Finance Notes

1.Definition of accounting: “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 a financial
character and interpreting the results there of”.

2.Book keeping:It is mainly concerned with recording of financial data relating to the business
operations in a significant and orderly manner.

3. Concepts of accounting:
A. separate entity concept
B. going concernconcept
C. money measurement concept
D. cost concept
E. dual aspect concept
F. accounting period concept
G. periodic matching of costs and revenue concept
H. realization concept.

4 Conventions of accounting
A. conservatism
B. full disclosure
C. consistency
D materiality.

5. Systems of book keeping:

A. single entry system
B. double entry system

6. Systems of accounting
A. cash system accounting
B. mercantile system of accounting.

7. Principles of accounting

a. personal a/c : debit the receiver

Credit the giver

b. real a/c : debit what comes in

credit what goes out

c. nominal a/c : debit all expenses and losses

credit all gains and incomes

8. Meaning of journal: journal means chronological record of transactions.

9. Meaning of ledger: ledger is a set of accounts. It contains all accounts of the business
enterprise whether real, nominal, personal.

10. Posting: it means transferring the debit and credit items from the journal to their respective
accounts in the ledger.

11. Trial balance: trial balance is a statement containing the various ledger balances on a
particular date.

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 Finance Notes

12. Credit note: the customer when returns the goods get credit for the value of the goods
returned. A credit note is sent to him intimating that his a/c has been credited with the value
of the goods returned.

13. Debit note: when the goods are returned to the supplier, a debit note is sent to him
indicating that his a/c has been debited with the amount mentioned in the debit note.

14. Contra entry: which accounting entry is recorded on both the debit and credit side of
the cashbook is known as the contra entry.

15. Petty cash book: petty cash is maintained by business to record petty cash expenses of the
business, such as postage, cartage, stationery, etc.

16.promisory note: an instrument in writing containing an unconditional undertaking signed by

the maker, to pay certain sum of money only to or to the order of a certain person or to the
barer of the instrument.

17. Cheque: a bill of exchange drawn on a specified banker and payable on demand.

18. Stale cheque: a stale cheque means not valid of cheque that means more than six months
the cheque is not valid.

20. Bank reconciliation statement: it is a statement reconciling the balance as shown by the
bank passbook and the balance as shown by the Cash Book. Obj: to know the difference &
pass necessary correcting, adjusting entries in the books.

21. Matching concept: matching means requires proper matching of expense with the revenue.

22. Capital income: the term capital income means an income which does not grow out of or
pertain to the running of the business proper.

23. Revenue income: the income, which arises out of and in the course of the regular business
transactions of a concern.

24. Capital expenditure: it means an expenditure which has been incurred for the purpose of
obtaining a long term advantage for the business.

25. Revenue expenditure: an expenditure that incurred in the course of regular business
transactions of a concern.

26. Differed revenue expenditure: an expenditure, which is incurred during an accounting

period but is applicable further periods also. Eg: heavy advertisement.

27. Bad debts: bad debts denote the amount lost from debtors to whom the goods were sold on
credit.

28. Depreciation: depreciation denotes gradually and permanent decrease in the value of asset
due to wear and tear, technology changes, laps of time and accident.

29. Fictitious assets: These are assets not represented by tangible possession or property.
Examples of preliminary expenses, discount on issue of shares, debit balance in the profit
and loss account when shown on the assets side in the balance sheet.

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 Finance Notes

30Intanglbe Assets: Intangible assets mean the assets which is not having the physical
appearance. And its have the real value, it shown on the assets side of the balance sheet.

31. Accrued Income : Accrued income means income which has been earned by the business
during the accounting year but which has not yet been due and, therefore, has not been
received.

32. Out standing Income : Outstanding Income means income which has become due during
the accounting year but which has not so far been received by the firm.

33. Suspense account: the suspense account is an account to which the difference in the trial
balance has been put temporarily.

34. Depletion: it implies removal of an available but not replaceable source, Such as extracting
coal from a coal mine.

35. Amortization: the process of writing of intangible assets is term as amortization.

36. Dilapidations: the term dilapidations to damage done to a building or other property during
tenancy.

37. Capital employed: the term capital employed means sum of total long term funds employed
in the business. i.e.

(share capital+ reserves & surplus +long term loans –

(non business assets + fictitious assets)

38. Equity shares: those shares which are not having pref. rights are called equity shares.

39. Pref.shares: Those shares which are carrying the pref.rights is called pref. shares
Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the even of
company winding up.

40. Leverage: It is a force applied at a particular work to get the desired result.

41. Operating leverage: the operating leverage takes place when a changes in revenue
greater changes in EBIT.

42. Financial leverage : it is nothing but a process of using debt capital to increase the rate of
return on equity

43. Combine leverage: it is used to measure of the total risk of the firm = operating risk +
Financial risk.

44. Joint venture: A joint venture is an association of two or more the persons who
combined for the execution of a specific transaction and divide the profit or loss their of an
agreed ratio.

