth worked out?

What is net worth?

Net worth is a performance indicator that shows the value of your
business’s property after liabilities are paid. Once you settle all business
debts, the net worth includes what is left over. You can use net worth to
determine your financial health, secure funding, or sell the business.
There are a lot of factors that go into a small business valuation. Net worth
is the starting point to determine the value of your company for you,
investors, and lenders. Let’s discover how to calculate business net worth.
How to calculate net worth
Determining how to calculate your business net worth is a simple process.
Before you calculate small business net worth, you need figures for your
business’s assets and liabilities. Information about your assets and
liabilities can be found on your small business balance sheet.
Assets
Assets are your business’s items of value. The items are your business’s
property and can be used to pay expenses, debts, and salaries.
Assets can be tangible or intangible. Tangible assets are physical items,
like a company vehicle. Intangible assets are items of value that are not
physical, such as a trademark.
To calculate net worth, add the value of your tangible assets. Also, estimate
the value of your intangible assets. You can hire an appraiser to help you
make accurate estimations. Then, add the tangible and intangible assets
together to find your business’s total assets.
Liabilities
Liabilities are debts your business owes to companies, vendors, employees,
and government agencies. Your company is responsible for paying
liabilities, which incur through regular business operations.
Liabilities are split into two categories on the balance sheet: short-term and
long-term. Short-term liabilities are usually paid off within one year, such
as invoices. Long-term liabilities extend longer than one year, such as
small business loans. To find your small business net worth, add the short-
term and long-term liabilities.
Calculating net worth
To determine the net worth, subtract the total liabilities from the total
assets. Use the following net worth formula:
Assets – Liabilities = Net Worth
If the assets are greater than the liabilities, the net worth is a positive
number (which is good). But if net worth is a negative number, the
business is not doing well. With a negative net worth, you have more
liabilities (or debt) than assets.
Example of net worth on balance sheet
Take a look at the following balance sheet to find the net worth. Note that
balance sheets usually show equity in addition to assets and liabilities. For
the purpose of this example, only the assets and liabilities are shown.
On the balance sheet, the total assets are recorded as Rs15,000. And, the
total liabilities are recorded as Rs500.
To find the net worth, subtract the liabilities from the assets.
Net Worth = Rs15,000 (assets) – Rs500 (liabilities)
Net Worth = Rs14,500
The net worth is Rs14,500. This is a positive net worth and a sign of a
healthy business.
Using net worth at your small business
Knowing your small business’s net worth can help you manage many
aspects of your company. Here are some common reasons you should know
the net worth of your company.
Get a complete view of business finances: Net worth shows financial
health because it accounts for both assets and liabilities. Net profit alone
will not give an accurate picture of financial health. By factoring in
expenses, taxes, and debts, you can compare what you own to what you
owe.
Gain perspective on your debt: Net worth shows how much debt you’ve
incurred and how much money you have to cover the debts. Even if you
have a lot of liabilities, your business could still be healthy if your assets
are larger than the debts. On the other hand, if your assets are smaller than
liabilities, you may need to improve your business debt management skills.
Secure outside funding: Since net worth is found with cumulative
reporting, it gives a picture of your business’s stability. To apply for a small
business loan, you need to report your net worth. Lenders want to know
your financial strength. The stronger your finances, the less risky it is to
lend to you.
Banks also look at net worth to determine creditworthiness when applying
for a line of credit. And, investors want to analyze your finances before
investing in your company

What are the best Moral stories about finance?

The Six Blind Men and The Elephant

This story first originated in the Indian subcontinent but gained worldwide
popularity after an American poet, created his own version as a poem.
Since then, the story has been used in va therious situations and is
interpreted in a variety of ways to highlight need for communication,
expert opinion, and respect for different perspectives.
Here’s how it goes:
“Once, 6 blind men are asked to describe an elephant. The first one touches
the side and describes the elephant like a wall. The second one touches the
tusk and calls it a spear. The third one touches the trunk and describes it as
a snake. The forth one touches the knee and calls it a tree. The fifth one
touches the ear and says it’s a fan. Finally the last one touches the tail and
describes the Elephant as a Rope!“
None of them called an Elephant an Elephant. Do you know why? Because
their perceptions lead to the misinterpretation. They all describe the
elephant differently, just on the basis of the part of the elephant they
touched.
Let’s see how this relates to stock markets and investors.
Consider the stock market as the elephant while investors or participants in
the stock market as the blind men.
Often investors see their portfolio’s performance or the Stock Markets from
the current / recent results perspective. This leads to incorrect
interpretations. This situation is termed ‘Recency Bias or The Party Effect’.
–
When you are driving alone and you see a speed trap – you slow down.
However after you’ve passed it, you continue to drive slowly because you
think there is another one out there. Similarly, people panic when their
portfolio goes down and they think it will continue to do so. They feel
excited when their portfolio goes up andthey think it will continue to go
up. What they forget is that their goal is long term. Markets go up and
down every day! The current performance of the market does not alter their
goal to retire comfortably 20 years down the line.
A few ideas how this story can be used :

1. To explain to clients that most investments do not generally

 offer steady returns. They change every single day.
2. To explain to clients the importance of utilizing a Financial
Advisor to help analyze things from a broader perspective and
to help guide them toward making better decisions.
3. To explain how the current behavior of the stock market
should not cause clients to deviate from their long term
investment goals.

What is a Deloitte company, what is auditing, can someone start a

company just to audit other companies, what is audit firms, How
would you explain this answer to a kid?