45. Partnership: partnership is the relation b/w the persons who have agreed to share the
profits of business carried on by all or any of them acting for all.

46. Factoring: It is an arrangement under which a firm (called borrower) receives advances
against its receivables, from a financial institutions (called factor)

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 Finance Notes

47. Capital reserve: The reserve which transferred from the capital gains is called capital
reserve.

48.General reserve: the reserve which is transferred from normal profits of the firm is called
general reserve

49. Free Cash:The cash not for any specific purpose free from any encumbrance like surplus
cash.

50. Minority Interest: minority interest refers to the equity of the minority shareholders in a
subsidiary company.

51. Capital receipts: capital receipts may be defined as “non-recurring receipts from the owner
of the business or lender of the money crating a liability to either of them.

52. Revenue receipts: Revenue receipts may defined as “A recurring receipts against sale of
goods in the normal course of business and which generally the result of the trading activities”.
53. Meaning of Company: A company is an association of many persons who contribute money
or money’s worth to common stock and employs it for a common purpose. The
common stock so contributed is denoted in money and is the capital of the company.

54. Types of a company:

1.Statutory companies
2.government company
3.foreign company
4.Registered companies:
a. Companies limited by shares
b. Companies limited by guarantee
c. Unlimited companies
D. private company
E. public company

55. Private company: A private co. is which by its

AOA: Restricts the right of the members to transfer of shares Limits the no. Of members
50.Prohibits any Invitation to the public to subscribe for its shares or debentures.

56. Public company: A company, the articles of association of which does not contain the
requisite restrictions to make it a private limited company, is called a public company.

57. Characteristics of a company:

Voluntary association
Separate legal entity
Free transfer of shares
Limited liability
Common seal
Perpetual existence.

58. Formation of company:

Promotion
Incorporation
Commencement of business

59. Equity share capital: The total sum of equity shares is called equity share capital.

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 Finance Notes

60. Authorized share capital: it is the maximum amount of the share capital, which a company
can raise for the time being.

61. Issued capital: It is that part of the authorized capital, which has been allotted to the public
for subscriptions.

62. Subscribed capital: it is the part of the issued capital, which has been allotted to the public
63. Called up capital: It has been portion of the subscribed capital which has been called up by the
company.

64. Paid up capital: It is the portion of the called up capital against which payment has been
received.

65. Debentures: Debenture is a certificate issued by a company under its seal acknowledging a
debt due by it to its holder.

66. Cash profit: cash profit is the profit it is occurred from the cash sales.

67. Deemed public Ltd. Company: A private company is a subsidiary company to public
company it satisfies the following terms/conditions Sec 3(1)3:
1.having minimum share capital 5 lakhs
2.accepting investments from the public
3.no restriction of the transferable of shares
4.No restriction of no. of members.
5.accepting deposits from the investors

68. Secret reserves: secret reserves are reserves the existence of which does not appear on
the face of balance sheet. In such a situation, net assets position of the business is stronger
than that disclosed by the balance sheet.
These reserves are crated by:
1.Excessive dep.of an asset, excessive over-valuation of a liability.
2.Complete elimination of an asset, or under valuation of an asset.

69. Provision: provision usually means any amount written off or retained by way of providing
depreciation, renewals or diminutions in the value of assets or retained by way of providing for
any known liability of which the amount can not be determined
with substantial accuracy.

70. Reserve: The provision in excess of the amount considered necessary for the purpose it was
originally made is also considered as reserve Provision is charge against profits while reserves
is an appropriation of profits Creation of reserve increase proprietor’s fund while creation of
provisions decreases his funds in the business.

71. Reserve fund: the term reserve fund means such reserve against which clearly investment
etc.,

72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with some
other a/c or group of accounts so that the existence of the reserve is not known such reserve
is called an undisclosed reserve.

73. Finance management: financial management deals with procurement of funds and their
effective utilization in business.

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 Finance Notes

74. Objectives of financial management: financial management having two objectives that
Is:
1. Profit maximization: the finance manager has to make his decisions in a manner so that the
profits of the concern are maximized.
2. Wealth maximization: wealth maximization means the objective of a firm should be to
maximize its value or wealth, or value of a firm is represented by the market price of its
common stock.

75. Functions of financial manager:

Investment decision
Dividend decision
Finance decision
Cash management decisions
Performance evaluation
Market impact analysis

76. Time value of money: the time value of money means that worth of a rupee received
today is different from the worth of a rupee to be received in future.

77. Capital structure: it refers to the mix of sources from where the long-term funds required in
a business may be raised; in other words, it refers to the proportion of debt, preference capital
and equity capital.

78. Optimum capital structure: capital structure is optimum when the firm has a combination of
equity and debt so that the wealth of the firm is maximum.