What is Auditing?
Auditing refers to the periodic examination of accounts, documents, and
vouchers in a corporate world. This financial certainty will help people
understand the ascertained workplace. Here the vouchers and accounts
cannot fulfill.
Auditing will take place in both the corporate and public sectors. It
recognizes all the possible pieces of evidence that evaluates and formulates
the opinion bases on communication that carry out.
Definition: Audit is the examination or inspection of various books of
accounts by an auditor followed by physical checking of inventory to make
sure that all departments are following documented system of recording
transactions. It is done to ascertain the accuracy of financial statements
provided by the organisation.
Description: Audit can be done internally by employees or heads of a
particular department and externally by an outside firm or an independent
auditor. The idea is to check and verify the accounts by an independent
authority to ensure that all books of accounts are done in a fair manner and
there is no misrepresentation or fraud that is being conducted.
Merits or Advantages of Financial Audit:
Auditing is a best practice that ensures the growth of public companies.
Many of the stakeholders of the business are financial statements of the
audit.
Auditing considers the place of substantive testing and the need to verify
it. It considers following the set of rules. It mentions the maximum of the
costs so that people can have prior intimation about the auditing. Here are
some of the advantages of an audit program or the benefits of auditing.
1. Access to the capital market:
The public has to remain under the security exchanges and the
requirements given under it. Once the auditing does the accounts that audit
easily accepted by the Government such as Central banks, public
authorities. This carries greater authority standards for the account to
authorized.
2. Lower capital cost:
This has reduced information that associates with the financial statements
that have lower interest rates and return on their investments. Sometimes
this activity provides facilitated settlements and claims of a partner. By
performing the process of auditing frauds and errors can be rectified on
time.
3. Deterrent to fraud and inefficiency:
Auditing that has carried out has to be within the claimed accounts
department. In the event of loss, the property that will maintain a fund is
transferred. In case if the public has a separate ownership plan then the
claims have to be resolved from the insurance claims.
4. Operational improvements:
An independent auditor can control and achieved operating
efficiency within the client’s organization. It has an influence on the staffs
along with the members of the client’s organization.
5. Ownership:
If a public company deals with the audition they can try to reassure the
stakeholders about the accounts that maintained properly.
6. Amalgamating members of the company:
The nature of each organization will be to define the goals. This
amalgamation helps in uniting people to work together as a team. This
combination or unity can found during the process of auditing.
7. Value of business:
The event of purchase has to identify within the management and by the
sales team. It interrelates with the settlement of claims, retirement funds,
etc. In case of loss of property, one has to enhance the activities with moral
values.
8. Gathering information about profit or loss:
This gathering will help in discussing the profit and loss of the company.
Here employees can disclose their ideas upon which they are lacking and
how can they overcome those obstacles.
9. Confidentiality:
During the process of the external audit, there is more private information
such as internal employee salary, CPF, etc. It may be significant for the
person to learn about the organization. It is because the auditor makes the
consideration and conducts the meetings that hold regarding the audit.
10. Assessing the tax:
It is the process of calculating one’s property. The person who calculates
called as an assessor. This information will record in the local government
regarding taxes and support. It has a specialization in the preview logics
that specifically modify for the sake of insurance.
11. Proof can presents:
During the audit, one may collect the details from the person to ensure that
every property has a legal proof. It helps in the evaluation of further
discussions. It helps in increasing the goodwill that might keep track of the
collected data.
12. The event of a loss:
In the event of loss of lives or property, an individual can get help from the
insured. It determines the values for business in the matter taking better
decisions on their own. It enables one to collect details about the accounts
and properties that maintained.
13. Settlement of claims:
The settlement of claims demands the enhancement and better atmosphere
that sequenced within the organization. For accessing and influencing
moral values one has to restrain themselves from performing fraudulent
activities.
14. Settlement of disputes:
The disputes between the management can settle easily that handled within
the past accounts. This requires independent information that enhanced the
accurate assessment of the traders. It has a more constructive way of
improving the efficiency of business within the management.
15. Reports:
It produces the report of the truth and fairness of the reported audit. It
involves financial statements that are more compatible when a person goes
through the documents and reports of the audit.
16. Maintaining the reputation of the organization:
For completion of an external audition, the reputation of the company
enhanced in the meanwhile ensuring the growth of the organization. It
reviews the multitude of regulations since it maintains a reputation in the
community.
17. High-quality perfection:
Every organization will strive indefinitely for their success. These
decisions will take in-case to undertake the particular concept that an
organization provides. These financial representations of data can be
gathered once the complete process of auditing gets over. It deals with the
same accounting and interpreting of high-quality perfection.
18. Ethical behavior:
Auditing can repeat to gain the business and its overall strategies. It
devotes to the dealings in the world. This analysis and exceptions are the
most ethical behavior of a company. This information about accounting and
records are qualified under the procedures of the firm.
19. Maximizing profit level:
An audit termed as an appraisal activity that related to the sequence of
challenging circumstances that also involves the conflict that pursued in
the maximum profit level that is to reach.
20. Impairments with quality standards:
Risk management here relates to the union and transactional specifications
of the reviewed concepts. It has focused on the primary coordination of the
standards. It must have impairments with quality standards.
This module is related to the estimates of expectancy. It avoids fraud
activities that make use of the organization’s resources. It is mainly related
to employee standards.
21. Analytical procedures:
It can neither help in prioritizing the changes and allocating them with the
resources that record in the work papers of audits. It also involves the
control environment and appointment of analytical procedures of the
system.
22. Reconciliations of items:
These findings will identify if the reconciliations of the processed items
and the respective operations are carried. This recommendation has to be
finished at least once a month. The process of reviewing the reports can be
estimated twice in a year.
23. Accounting on auditing:
Auditing is the process that includes testing and weighting of the accounts.
It is the correctness of the reviews of the logic. It is critical, analytical and
the investigation that is done leads to heavy work on ideas and adaptable
methods. Audited accounts carry greater knowledge than the accounts that
are under the process of auditing.
24. Returning the loan:
Some of the funds such as LIC, HUDCO, IFCI, etc, evaluates the previous
year auditing accounts that are determined as more reliable. One can take
any kind of loan that the bank offers. The policies that are followed does
not remain constant whereas it will change twice in a year.
25. Provisions in the budget:
The provision in budget results in the event of sales, profits, and business
and sometimes account for the loss. It also enhances the auditing even
when the death of the partner is approved.
26. No politics:
Audits have politics that are no way related to politics or the politician. It
has certain proofs that act the real linked data among the other recent ideas.
27. Auditor constructive:
Constructive people make certain disputes and take the decision that re-
dictated free for help and continues to report it. It works with the people
who deal with stakeholders to prove the efficiency of an organization. And
It forces the organization to force settle all the disputes. It helps in quick
and common rectification of frauds and other common errors.
28. Regular audit:
Regular audit deals with the accounts that are facilitated to involve the
happening of the insured claims. It can create fear among the employees, to
gain confidence in the related auditing sections.
29. Settlement of claims:
Some of the audited accounts that are explained are defined and must fit
into the claims to ensure the recent files. It determines the value of the
business to claim for the other networks.
30. Money on contract basis:
Here the money involved is on a contract basis that compromises certain
related functions. It has the sense of hiring a permanent internal employee
which makes more sense financially.
Demerits or Disadvantages of Auditing:
The main risk in the audit program is towards the assurance services that
derive wrong conclusions. Assurances are to be provided within the related
certification. Here are some of the limitations of an audit.
1. Extra cost:
Testing involves the extra cost to the organization which is considered a
burden. It involves the disruptions of multiple cases. The auditor has to
concentrate more even though there are disruptions. Before the audit
begins the auditor must get the attention of all the staff members of the
organization.
2. Evidence:
Evidence that is identified is more pervasive than conclusive. The strength
of the submission of audited accounts makes major changes in the accounts
of the distribution of profits.
3. Harassment of staves:
Since the employees cannot express their own in terms of auditing, these
changes are calibrated and the employees will feel harassed due to the
changes that are caused. Even if they try to express their knowledge of new
ideas, the organization may not entertain the employees in these types of
situations.
4. Unsuitable changes:
The rules and regulations of business may vary from time to time. It
remains unstable when the program begins. The company’s policies may
not change periodically whereas the rules and regulations may.
5. Chances of fraud:
Since the information delivered after the audit procedure is credential then
there becomes more chance of getting the situations where an individual
will be forced to commit the crime. It harasses the auditors to commit
crimes after the audit gets over.
6. Small concerns:
Small-scale industries may usually proceed with transactions that are
usually completed within a shorter period. Thus, auditing is not too
important.
7. Problems in remedial measures:
Here the problem is created in remedial measures that are enhanced by the
detailed interface of the data of remedial measures. These remedial
measures are not included in the audit program.
8. Insufficient considerate:
The education curve will be contented about the business and insufficient
relaxed networks and also offers systematic internal recruitment. These
may gravely obstruct the expense of all the employees.
9. Not guaranteed:
Auditing cannot provide any data that are analyzed and prepared. It has
financial accounts for the data that are provided. It is disclosed based on
the information and explanations that are agreed on by the clients.
Importance of Financial Audit for Small Businesses:

Helps in attaining various important objectives

Misstatement risks
Prevention of any type of frauds
Cost of capital
Objectives of an Audit:

The main objective of the auditing is to provide a suggestion on financial

reports and statements.
For this, the auditor needs to analyze all the financial statements to check
the financial position of the entity.
Though the auditing will not cover all the errors and frauds that happened
with the help of financial reports provided.
Here the main objectives of the auditing categorized into two types. They
are
(i) Primary objectives
(ii) Subsidiary objectives.
Primary Objectives of Auditing:
The main objectives of auditing are also known as the primary objectives
of auditing. Some of them mentioned are below

Analyzing the internal system.