79. Wacc: it denotes weighted average cost of capital. It is defined as the overall cost of capital
computed by reference to the proportion of each component of capital as weights.

80. Financial break-even point: it denotes the level at which a firm’s EBIT is just sufficient to
cover interest and preference dividend.

81. Capital budgeting: capital budgeting involves the process of decision making with regard to
investment in fixed assets. Or decision making with regard to investment of money in long-
term projects.

82. Pay back period: payback period represents the time period required for complete recovery
of the initial investment in the project.

83. ARR: accounting or average rate of return means the average annual yield on the project.

84. NPV: the net present value of an investment proposal is defined as the sum of the present
values of all future cash in flows less the sum of the present values of all cash out flows
associated with the proposal.

85. Profitability index: where different investment proposal each involving different initial
investments and cash inflows are to be compared.

86. IRR: internal rate of return is the rate at which the sum total of discounted cash inflows
equals the discounted cash out flow.

87. Treasury management: it means it is defined as the efficient management of liquidity and
financial risk in business.

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 Finance Notes

88. Concentration banking: it means identify locations or places where customers are placed
and open a local bank a/c in each of these locations and open local collection canter.

89. Marketable securities: surplus cash can be invested in short term instruments in order to
earn interest.

90. Ageing schedule: in a ageing schedule the receivables are classified according to their age.

91. Maximum permissible bank finance (MPBF): it is the maximum amount that banks can
lend a borrower towards his working capital requirements.

92. Commercial paper: a cp is a short term promissory note issued by a company, negotiable by
endorsement and delivery, issued at a discount on face value as may be determined by the
issuing company.

93.Bridge finance: It refers to the loans taken by the company normally from a commercial
banks for a short period pending disbursement of loans sanctioned
by the financial institutions.

94. Venture capital: It refers to the financing of high-risk ventures promoted by new qualified
entrepreneurs who require funds to give shape to their ideas.

95. Debt securitization: It is a mode of financing, where in securities are issued on the basis of
a package of assets (called asset pool).

96. Lease financing: Leasing is a contract where one party (owner) purchases assets and
permits its views by another party (lessee) over a specified period

97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of
business.

98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed to
overdraw from his account.

99. Cash credit: It is an arrangement under which a customer is allowed an advance up to

certain limit against credit granted by bank.

100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any
tangible security.

101. Share capital: The sum total of the nominal value of the shares of a company is called
share capital.

102. Funds flow statement: It is the statement deals with the financial resources for running
business activities. It explains how the funds obtained and how they used.

103.Sources of funds: There are two sources of funds Internal sources and external sources.

Internal source: Funds from operations is the only internal sources of funds and some
important points add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) (b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets
Deduct the following items, as they do not increase the funds:

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 Finance Notes

Profit on sale of fixed assets, profit on revaluation

Of fixed assets

External sources: (a) Funds from long-term loans

(b)Sale of fixed assets
(c) Funds from increase in share capital

104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of
tax liability (d) Payment of fixed liability

105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For
example 6 months or less from another company which have surplus liquidity. Such eposits
made by one company in another company are called ICD.

106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt
issued by banks there is no prescribed interest rate on such CDs it is based on the prevailing
market conditions.

107. Public deposits: It is very important source of short term and medium term finance. The
company can accept PD from members of the public and shareholders. It has the maturity
period of 6 months to 3 years.

108.Euro issues: The euro issues means that the issue is listed on a European stock Exchange.
The subscription can come from any part of the world except India.

109.GDR (Global depository receipts): A depository receipt is basically a negotiable certificate

, dominated in us dollars that represents a non-US company publicly traded in local currency
equity shares.

110. ADR (American depository receipts): Depository receipt issued by a company in the USA
are known as ADRs. Such receipts are to be issued in accordance with the provisions
stipulated by the securities Exchange commission (SEC) of USA like SEBI in India.

111.Commercial banks: Commercial banks extend foreign currency loans for international
operations, just like rupee loans. The banks also provided overdraft.

112.Development banks: It offers long-term and medium term loans including foreign
currency loans

113.International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide

indirect assistance for obtaining foreign currency.

114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for
professionally or technically qualified entrepreneurs and persons possessing relevant
experience and skills and entrepreneur traits.

115. Unsecured l0ans: It constitutes a significant part of long-term finance available to an

enterprise.

116. Cash flow statement: It is a statement depicting change in cash position from one period
to another.

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 Finance Notes

117.Sources of cash: Internal sources-

(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves External sources-
(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments

118. Application of cash:

(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits

119. Budget: It is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies.

120. Budgetary control: It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the actual results
compared with the forecasted and planned ones.

121. Cash budget: It is a summary statement of firm’s expected cash inflow and outflow over a
specified time period.

122. Master budget: A summary of budget schedules in capsule form made for the purpose of
presenting in one report the highlights of the budget forecast.

123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of the
level of activity actually attained.

124.Zero- base- budgeting: It is a management tool which provides a systematic method for
evaluating all operations and programmes, current of new allows for budget reductions and
expansions in a rational manner and allows reallocation of source from low to high priority
programs.

125. Goodwill: The present value of firm’s anticipated excess earnings.

126. BRS: It is a statement reconciling the balance as shown by the bank pass book and balance
shown by the cash book.

127. Objective of BRS: The objective of preparing such a statement is to know the causes of
difference between the two balances and pass necessary correcting or adjusting entries in the
books of the firm.

128.Responsibilities of accounting: It is a system of control by delegating and locating the

Responsibilities for costs.

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 Finance Notes

129. Profit centre: A centre whose performance is measured in terms of both the expense
incurs and revenue it earns.

130.Cost centre: A location, person or item of equipment for which cost may be ascertained and
used for the purpose of cost control.

131. Cost: The amount of expenditure incurred on to a given thing.

132. Cost accounting: It is thus concerned with recording, classifying, and summarizing costs
for determination of costs of products or services planning, controlling and reducing such costs
and furnishing of information management for decision making.

133. Elements of cost:

(A) Material
(B) Labour
(C) Expenses
(D) Overheads

134. Components of total costs: (A) Prime cost (B) Factory cost
(C)Total cost of production (D) Total c0st

135. Prime cost: It consists of direct material direct labour and direct expenses. It is also
known as basic or first or flat cost.

136. Factory cost: It comprises prime cost, in addition factory overheads which include cost of
indirect material indirect labour and indirect expenses incurred in factory. This cost is also
known as works cost or production cost or manufacturing cost.

137. Cost of production: In office and administration overheads are added to factory cost, office
cost is arrived at.

138. Total cost: Selling and distribution overheads are added to total cost of production to get
the total cost or cost of sales.

139. Cost unit: A unit of quantity of a product, service or time in relation to which costs may be
ascertained or expressed.

140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing (D)Operation

costing (E)Operating costing (F)Unit costing (G)Batch costing.

141. Techniques of costing: (a) marginal costing (b) direct costing (c)absorption costing (d)
uniform costing.

142. Standard costing: standard costing is a system under which the cost of the product is
determined in advance on certain predetermined standards.

143. Marginal costing: it is a technique of costing in which allocation of expenditure to

production is restricted to those expenses which arise as a result of production, i.e., materials,
labour, direct expenses and variable overheads.

144. Derivative: derivative is product whose value is derived from the value of one or more basic
variables of underlying asset.

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 Finance Notes

145. Forwards: a forward contract is customized contracts between two entities were settlement
takes place on a specific date in the future at today’s pre agreed price.

146. Futures: a future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Future contracts are standardized exchange
traded contracts.

147. Options: an option gives the holder of the option the right to do some thing. The option
holder option may exercise or not.

148. Call option: a call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price.

149. Put option: a put option gives the holder the right but not obligation to sell an asset by a
certain date for a certain price.

150. Option price: option price is the price which the option buyer pays to the option seller. It is
also referred to as the option premium.

151. Expiration date: the date which is specified in the option contract is called expiration date.

152. European option: it is the option at exercised only on expiration date it self.

153. Basis: basis means future price minus spot price.

154. Cost of carry: the relation between future prices and spot prices can be summarized in
terms of what is known as cost of carry.

155. Initial margin: the amount that must be deposited in the margin a/c at the time of first
entered into future contract is known as initial margin.

156 Maintenance margin: this is some what lower than initial margin.

157. Mark to market: in future market, at the end of the each trading day, the margin a/c is
adjusted to reflect the investors’ gains or loss depending upon the futures selling price. This is
called mark to market.

158. Baskets : basket options are options on portfolio of underlying asset.

159. Swaps: swaps are private agreements between two parties to exchange cash flows in the
future according to a pre agreed formula.

160. Impact cost: impact cost is cost it is measure of liquidity of the market. It reflects the costs
faced when actually trading in index.

161. Hedging: hedging means minimize the risk.

162. Capital market: capital market is the market it deals with the long term investment funds.
It consists of two markets 1.primary market 2.secondary market.

163. Primary market: those companies which are issuing new shares in this market. It is also
called new issue market.

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 Finance Notes

164. Secondary market: secondary market is the market where shares buying and selling. In
India secondary market is called stock exchange.

165. Arbitrage: it means purchase and sale of securities in different markets in order to profit
from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by
price fluctuations of securities held in a portfolio.

166. Meaning of ratio: Ratios are relationships expressed in mathematical terms between
figures which are connected with each other in same manner.

167. Activity ratio: it is a measure of the level of activity attained over a period.

168. mutual fund : a mutual fund is a pool of money, collected from investors, and is
invested according to certain investment objectives.