Checking the authenticity and validity of transactions.
Examining arithmetical accuracy of books of
accounts, casting, balancing, etc.
Finalizing the current value of assets and liabilities.
Inspecting the variance between capital and revenue type of
 transactions.

Secondary Objectives of Auditing:

The secondary objectives of auditing also known as subsidiary objectives
of auditing. Moreover, these are the type of objectives which help you in
completing primary objectives. Some of them are

Finding and preventing errors

Finding and preventing of frauds
Unusual stock valuation.

What is the difference between transfer payments and current

transfers? Are they in any way related?

Current transfers include all transfers that do not have the following
characteristics of capital transfers:

1. Transfers of ownership of fixed assets

2. Transfers of funds linked to acquisition or disposal of fixed
assets
3. Forgiveness by creditors of liabilities without any
counterparts being received in return

Current transfers are one-sided transaction transfers, such as

worker remittances, in which there is no quid pro quo between
the two parties involved in the transfer.
The two main types of current transfers are general
government transfers, which are conducted between
governments of two countries, and other sector transfers, such
as those involving worker remittances or premiums associated
with non-life insurances.
Accounting for current transfers is not always clear in balance
of payments because of their one-sided nature.

Types of Current Transfers

The two main types of current transfers are general government and other
sectors.
General government transfers include the following:

Transfers in cash or kind backed by international

cooperation between governments of different economies, or
between a government and an international organization
Cash transfers between governments for financing current
expenditures by the recipient government
Gifts of food, clothing, medical aid, etc. as relief efforts after a
natural disaster
Gifts of certain military equipment
Current taxes on income and wealth, and other transfers such
as Social Security contributions

Other sector transfers include:

Workers’ remittances by migrants (someone who stays in

another nation for more than a year) who are considered
residents of other countries
Transfers in cash and kind for disaster relief
Regular contributions to charitable, religious, scientific, and
cultural organizations
Premiums and claims for non-life insurance
transfer payments
A transfer payment is money paid to an individual who has not
performed any service or rendered any goods for it.
Transfer payments are ways for local, state, and federal
governments to redistribute money to those in need.
Transfer payments are considered income and are potentially
taxable.

What is small finance? How are they different than other commercial
banks?

The prime objective of a small finance bank would be to undertake basic

banking activities of acceptance of deposits and lending to unserved and
underserved sections of the population.
The SFBs provide services to small business units, small and marginal
farmers, micro and small industries and unorganized sector entities through
high technology & low-cost operations, While the Scheduled Commercial
banks provided banking services to all sections of the society.
i. Rate of interest
The rates on interest on bank loans will be as per directives issued by our
Department of Banking Regulation from time to time.
ii. Service charges
No loan related and adhoc service charges/inspection charges should be
levied on priority sector loans up to 25,000. In case of eligible priority
sector loans to Self-help groups/ Joint Liability Groups, this limit will be
applicable per member and not to the group as a whole

Why does a company have a high profit margin but a low asset
turnover?

Asset Turnover =Revenue / total assets

Asset turnover = Revenue ÷ Total Assets
Indicates the relationship between assets and revenue.
Things to remember

Companies with low profit margins tend to have high asset

turnover, those with high profit margins have low asset
turnover - indicating pricing strategy.
This ratio is more useful for growth companies to check if in
fact they are growing revenue in proportion to sales.
$12,154 =net sales
= 0.85
$14,725=liabilities
For Cory's Tequila Co.: $12,154 ÷ $14,725 = 0.85
Asset Turnover Analysis:
This ratio is useful to determine the amount of sales that are generated
from each dollar of assets. As noted above, companies with low profit
margins tend to have high asset turnover, those with high profit margins
have low asset turnover. Cory's Tequila Co.'s asset turnover seems to be
relatively low, meaning that it makes a high profit margin on its products.
For companies in the retail industry you would expect a very high turnover
ratio - mainly because of cutthroat and competitive pricing.
Mega grocery stores, discount stores, and warehouse clubs often have
small profit margins but have high turnover ratios. The small profit
margins as a percent of sales exist because of intense
competition. The inventory turnover ratios are high because the stores
feature the fast selling brands at low prices. Their strategy is that huge
sales volumes with small profit margins will still result in adequate net
income dollars.
In contrast to the stores with low profit margins and high turnover ratios, is
a heavy equipment manufacturer with a high demand product that takes six
months to manufacture. If this manufacturer has few or no competitors, a
great product, and an excellent reputation for service, its profit margin can
be very large. Unlike the discount stores, its inventory turnover will be
very very low

How is a cost audit performed?

Objectives of Cost Audit

The following are some of the objectives for which cost audit is
undertaken:

1. To establish the accuracy of costing data. This is done by

verifying the arithmetical accuracy of cost accounting entries
in the books of accounts.
2. To ensure that cost accounting principles are governed by
the management objectives and these are strictly adhered to in
preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect
errors, frauds and wrong practice in the existing system.
4. To check up the general working of the cost department of
the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on
certain important matters
6. to determine the actual cost of production when the goods
are ready.
7. To reduce the amount of detailed checking by the external
auditor its effective internal cost audit system is in operation.
 8. To find out whether each item of expenditure involved in the
relevant components of the goods manufactured or produced
has been properly incurred or not.
9. Advantages of Cost Audit

The important advantages of cost audit are briefly discussed as follows:

Advantages to the Management

1. It provides necessary information for prompt decision

decisions.
2. It helps management to regulate production.
3. Errors, omission, fraud, and mistakes can be detected and
prevented due to the effective auditing of cost accounts.
4. It reduces the cost of production through plugging loopholes
relating to wastage of material, labor, and overheads.
5. It can fix the responsibility of an individual wherever
irregularities or wastage are found.
6. It improves the efficiency of the organization as a whole and
costing system in particular by constant review, revision and
checking or routine procedures and methods.
7. It helps in comparing actual results with budgeted results
and points out the areas where management action is more
needed.
8. It also enables comparison among different units of the
factory to find out the profitability of the different units.
9. It exercises a moral influence on employees which keeps
them efficient and alert.
10. It ensures that the cost accounts have been
maintained under the principles of costing employed in the
industry concerned.
11. It ensures effective internal contr
12. It helps to increase the overall efficiency of
productivity.
13. Inefficiency can be eliminated by suitable
corrective actions.
14. It facilitates cost control and cost reduction
15. It assists in the valuation of stock of materials,
 works in progress and finished goods.
16. It ensures maximum utilization of available
resources,
17. It enables the management to choose economic
methods of operations and thus earn profits to satisfy the
shareholders and the investing public.
18. It enables the management to chalk out the
future policy based on the report by the cost auditor especially
regarding labor, raw material, plant, etc. to maximize
production and reduce the cost of production.
19. It tests the effectiveness of cost control
techniques and to evaluate their advantages to the enterprise.
20. Circumstances under Which Cost Audit is
Desirable

The following are the circumstances under which cost audit is ordered:

1. Price Fixation.
2. Cost variation within the industry.
3. Inefficient Management.
4. Tax Assessment. courtesy edunote

What is the difference between a ledger and a general ledger?