169. characteristics of mutual fund : Ownership of the MF is in the hands of the of the
investors MF managed by investment professionals The value of portfolio is updated every day

170.advantage of MF to investors : Portfolio diversification Professional management

Reduction in risk Reduction of transaction casts Liquidity Convenience and flexibility

171.net asset value : the value of one unit of investment is called as the Net Asset Value

172.open-ended fund : open ended funds means investors can buy and sell units of fund, at
NAV related prices at any time, directly from the fund this is called open ended fund. For ex;
unit 64

173.close ended funds : close ended funds means it is open for sale to investors for a specific
period, after which further sales are closed. Any further transaction for buying the units or
repurchasing them, happen, in the secondary markets.

174. dividend option : investors who choose a dividend on their investments, will receive
dividends from the MF, as when such dividends are declared.

175.growth option : investors who do not require periodic income distributions can be choose
the growth option.

176.equity funds : equity funds are those that invest pre-dominantly in equity shares of
company.

177.types of equity funds : Simple equity funds Primary market funds Sectoral funds Index
funds

178. sectoral funds : sectoral funds choose to invest in one or more chosen sectors of the
equity markets.

179.index funds :the fund manager takes a view on companies that are expected to perform
well, and invests in these companies

180.debt funds : the debt funds are those that are pre-dominantly invest in debt securities.

181. liquid funds : the debt funds invest only in instruments with maturities less than one year.

182. gilt funds : gilt funds invests only in securities that are issued by the GOVT. and therefore

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 Finance Notes

does not carry any credit risk.

183.balanced funds :funds that invest both in debt and equity markets are called balanced
funds.

184. sponsor : sponsor is the promoter of the MF and appoints trustees, custodians and the AMC
with prior approval of SEBI .

185. trustee : trustee is responsible to the investors in the MF and appoint the AMC for
managing the investment portfolio.

186. AMC : the AMC describes Asset Management Company, it is the business face of the MF, as
it manages all the affairs of the MF.

187. R & T Agents : the R&T agents are responsible for the investor servicing functions, as they
maintain the records of investors in MF.

188. custodians : custodians are responsible for the securities held in the mutual fund’s portfolio.

189. scheme take over : if an existing MF scheme is taken over by the another AMC, it is called
as scheme take over.

190.meaning of load: load is the factor that is applied to the NAV of a scheme to arrive at the
price.

192. market capitalization : market capitalization means number of shares issued multiplied
with market price per share.

193.price earning ratio : the ratio between the share price and the post tax earnings of
company is called as price earning ratio.

194. dividend yield : the dividend paid out by the company, is usually a percentage of the face
value of a share.

195. market risk : it refers to the risk which the investor is exposed to as a result of adverse
movements in the interest rates. It also referred to as the interest rate risk.

196. Re-investment risk : it the risk which an investor has to face as a result of a fall in the
interest rates at the time of reinvesting the interest income flows from the fixed income
security.

197. call risk : call risk is associated with bonds have an embedded call option in them. This
option hives the issuer the right to call back the bonds prior to maturity.

198. credit risk : credit risk refers to the probability that a borrower could default on a
commitment to repay debt or band loans

199.inflation risk : inflation risk reflects the changes in the purchasing power of the cash flows
resulting from the fixed income security.

200.liquid risk : it is also called market risk, it refers to the ease with which bonds could be
traded in the market.

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 Finance Notes

201.drawings : drawings denotes the money withdrawn by the proprietor from the business for
his personal use.

202.outstanding Income : Outstanding Income means income which has become due during
the accounting year but which has not so far been received by the firm.

203.Outstanding Expenses : Outstanding Expenses refer to those expenses which have become
due during the accounting period for which the Final Accounts have been prepared but have
not yet been paid.

204.closing stock : The term closing stock means goods lying unsold with the businessman at
the end of the accounting year.

205. Methods of depreciation :

1.Unirorm charge methods :
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods :
a. Diminishing balance method
b.Sum of years digits method
c. Double declining method
3. Other methods :
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
e. Insurance policy method.

206.Accrued Income : Accrued Income means income which has been earned by the business
during the accounting year but which has not yet become due and, therefore, has not been
received.

207.Gross profit ratio : it indicates the efficiency of the production/trading operations.

Formula : Gross profit
-------------------X100
Net sales

208.Net profit ratio : it indicates net margin on sales

Formula: Net profit

--------------- X 100
Net sales

209. return on share holders funds : it indicates measures earning power of equity capital.

Formula :

profits available for Equity shareholders

-----------------------------------------------X 100
Average Equity Shareholders Funds

210. Earning per Equity share (EPS) : it shows the amount of earnings attributable to each
equity share.

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 Finance Notes

Formula :
profits available for Equity shareholders
----------------------------------------------
Number of Equity shares

211.dividend yield ratio : it shows the rate of return to shareholders in the form of dividends
based in the market price of the share

Formula : Dividend per share

---------------------------- X100
Market price per share

212. price earning ratio : it a measure for determining the value of a share. May also be used
to
measure the rate of return expected by investors.