GL is a set of master accounts where transactions are recorded

whereas Sub-ledger is an intermediary set of accounts linked
to the SL.
Examples of the general ledger are account receivable, account
payable, cash management, bank management, and fixed
assets and examples of sub-ledger are customer accounts,
vendor accounts, bank accounts, and fixed assets.
The groups of transactions have different characteristics in
general ledger whereas in the Subsidiary ledger the groups of
transactions have common characteristics.
There can be only one ledger account in the GL and there can
be many sub-ledger accounts.
GL contains a limited volume of data whereas Sub-ledger
contains a large volume of data.
GL has a chart of accounts whereas sub-ledger does not have
charts of accounts.
General ledger has no such requirement for the ledger account
whereas the total of sub-ledger should always match with the
line item amount on the general ledger.
GL control sub-ledger whereas Sub-ledger is part of the
general ledger.
The trial balance is prepared by using general
ledger whereas trial balance is not prepared by using a general
ledger
The general ledger is a set of master accounts where
transactions are recorded. The general ledger is the principal
set of accounts where all financial transactions are recorded
General ledger contain all debit and credit entries of
transaction and entry for same is done in different account
mainly there are five types of accounts assets, liabilities,
equity, income, and expense. But there are limitations in the
recording of the transaction so the sum of a different subset of
sub-ledger is added in general ledger. It is also referred to as a
chart of account master. General ledger control sub-ledger.
Sub-ledger is also known as a subsidiary ledger. Sub-ledger is
an intermediary set of accounts linked to the general ledger. It
is a detailed subset of accounts that contains transaction
information. It is the subset of the general ledger in the
accounting it is not possible to record all transactions in
general ledger hence transactions are recorded in sub-ledger in
a different account and their total sum is reflected in general
ledger. The total of sub-ledger should always match with the
line item amount on the general ledger. So, it contains detail
information regarding the business transaction and financial
accounts. It can include purchase, payable, receivable,
production cost and payroll.
Examples of the Subsidiary ledger are customer accounts, vendor accounts,
bank accounts, and fixed assets. The groups of transactions have common
characteristics. Sub-ledger is part of the general ledger but the Trial
balance is not prepared by using a general ledger.
What are the two basic procedures for accounting for inventory?

Inventory Methods:
There are two basic methods used to account for inventory:
Periodic and Perpetual.
Periodic Inventory: o A separate general ledger account is used for each
type of inventory transaction. o Cost of goods sold transactions are ignored
during the period and recorded only at the end of the period. o Merchandise
inventory balance in the general ledger is not updated until the end of the
period and does NOT represent the value of inventory on hand.
• Perpetual Inventory: o All inventory transactions are recorded in a single
merchandise inventory account in the general ledger. o Cost of goods sold
transactions are recorded as incurred throughout the period
All inventory transactions are recorded as incurred, constantly updating the
value of inventory in the general ledger which represents the value of
inventory on hand.

First in, first out method. Under the FIFO method, you are
assuming that items bought first are also used or sold first,
which also means that the items still in stock are the newest
ones. This policy closely matches the actual movement of
inventory in most companies, and so is preferable simply from
a theoretical perspective. In periods of rising prices (which is
most of the time in most economies), assuming that the earliest
units bought are the first ones used also means that the least
expensive units are charged to the cost of goods sold first. This
means that the cost of goods sold tends to be lower, which
therefore leads to a higher amount of operating earnings, and
more income taxes paid. Also, it means that there tend to be
fewer inventory layers than under the LIFO method (see next),
since you will continually use up the oldest layers.
Last in, first out method. Under the LIFO method, you are
assuming that items bought last are sold first, which also
means that the items still in stock are the oldest ones. This
policy does not follow the natural flow of inventory in most
 companies; in fact, the method is banned under International
Financial Reporting Standards. In periods of rising prices,
assuming that the last units bought are the first ones used also
means that the cost of goods sold tends to be higher, which
therefore leads to a lower amount of operating earnings, and
fewer income taxes paid. There tend to be more inventory
layers than under the FIFO method, since the oldest layers may
not be flushed out for years.

What is the difference between investing in a mutual fund and in an

IPO?

Investing in a mutual fund and investing in an initial public offering (IPO)

of a company are two different things.
A mutual fund pool money from several investors and invests this in
stocks, bonds, money market instruments and other types of securities.
In mutual funds, you have option of investing a lump sum amount at once
or you can opt for Systematic Investment Plan (SIP). You can start a
mutual fund SIP from as low as Rs 500 a month.
An IPO is the very first sale of stock issued by a company to the public.
The Company utilizes the fund generated through IPO to clear off debts,
expand and improve their business or use it as a working capital. Investing
in IPOs involves a lot of risk but also has the potential to give very high
returns among other assets in the portfolio.
You can invest in mutual fund either through fund website or through Asset
Management Companies (AMCs). To start investing in an IPO, you need to
open demat cum trading account. A linked bank account and a PAN card
are also required. You can also apply for IPO subscription directly from
your bank account through net-banking.
Yes, there is a difference. IPOs of companies may open at lower or higher
price than the issue price depending on market sentiment and perception of
investors. However, in the case of mutual funds, the par value of the units
may not rise or fall immediately after allotment. A mutual fund scheme
takes some time to make investment in securities. NAV of the scheme
depends on the value of securities in which the funds have been deployed.
Investors may please note that in case of mutual funds schemes, lower or
higher NAVs of similar type schemes of different mutual funds have no
relevance. On the other hand, investors should choose a scheme based on
its merit considering performance track record of the mutual fund, service
standards, professional management, etc. This is explained in an example
given below.
Suppose scheme A is available at a NAV of ₹ 15 and another scheme B at ₹
90. Both schemes are diversified equity oriented schemes. Investor has put
₹ 9,000 in each of the two schemes. He would get 600 units (9000/15) in
scheme A and 100 units (9000/90) in scheme B. Assuming that the markets
go up by 10 per cent and both the schemes perform equally good and it is
reflected in their NAVs. NAV of scheme A would go up to ₹ 16.50 and that
of scheme B to ₹ 99. Thus, the market value of investments would be ₹
9,900 (600* 16.50) in scheme A and it would be the same amount of ₹
9900 in scheme B (100*99). The investor would get the same return of
10% on his investment in each of the schemes. Thus, lower or higher NAV
of the schemes and allotment of higher or lower number of units within the
amount an investor is willing to invest, should not be the factors for
making investment decision. Likewise, if a new equity oriented scheme is
being offered at ₹ 10 and an existing scheme is available for ₹ 90, should
not be a factor for decision making by the investor. Similar is the case with
income or debt-oriented schemes.
Therefore, the investor should give more weightage to the professional
management of a scheme instead of lower NAV of any scheme. He may get
much higher number of units at lower NAV, but the scheme may not give
higher returns

What is the difference between a firm's operating cycle and its cash
cycle? A) its account payable days. B) its account receivable days. C)
its inventory days.