Formula : Market price of share(MPS)

-------------------------------X 100
Earning per share (EPS)

213.Current ratio : it measures short-term debt paying ability.

Formula : Current Assets

------------------------
Current Liabilities

214. Debt-Equity Ratio : it indicates the percentage of funds being financed through borrowings;
a measure of the extent of trading on equity.

Formula : Total Long-term Debt

---------------------------
Shareholders funds

215.Fixed Assets ratio : This ratio explains whether the firm has raised adepuate long-term
funds to meet its fixed assets requirements.

Formula Fixed Assets

-------------------
Long-term Funds

216 . Quick Ratio : The ratio termed as ‘ liquidity ratio’. The ratio is ascertained y comparing the
liquid assets to current liabilities.

Formula : Liquid Assets

------------------------
Current Liabilities

15
 Finance Notes

217. Stock turnover Ratio : the ratio indicates whether investment in inventory in efficiently
used or not. It, therefore explains whether investment in inventory within proper limits or not.

Formula: cost of goods sold

------------------------
Average stock

218. Debtors Turnover Ratio : the ratio the better it is, since it would indicate that debts are
being
collected more promptly. The ration helps in cash budgeting since the flow of cash from
customers can be worked out on the basis of sales.

Formula: Credit sales

----------------------------
Average Accounts Receivable

219.Creditors Turnover Ratio : it indicates the speed with which the payments for credit
purchases are made to the creditors.

Formula: Credit Purchases

-----------------------
Average Accounts Payable

220. Working capital turnover ratio : it is also known as Working Capital Leverage Ratio. This
ratio
Indicates whether or not working capital has been effectively utilized in making sales.

Formula: Net Sales

----------------------------
Working Capital

221.Fixed Assets Turnover ratio : This ratio indicates the extent to which the investments in
fixed assets contributes towards sales.

Formula: Net Sales

--------------------------
Fixed Assets

222 .Pay-out Ratio : This ratio indicates what proportion of earning per share has been used for
paying dividend.

Formula: Dividend per Equity Share

--------------------------------------------X100
Earning per Equity share

223.Overall Profitability Ratio : It is also called as “ Return on Investment” (ROI) or Return on

Capital Employed (ROCE) . It indicates the percentage of return on the total capital employed
in the business.

Formula :
Operating profit
------------------------X 100
Capital employed

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 Finance Notes

The term capital employed has been given different meanings a.sum total of all assets
whether fixed or current b.sum total of fixed assets, c.sum total of long-term funds employed
in the business, i.e., share capital +reserves &surplus +long term loans –(non business assets
+ fictitious assets). Operating profit means ‘profit before interest and tax’

224 . Fixed Interest Cover ratio : the ratio is very important from the lender’s point of view. It
indicates whether the business would earn sufficient profits to pay periodically the interest
charges.

Formula : Income before interest and Tax

---------------------------------------
Interest Charges

225. Fixed Dividend Cover ratio : This ratio is important for preference shareholders entitled to
get dividend at a fixed rate in priority to other shareholders.

Formula : Net Profit after Interest and Tax

------------------------------------------
Preference Dividend

226. Debt Service Coverage ratio : This ratio is explained ability of a company to make
payment of principal amounts also on time.

Formula : Net profit before interest and tax

---------------------------------------- 1-Tax rate
Interest + Principal payment installment

227. Proprietary ratio : It is a variant of debt-equity ratio . It establishes relationship between

the proprietor’s funds and the total tangible assets.

Formula : Shareholders funds

----------------------------
Total tangible assets

228.Difference between joint venture and partner ship : In joint venture the business is
carried on without using a firm name, In the partnership, the business is carried on under a
firm name.
In the joint venture, the business transactions are recorded under cash system In the
partnership, the business transactions are recorded under mercantile system. In the joint
venture, profit and loss is ascertained on completion of the venture In the partner ship , profit
and loss is ascertained at the end of each year. In the joint venture, it is confined to a
particular operation and it is temporary. In the partnership, it is confined to a particular
operation and it is permanent.

229.Meaning of Working capital : The funds available for conducting day to day operations of
an enterprise. Also represented by the excess of current assets over current liabilities.

230.concepts of accounting :

1.Business entity concepts :- According to this concept, the business is treated as a separate
entity distinct from its owners and others.

17
 Finance Notes

2.Going concern concept :- According to this concept, it is assumed that a business has a
reasonable expectation of continuing business at a profit for an indefinite period of time.

3.Money measurement concept :- This concept says that the accounting records only those
transactions which can be expressed in terms of money only.

4.Cost concept :- According to this concept, an asset is recorded in the books at the price paid to
acquire it and that this cost is the basis for all subsequent accounting for the asset.