OPERATING CYCLE
Raw material >>> Work-in-Process >>> Finished Goods >>> Accounts
Receivable >>> Cash
This cycle of raw material conversion to cash is called
operating or working capital cycle. In terms of time, it is the time taken
after the purchases of raw material till its translation into cash. The total of
inventory holding period and a receivable collection period of a firm is the
operating cycle time of that firm.
Operating cycle and cash operating cycle are used interchangeably but it’s
a misconception. They are different by a small margin but that makes a big
difference.
CASH OPERATING CYCLE
Like working capital, operating cycle can also be gross operating cycle
(operating cycle) and net operating cycle (cash operating cycle). Cash
operating cycle is gross operating cycle less creditor’s collection period. It
is the time period for which the working capital is required.
HOW TO CALCULATE USING FORMULA?
The time of operating cycle can be broken as follows:
1. Inventory Holding Period
• Raw Material Holding Period
• Work-in-process Period
• Finished Goods Holding Period
2. Receivables Collection Period
FORMULA FOR OPERATING CYCLE
Operating Cycle = Inventory Holding Period + Receivable Collection
Period
Or, Operating Cycle = Raw Material Holding Period + Work-in-process
Period + Finished Goods Holding Period + Receivable Collection Period
FORMULA FOR CASH OPERATING CYCLE
Cash Operating Cycle = Inventory Holding Period + Receivable Collection
Period – Creditor’s Payment Period
Or, Cash Operating Cycle = Raw Material Holding Period + Work-in-
process Period
+ Finished Goods Holding Period + Receivable Collection Period –
Creditor’s Payment Period
OPERATING CYCLE EXAMPLE
Suppose 500 Rs worth of inventory is purchased from a supplier on 20
days credit and it was sold after 40 days of purchasing it. The credit of 40
days is given to the buyer. The buyer paid on completion of the credit
period.
Here,
The Operating Cycle = Inventory Holding Period + Receivable Collection
Period
= 40 + 40
= 80 Days.
Cash Operating Cycle = 80 Days – 20 Days (Supplier’s Credit)
= 60 Days
ANALYSIS OF OPERATING AND CASH CYCLE
Operating cycle is extremely important because business is all about the
running the operating cycle smoothly. If it is running smoothly, almost
everything will be smooth. If any part of the operating cycle is stuck, the
whole business gets disturbed. For a manager to effectively manage the
business, he should have a deep understanding of his business cycle and
potential threats and risks to it. Proactively, he should have ways and
means to mitigate those threats and risks.
In our example, operating cycle is 80 days. The entrepreneur should always
focus to reduce it as more as possible and that will ensure better utilization
of their fixed assets. In turn, they will gain the higher return on their
investment.
On the other hand, cash operating cycle is the base for working capital
estimations. In our example, working capital requirement is Rs500 for 60
days. Banks take this as a base for funding their client. A manager handling
finance should focus on reducing the cash cycle as that will save him the
interest cost. Reducing this cycle means reducing the inventory holding
period and increasing the supplier’s payment period. Other than normal
strategies,
What is the difference between cash flow management and capital
management?

Cash Flow Elements

Cash flow refers to the amount of cash that moves in and out of your
company in a specific period of time. The thing to remember, however, is
that cash flow is almost never equal to net profit, because most companies
tend to sell on credit and then borrow money. If you’re having trouble
determining your cash flow, you can buy a cash-flow tool that can make
this task easier. The cash-flow tool can provide you with a raw number of
how much cash you generated in a specific time frame. For example, if you
own a bakery and you want to know how much cash you generated in the
past seven days, the cash flow tool will give you that figure. It won’t tell
you much about your net profits because it doesn’t subtract your liabilities,
but it can paint a picture of the amount of cash that you generate in a
specific time period.
Working Capital Elements
Working capital refers to the difference between your company’s current
assets and current liabilities. In accounting, the term “current” refers to
assets that you can convert into cash or liabilities that are due in less than
12 months. Typically, these liabilities are short-term loans rather than long-
term debt such as an original loan when you opened your business.
Because both figures are stated in the balance sheet of your company, the
calculation of working capital is fairly simple. A large amount of working
capital or an increase in working capital means that your company’s assets
are sufficient to cover liabilities that are soon due. A negative change in
working capital means your company most likely can’t pay bills that are
coming due, which could mean that you have to make some changes.
Differences Between Cash Flow and Working Capital
The primary difference between cash flow and working capital is
that working capital provides a snapshot of your company’s current
financial situation, whereas cash flow tells you how much cash your
business can generate over a specific period of time. Your monthly or
quarterly cash flow will differ from the amount of money generated in a
year. As a result, working capital gives you a good idea about how quickly
your company can pay immediate liabilities, while cash flow is more
forward-looking. If working capital is low but cash flow is strong, your
company can generate sufficient cash, if given enough time. However, if
creditors aren’t willing to give you enough time, you may be facing some
serious financial difficulty, including the possibility of bankruptcy.
Cash Flow and Working Capital Considerations
Without understanding cash flow and working capital, it’s difficult for you
to know whether or not your company can survive a sudden financial
catastrophe. If your working capital is greater than your liabilities, you can
be reasonably confident that you can pay any debts that are due within a
year. But if you were to rely on knowing your cash flow, you wouldn’t
know the true financial position of your business, as it relates to debt.

What are some examples of activities that have regular cash flows?

Cash flows from financing activities is a line item in the statement of cash
flows. This statement is one of the documents comprising a
company's financial statements. The line item contains the sum total of the
changes that a company experienced during a designated reporting
period that were caused by transactions with owners or lenders to either:

Provide long-term funds to the company; or

Return those funds to the owners or lenders.

If the company is a not-for-profit, then you would also include in this line
item all contributions from donors where the funds are to be used only for
long-term purposes.
Items that may be included in the financing activities line item are:

Sale of stock (positive cash flow)

Repurchase of company stock (negative cash flow)
Issuance of debt, such as bonds (positive cash flow)
Repayment of debt (negative cash flow)
Payment of dividends (negative cash flow)
Donor contributions restricted to long-term use (positive cash
flow)

Cash Flow from Investing Activities?in cash flow

Cash Flow from Investing Activities is the section of a company’s cash
flow statement that displays how much money has been used in (or
generated from) making investments during a specific time period.
Investing activities include purchases of long-term assets (such as property,
plant, and equipment), acquisitions of other businesses, and investments in
marketable securities (stocks and bonds).
What are Investing Activities in Accounting?
Let’s look at an example of what investing activities include. In this section
of the cash flow statement, there can be a wide range of items listed and
included, so it’s important to know how investing activities are handled in
accounting.
Investing Activities Include:

Purchase of property plant, and equipment (PP&E) –

a.k.a. capital expenditures
Proceeds from the sale of PP&E
Acquisitions of other businesses or companies
Proceeds from the sale of other businesses (divestitures)
Purchases of marketable securities (i.e., stocks, bonds, etc.)
Proceeds from the sale of marketable securities
What do Investing Activities Not Include?

Now that you have a solid understanding of what’s included, let’s look at
what’s not included.
Not included items are:

Interest payments or dividends

Debt, equity, or other forms of financing
Deprecation of capital assets (even though the purchase of
these assets is part of investing)
All income and expenses related to normal business operations
Cash flows from investing activities

Cash flows from investing activities is a line item in the statement of cash
flows, which is one of the documents comprising a company's financial
statements. This line item contains the sum total of the changes that a
company experienced during a designated reporting period in investment
gains or losses, as well as from any new investments in or sales of fixed
assets. Items that may be included in the investing activities line item
include the following:

Purchase of fixed assets (negative cash flow)

Sale of fixed assets (positive cash flow)
Purchase of investment instruments, such as stocks and bonds
(negative cash flow)
Sale of investment instruments, such as stocks and bonds
(positive cash flow)
Lending of money (negative cash flow)
Collection of loans (positive cash flow)
Proceeds of insurance settlements related to damaged fixed
assets (positive cash flow)

If a company is reporting consolidated financial statements, the preceding

line items will aggregate the investing activities of all subsidiaries included
in the consolidated results.

Cash Flow from Operations Formula

While the exact formula will be different for every company (depending on
the items they have on their income statement and balance sheet), there is a
generic cash flow from operations formula that can be used:
Cash Flow from Operations = Net Income + Non-Cash Items + Changes in
Working Capital
Cash Flow from Operations Example
Below is an example of Amazon’s operating cash flow from 2015 to 2017.
As you can see in the screenshot below, the statement starts with net
income, then adds back any non-cash items, and accounts for changes
in working capital.
Follow these three steps:

1. Take net income from the income statement

2. Add back non-cash expenses
3. Adjust for changes in working capital

1. Step 1: Start calculating operating cash flow by taking net

income from the income statement.

Step 2: Add back all non-cash items. In this case, depreciation and
amortization is the only item.
Step 3: Adjust for changes in working capital. In this case, there is only one
line because the model has a separate section below that calculates the
changes in accounts receivable, inventory, and accounts payable.
 1. working capital calculation

What is the difference between profit and accumulated profit?

What are Accumulated Earnings?

Accumulated earnings is the sum of a company's profits,
after dividend payments, since the company's inception. It can also be
called retained earnings, earned surplus, or retained capital.
How Do Accumulated Earnings Work?
Let's look at an example to illustrate:
Assume Company XYZ has been in business for five years, and it has
reported the following annual net income:
Year 1: Rs10,000
Year 2: Rs5,000
Year 3: -Rs5,000
Year 4: Rs1,000
Year 5: -Rs3,000
Assuming Company XYZ paid no dividends during this time,
XYZ's accumulated earnings are the sum of its net income since inception:
10,000 + 5,000 - 5,000 + 1,000 - 3,000 = 8,000.
In subsequent years, XYZ's accumulated earnings will change by the
amount of each year's net profit, less dividends.
The statement of accumulated earnings summarizes changes in
accumulated earnings for a fiscal period, and total accumulated earnings
appears in the shareholders' equity portion of the balance sheet. This means
that every dollar of accumulated earnings is essentially another dollar
added to shareholders' equity.
Why Do Accumulated Earnings Matter?
It is important to understand that accumulated earnings do not represent
extra cash or cash left over after the payment of dividends. Rather,
accumulated earnings demonstrate what a company did with its profits;
they are the amount of profit the company has reinvested in the business
since its inception. These reinvestments are either asset purchases
or liability reductions.
Accumulated earnings somewhat reflect a company's dividend policy,
because it reflects a company's decision to either reinvest profits or pay
them out to shareholders. Ultimately, most analyses of accumulated
earnings focuses on evaluating which action generated or would generate
the highest return for the shareholders.
Capital-intensive industries and growing industries tend to retain more of
their earnings than other industries because they require more
asset investment just to operate. Also, because accumulated earnings
represents the sum of profits less dividends since inception, older
companies may report significantly higher accumulated earnings than
identical younger ones. This is why comparison of accumulated earnings is
difficult but generally most meaningful among companies of the same age
and within the same industry, and the definition of "high" or "low"
accumulated earnings should be made within this context.

What is the difference between outstanding expenses and prepayment

expenses, outstanding income and accrual income, interest on capital
and interest on drawing?

Outstanding Expenses
Sometimes in the normal course of business, an enterprise may have some
expenses relating to which the payment is due at the end of the year. We
know these expenses as Outstanding Expenses.
Wages, salary, rent, interest on the loan, etc. are examples of such expenses
that may remain due at the end of the accounting year.
However, we need to record them as they relate to the incomes of the
current year. Like all other expenses, they are also a charge against the
profit of the current year.
Prepaid Expenses
In the normal course of business, some of the expenses may be paid in
advance. However, the organization may not receive the benefits from
these expenses by the end of the current accounting year. We call these
expenses as prepaid expenses. We treat them as current assets.he Prepaid
Expense A/c appears on the assets side of the Balance Sheet. While
preparing the Trading and Profit and Loss A/c we need to deduct the
amount of prepaid expense from that particular expense.
Accrued Income
It may so happen that we may earn some incomes during the current
accounting year but not receive them in the same year. Such income is
accrued income.Thus, these incomes pertain to the current accounting year.
Therefore, we need to record them as current year’s incomes.he Accrued
Income A/c appears on the assets side of the Balance Sheet. While
preparing the Trading and Profit and Loss A/c we need to add the amount
of accrued income to that particular income
Income Received in Advance
In the ordinary course of a business, it may receive some incomes in
advance in spite of not rendering the services. Such incomes are incomes
received in advance.
Thus, these are not pertaining to the current accounting year. Therefore,
these are current liabilities.
Interest on capital is PAID to the partner. Accordingly it is an expense for
the firm.
Interest on drawings is CHARGED/RECEIVED from the partner.
Accordingly it is an income for the firm. Reverse will be treatment in the
books of the partner. Interest on capital will be income and interest on
drawing shall be expense.

Comparision of companies by ratios analysis

Introduction and Rationale of the study

Objectives

This Study will examine the financial statement and analysis its financial
prospects in terms of liquidity, debt, company performance, efficiency
and the market performance of the market.
Sources of Data

The main data source ids the published annual reports of A Ltd, B LTD ,
and C LTD for the year ended 2007, 2008, 2009, 2010 and 2012.
Methodology

The Financial Ratios:

I. Liquidity Ratio

i) Current Ratio
ii) Quick Ratio

II. Debt Ratio

i) Debt-to-equity
ii) Debt-to-Total Asset

III. Profitability/Performance
 i) Gross Profit Margin
ii) Net Profit Margin
iii) Return on Asset (ROA)
iv) Return on Equity (ROE)

IV. Activity Ratio

i) Account Receivables Turnover

ii) Average Collection Period
iii) Inventory Turnover
iv) Inventory Turnover in days
v) Payable Turnover
vi) Payable Turnover in Days
vii) Operating Cycle
viii) Cash Conversion Cycle

V. Market Performance

i) EPS
ii) Payout Ratio
iii) PE Ratio
Findings of the Ratio Analysis

Liquidity Ratio
In a nutshell, a company's liquidity is its ability to meet its near-term
obligations, and it is a major measure of financial health. Liquidity can
be measured through several ratios.
I. Current ratio
The current ratio is the most basic liquidity test. It signifies a company's
ability to meet its short-term liabilities with its short-term assets. A
current ratio greater than or equal to one indicates that current assets
should be able to satisfy near-term obligations. A current ratio of less
than one may mean the firm has liquidity issues.
Current Ratio = (Current Assets) / Current Liabilities