5.Dual aspect concept :- In every transaction, there will be two aspects – the receiving aspect
and the giving aspect; both are recorded by debiting one accounts and crediting another
6.Accounting period concept account. This is called double entry.
:- It means the final accounts must be prepared on a periodic basis.
Normally accounting period adopted is one year, more than this period reduces the utility of
accounting data.

7.Realization concept :- According to this concepts, revenue is considered as being earned on

the data which it is realized, i.e., the date when the property in goods passes the buyer and he
become legally liable to pay.

8.Materiality concepts :- It is a one of the accounting principle, as per only important

information will be taken, and un important information will be ignored in the preparation of
the financial statement.

9.Matching concepts :- The cost or expenses of a business of a particular period are compared
with the revenue of the period in order to ascertain the net profit and loss.

10.Accrual concept :- The profit arises only when there is an increase in owners capital, which is
a
result of excess of revenue over expenses and loss.

231. Financial analysis :The process of interpreting the past, present, and future financial
condition of a company.

232. Income statement : An accounting statement which shows the level of revenues, expenses
and profit occurring for a given accounting period.

233.Annual report : The report issued annually by a company, to its share holders. it containing
financial statement like, trading and profit & lose account and balance sheet.

234. Bankrupt : A statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration

235 . Lease : Lease is a contract between to parties under the contract, the owner of the asset
gives the right to use the asset to the user over an agreed period of the time for a
consideration

236.Opportunity cost : The cost associated with not doing something.

237. Budgeting : The term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and control of business enterprise.

238.Capital : The term capital refers to the total investment of company in money, tangible and

18
 Finance Notes

intangible assets. It is the total wealth of a company.

239.Capitalization : It is the sum of the par value of stocks and bonds out standings.

240. Over capitalization : When a business is unable to earn fair rate on its outstanding
securities.

241. Under capitalization : When a business is able to earn fair rate or over rate on it is
outstanding securities.

242. Capital gearing : The term capital gearing refers to the relationship between equity and
long term debt.

243.Cost of capital : It means the minimum rate of return expected by its investment.

244.Cash dividend : The payment of dividend in cash

245.Define the term accrual : Recognition of revenues and costs as they are earned or incurred
. it includes recognition of transaction relating to assets and liabilities as they occur
irrespective of the actual receipts or payments.

245. accrued expenses : An expense which has been incurred in an accounting period but for
which no enforceable claim has become due in what period against the enterprises.

246.Accrued revenue : Revenue which has been earned is an earned is an accounting period but
in respect of which no enforceable claim has become due to in that period by the enterprise.

247.Accrued liability : A developing but not yet enforceable claim by an another person which
accumulates with the passage of time or the receipt of service or otherwise. it may rise from
the purchase of services which at the date of accounting have been only partly performed and
are not yet billable.

248.Convention of Full disclosure : According to this convention, all accounting statements

should be honestly prepared and to that end full disclosure of all significant information will be
made.

249.Convention of consistency : According to this convention it is essential that accounting

practices and methods remain unchanged from one year to another.

250.Define the term preliminary expenses : Expenditure relating to the formation of an

enterprise. There include legal accounting and share issue expenses incurred for formation of
the enterprise.

251.Meaning of Charge : charge means it is a obligation to secure an indebt ness. It may be

fixed
charge and floating charge.

252.Appropriation : It is application of profit towards Reserves and Dividends.

253.Absorption costing : A method where by the cost is determine so as to include the appropriate
share of both variable and fixed costs.

254.Marginal Cost : Marginal cost is the additional cost to produce an additional unit of a product.
It is also called variable cost.

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 Finance Notes

255. What are the ex-ordinary items in the P&L a/c : The transaction which are not related
to the business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or
losses on the sale of fixed assets, interest received from other company investments, profit or
loss on foreign exchange, unexpected dividend received.

256 . Share premium : The excess of issue of price of shares over their face value. It will be
showed with the allotment entry in the journal, it will be adjusted in the balance sheet on the
liabilities side under the head of “reserves & surplus”.

257.Accumulated Depreciation : The total to date of the periodic depreciation charges on

depreciable assets.

258.Investment : Expenditure on assets held to earn interest, income, profit or other benefits.

259.Capital : Generally refers to the amount invested in an enterprise by its owner. Ex; paid up
share capital in corporate enterprise.

260. Capital Work In Progress : Expenditure on capital assets which are in the process of
construction as completion.

261. Convertible Debenture : A debenture which gives the holder a right to conversion wholly or
partly in shares in accordance with term of issues.

262.Redeemable Preference Share : The preference share that is repayable either after a fixed
(or) determinable period (or) at any time dividend by the management.

263. Cumulative preference shares : A class of preference shares entitled to payment of

umulates
dividends. Preference shares are always deemed to be cumulative unless they are expressly
made non-cumulative preference shares.

264.Debenture redemption reserve : A reserve created for the redemption of debentures at a

future date.