Current ratio
Company/Years 2007 2008 2009 2010 2011 Average
A 2.51 1.42 1.71 1.84 2.66 2.03
B 3.12 4.96 6.11 2.87 2.09 3.83
C 7.18 7.01 1.62 1.56 4.65 4.40
Table 1: Current ratio

Among the three companies C Ltd. is more liquid then B LTD and then A
LTD
Quick Ratio
The quick ratio is a tougher test of liquidity than the current ratio. It
eliminates certain current assets such as inventory and prepaid expenses
that may be more difficult to convert to cash. Like the current ratio,
having a quick ratio above one means a company should have little
problem with liquidity. The higher the ratio, the more liquid it is, and the
better able the company will be to ride out any downturn in its business.
Quick Ratio = (Cash + Accounts Receivable + Short-Term or Marketable
Securities) / (Current Liabilities)
Acid test ratio
Company/Years 2007 2008 2009 2010 2011 Average
A 1.97 1.37 0.81 1.22 2.20 1.51
B 3.12 4.96 6.11 2.87 2.09 3.83
C 6.06 5.76 1.37 1.30 4.22 3.74
Table 2: Acid test ratio
The quick ratio also behalf like the current ratio. Among the three
companies BLtd. is more liquid then C and then A. One interesting
observation is the Current and Quick ratios of all selected year are same,
because of null inventories in their operations.

Ranking in terms of Liquidity

Rank Current ratio Acid test ratio
1 C B
2 B C
3 A A
Table 3: Ranking in terms of Liquidity
Debt Ratio
The debt ratio compares a company's total debt to its total assets, which
is used to gain a general idea as to the amount of leverage being used by
a company. A low percentage means that the company is less dependent
on leverage, i.e., money borrowed from and/or owed to others. The
lower the percentage, the less leverage a company is using and the
stronger its equity position. In general, the higher the ratio, the more risk
that company is considered to have taken on.
Total debt to equity ratio
Company/Years 2007 2008 2009 2010 2011 Average
A 39.00% 39.00% 23.00% 22.00% 24.00% 29.00%
B 24.00% 14.00% 7.00% 20.00% 31.00% 19.00%
C 7.00% 8.00% 33.00% 33.00% 11.00% 18.00%
 Table 4: Total debt to equity ratio
A ltd have comparatively higher debt portion relative to the equity than
other two companies. It might not be normal compared to the industry
and which might put the firm under risk but indicate high leverage.
Debt-to-Total Asset
Company/Years 2007 2008 2009 2010 2011 Average
A 39.91% 70.47% 58.42% 54.42% 37.59% 52.16%
B 32.10% 20.17% 16.38% 34.84% 47.94% 30.29%
C 13.94% 14.26% 61.86% 64.15% 21.49% 35.14%
Table 5: Debt-to-Total Asset
A also have comparatively higher debt portion relative to the Assets than
other two companies. It seems using more debt compared to the industry
and which might put the firm under risk pressure but indicate high
leverage.
Ranking in terms of high leverage
Total debt to Debt-to-Total
Rank
equity ratio Asset
1 A A
2 B C
3 C B
Table 6: Ranking in terms of high leverage
Profitability/Performance
Every firm is most concerned with its profitability. One of the most
frequently used tools of financial ratio analysis is profitability ratios
which are used to determine the company's bottom line. Profitability
measures are important to company managers and owners alike. If a
small business has outside investors who have put their own money into
the company, the primary owner certainly has to show profitability to
those equity investors. Gross Profit Margin
The gross profit margin looks at cost of goods sold as a percentage of
sales. This ratio looks at how well a company controls the cost of
its inventory and the manufacturing of its products and subsequently
passes on the costs to its customers. The larger the gross profit margin,
the better for the company. The calculation is: Gross Profit/Net Sales =
____%. Both terms of the equation come from the company's income
statement.
Gross Profit Margin
Company/Years 2007 2008 2009 2010 2011 Average
A 19.16% 19.16% 19.93% 18.71% 21.72% 19.74%
B 45.93% 51.38% 44.47% 49.62% 47.85% 47.85%
c 65.35% 67.03% 73.94% 68.38% 63.16% 67.57%
Table 7: Gross Profit Margin
Higher GPM indicates higher profitability of the firm.

I. Net Profit Margin

When doing a simple profitability ratio analysis, net profit margin is the
most often margin ratio used. The net profit margin shows how much of
each sales dollar shows up as net income after all expenses are paid. For
example, if the net profit margin is 5% that means that 5 cents of every
rupee is profit. The net profit margin measures profitability after
consideration of all expenses including taxes, interest, and depreciation.
The calculation is: Net Income/Net Sales = _____%. Both terms of the
equation come from the income statement.

Net Profit Margin

 Company/Years 2007 2008 2009 2010 2011 Average
A 4.72% 4.04% 6.05% 6.29% 12.39% 6.70%
B 22.56% 24.35% 20.56% 19.43% 10.53% 19.49%
C 6.87% 7.84% 7.76% 9.46% 16.29% 9.65%
Table 8: Net Profit Margin
Here also higher NPM indicates higher profitability of the firm.
II. Return on Asset (ROA)
The Return on Assets ratio is an important profitability ratio because it
measures the efficiency with which the company is managing its
investment in assets and using them to generate profit. It measures the
amount of profit earned relative to the firm's level of investment in total
assets. The return on assets ratio is related to the asset
management category of financial ratios. The calculation for the return on
assets ratio is: Net Income/Total Assets = _____%. Net Income is taken
from the income statement and total assets are taken from the balance
sheet.
Return on Asset
Company/Years 2007 2008 2009 2010 2011 Average
A 3.67% 3.06% 5.32% 4.45% 5.21% 4.34%
B 9.33% 9.50% 5.81% 4.97% 2.62% 6.45%
C 2.96% 3.42% 2.81% 5.04% 6.02% 4.05%
Table 9: Return on Asset
The higher the percentage, the better the firm’s asset utilization to earn,
because that means the company is doing a good job using its assets to
generate sales.
III. Return on Equity (ROE)
The Return on Equity ratio is perhaps the most important of all the
financial ratios to investors in the company. It measures the return on the
money the investors have put into the company. This is the ratio
potential investors look at when deciding whether or not to invest in the
company. The calculation is: Net Income/Stockholder's Equity =
_____%. Net income comes from the income statement and stockholder's
equity comes from the balance sheet.
Return on Equity
Company/Years 2007 2008 2009 2010 2011 Average
A 5.11% 3.70% 5.65% 5.44% 6.45% 5.27%
B 11.56% 10.84% 6.23% 5.96% 3.42% 7.60%
C 3.17% 3.71% 3.74% 6.69% 6.68% 4.80%
Table 10: Return on Equity
In general, the higher the percentage, the better earning capability
against its equity, with some exceptions, as it shows that the company is
doing a good job using the investors' money.
Ranking in terms of Profitability & Performance
Gross Profit Net Profit Return on Return on
Rank
Margin Margin Asset Equity
1 C B B B
2 B A C C
3 A C A A
Table 11: Ranking in terms of Profitability & Performance
Activity Ratio
Activity ratios measure company sales per another asset account—the
most common asset accounts used are accounts receivable, inventory,
and total assets. Activity ratios measure the efficiency of the company in
using its resources. Since most companies invest heavily in accounts
receivable or inventory, these accounts are used in the denominator of
the most popular activity ratios.
I. Account Receivables Turnover
Accounts receivable is the total amount of money due to a company for
products or services sold on an open credit account. The accounts
receivable turnover shows how quickly a company collects what is
owed to it.

Total Credit Sales

Accounts Receivable Turnover
= Accounts
Receivable

Receivable Turnover
Company/Years 2007 2008 2009 2010 2011 Average
A 5.32 3.84 5.82 22.66 11.26 9.78
B 1.00 0.90 0.92 0.73 0.63 0.84
C 2.11 2.18 2.40 3.33 3.21 2.65
Table 12: Receivable Turnover
The higher the receivable turnover indicates quicker chance of
receivable collection.
II. Average Collection Period
This indicates the collection period in days of the receivables of credit
sales.
Average Collection Period
Company/Years 2007 2008 2009 2010 2011 Average
A 67.69 93.67 61.81 15.89 31.98 54.21
B 358.39 398.53 389.84 492.87 569.13 441.75
C 170.42 165.31 149.81 108.10 112.18 141.16
Table 13: Average Collection Period
The lower the collection period indicates quicker receivable collection.
III. Inventory Turnover
For a company to be profitable, it must be able to manage its inventory,
because it is money invested that does not earn a return. The best
measure of inventory utilization is the inventory turnover ratio which is
the total annual sales or the cost of goods sold divided by the cost of
inventory.

Total Annual Sales or Cost of Goods Sold

Inventory Turnover =
Inventory Cost

Using the cost of goods sold in the numerator is a more accurate

indicator of inventory turnover, and allows a more direct comparison
with other companies, since different companies would have different
markups to the sale price, which would overstate the actual inventory
turnover. (IGC, 2012)

Inventory Turnover
Company/Years 2007 2008 2009 2010 2011 Average
A 5.14 44.62 4.49 6.28 4.74 13.06
B - - - - - -
C 5.91 4.51 5.90 8.39 8.73 6.69
Table 14: Inventory Turnover
The higher turnover indicates the maximum utilization of inventory
efficiently.
B LTD do not have any inventory for operation)
IV. Inventory Turnover in days
The lower turnover in days indicates the maximum utilization of
inventory efficiently.
Inventory Turnover (Days)
Company/Years 2007 2008 2009 2010 2011 Average
A 70.08 8.07 80.17 57.28 75.95 58.31
B - - - - - -
C 60.87 79.87 61.01 42.88 41.23 57.17
Table 15: Inventory Turnover (Days)
B LTD do not have any inventory for operation)
V. Payable Turnover
A short-term liquidity measure used to quantify the rate at which a
company pays off its suppliers. Accounts payable turnover ratio is
calculated by taking the total purchases made from suppliers and
dividing it by the average accounts payable amount during the same
period.

Payable Turnover
Company/Years 2007 2008 2009 2010 2011 Average
A 36.95 32.62 41.98 27.69 33.40 34.53
B - - - - - -
C 8.27 6.14 1.54 4.01 4.76 4.94
 Table 16: Payable Turnover
The lower payable turnover allows the firm to get the maximum
advantage of credit purchase.
B LTD do not have any credit purchase/ payables)
VI. Payable Turnover in Days
Payable Turnover (Days)
Company/Years 2007 2008 2009 2010 2011 Average
A 9.74 11.03 8.57 13.00 10.78 10.63
B - - - - -
C 43.55 58.67 233.25 89.70 75.65 100.16
Table 17: Payable Turnover (Days)
The higher payable turnover days allow the firm to get the maximum
advantage of credit purchase.
VII. Operating Cycle
The time between the purchases of an asset and its sale, or the sale of a
product made from the asset. Most companies desire short operating
cycles because it creates cash flow to cover the company's liabilities.
Operating Cycle
Company/Years 2007 2008 2009 2010 2011 Average
A 138.75 101.85 143.10 73.97 108.98 113.33
B - - - - - -
C 232.13 246.28 211.66 151.58 153.98 199.13
Table 18: Operating Cycle
A long operating cycle often necessitates borrowing and thereby reduces
profitability.
VIII. Cash Conversion Cycle
A metric that expresses the length of time, in days, that it takes for a
company to convert resource inputs into cash flows. The cash conversion
cycle attempts to measure the amount of time each net input dollar is tied
up in the production and sales process before it is converted into cash
through sales to customers. This metric looks at the amount of time
needed to sell inventory, the amount of time needed to collect
receivables and the length of time the company is afforded to pay its
bills without incurring penalties, also known as "cash cycle." Calculated
as:
Where:
DIO represents days inventory outstanding
DSO represents day’s sales outstanding
DPO represents day’s payable outstanding
Cash Conversion Cycle
Company/Years 2007 2008 2009 2010 2011 Average
A 127.22 85.52 153.38 72.98 118.15 111.45
B 358.39 398.53 389.84 492.87 569.13 441.75
C 261.60 260.15 -644.94 -34.32 36.86 -24.13
Table 19: Cash Conversion Cycle
The lower the cash conversion cycles the more the firm efficient in
liquating its asset.
Ranking in terms of activity ratios
Account Average Inventory Payable
Inventory Payable
Rank Receivables Collection Turnover Turnover
Turnover Turnover
Turnover Period in days in Days
1 A A A C C
2 C C A C
 C
3 B B -- -- --
Table 20: Ranking in terms of activity ratios

Market Performance
I. EPS
The portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serve as an indicator of a company's
profitability.
Calculated as:

EPS
Company/Years 2007 2008 2009 2010 2011 Average
A 0.69 0.47 0.70 0.63 0.94 0.69
B 1.08 1.22 1.18 1.05 0.55 1.02
C 0.67 0.92 0.86 0.61 0.51 0.71
Table 21: EPS
II. Payout Ratio
The amount of earnings paid out in dividends to shareholders. Investors
can use the payout ratio to determine what companies are doing with
their earnings.
Calculated as:

Payout Ratio
Company/Years 2007 2008 2009 2010 2011 Average
A 1.84 0.03 0.53 0.01 0.00 0.48
B 0.90 0.32 0.42 0.00 0.00 0.33
C 0.00 0.00 0.00 0.00 0.53 0.11
Table 22: Payout Ratio
Mostly depend in the company policy
III. PE Ratio
The P/E looks at the relationship between the stock price and the
company’s earnings. The P/E is the most popular metric of stock
analysis, although it is far from the only one you should
consider. P/E = Stock Price / EPS
PE Ratio
Company/Years 2007 2008 2009 2010 2011 Average
A 26.13 25.50 18.65 22.22 14.89 21.48
B 15.28 14.75 20.34 20.95 49.09 24.08
C 32.84 20.65 20.93 28.69 34.80 27.58
Table 23: PE Ratio
Ranking in terms of Market performance
Rank EPS Payout P/E
1 B C C
2 C B B
3 A A A
Table 24: Ranking in terms of Market performance
Conclusion

It is to be concluded for this study that, this is a very difficult to make

decision about any of the firms performance and the measurement tools,
because all the formulas and functions are applied to attain an specific
requirement of the firm as the part of the firm’s financial strategy. So, the
qualitative information will also need to understand the purpose of the
firm to use any of the tools to measure their performance. Finally it
could be recommended that, the importance of the ratio analysis depends
on the stakeholder’s specific need and the situational requirements.