265. Cumulative dividend : A dividend payable as cumulative preference shares which it unpaid
cumulates as a claim against the earnings of a corporate before any distribution is made to the
other shareholders.

266. Dividend Equalization reserve : A reserve created to maintain the rate of dividend in
future years.

267. Opening Stock : The term ‘opening stock’ means goods lying unsold with the businessman
in the beginning of the accounting year. This is shown on the debit side of the trading account.

268.Closing Stock : The term ‘Closing Stock’ includes goods lying unsold with the businessman
at the end of the accounting year. The amount of closing stock is shown on the credit side of
the trading account and as an asset in the balance sheet.

269.Valuation of closing stock : The closing stock is valued on the basis of “Cost or Market
price whichever is less” principle.

20
 Finance Notes

272. Contingency : A condition (or) situation the ultimate out come of which gain or loss will be
known as determined only as the occurrence or non occurrence of one or more uncertain
future events.

273.Contingent Asset : An asset the existence ownership or value of which may be known or
determined only on the occurrence or non occurrence of one more uncertain future events.

274. Contingent liability : An obligation to an existing condition or situation which may arise in
future depending on the occurrence of one or more uncertain future events.

275. Deficiency : the excess of liabilities over assets of an enterprise at a given date is called
deficiency.

276.Deficit : The debit balance in the profit and loss a/c is called deficit.

277.Surplus : Credit balance in the profit & loss statement after providing for proposed
appropriation & dividend , reserves.

278.Appropriation Assets : An account sometimes included as a separate section of the profit

and loss statement showing application of profits towards dividends, reserves.

279. Capital redemption reserve : A reserve created on redemption of the average cost:- the
cost of an item at a point of time as determined by applying an average of the cost of all items
of the same nature over a period. When weights are also applied in the computation it is
termed as weight average cost.

280.Floating Change : Assume change on some or all assets of an enterprise which are not
attached to specific assets and are given as security against debt.

281.Difference between Funds flow and Cash flow statement : A Cash flow statement is
concerned only with the change in cash position while a funds flow analysis is concerned with
change in working capital position between two balance sheet dates.

A cash flow statement is merely a record of cash receipts and disbursements. While studying the
short-term solvency of a business one is interested not only in cash balance but also in the
assets which are easily convertible into cash.

282. Difference Between the Funds flow and Income statement :

A funds flow statement deals with the financial resource required for running the business
activities. It explains how were the funds obtained and how were they used, Whereas an
income
statement discloses the results of the business activities, i.e., how much has been earned and
how it has been spent.

A funds flow statement matches the “funds raised” and “funds applied” during a particular period.
The source and application of funds may be of capital as well as of revenue nature. An income
statement matches the incomes of a period with the expenditure of that period, which are both
of a revenue nature.

1) American Depository Receipt – ADR: A negotiable certificate issued by a U.S. bank

representing a specified number of shares (or one share) in a foreign stock that is traded on a
U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a

21
 Finance Notes

U.S.financial institution overseas, and help to reduce administration and duty costs on each
transaction that would otherwise be levied.

2) Global Depository Receipt – GDR: 1. A bank certificate issued in more than one country for
shares in a foreign company. The shares are held by a foreign branch of an international bank.
The shares trade as domestic shares, but are offered for sale globally through the various bank
branches.

3) Working Capital Cycle: The Cycle of working capital rotates from cash, raw materials,
overheads, work-in-progress, debtors and ends with again cash.

4) Negative effects of working capital: The total current liabilities are in excess of total
current assets gives the negative effect of working capital.

5) Depreciation: It is a measure of wearing out, consumption or other loss of value of a

depreciable assets arising from its usage or passage of time.

6) Depletion : It is a method of providing depreciation on wasting assets like mineral ores e.t.c.

7) Amortization: It is a method to witing off of the asset over a period of time similar to
depreciation. This method is generally used for Intangible assets.

8)Profit & Loss (appropriation) account : The provisions contained in part II of schedule VI of
the companies act require that the appropriation made out of profit like proposed dividend,
transfer to and from reserves and other appropriations should be disclosed in profit & loss
(appropriation) a/c.

9)NPV: Net Present Value: The difference between the present value of cash inflows and the
present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an
investment or project

10) Internal Rate of Return: It is the rate at which the sum totals of cash inflows after
discounting equals to the discounted cash outflows. The IRR of a project is the discount rate which
makes net present value of the project equal to zero.

11) Treatment of dividends in cash flow statements: When we pay dividend for the
investments made by the outsiders, it is called as financing activity and taken into consideration of
cash flow from financing activity where as the receipt of dividend in respect of investment that we
made considered in cash flow from investing activity.

12) Treatment of interest in cash flow statements: When we pay interest on the borrowed
amount, it is called as financing activity and taken into consideration of cash flow from financing
activity where as the receipt of interest in respect of advances that we made considered in cash
flow from investing activity.

13)Profit & loss account Vs Cash flow statement: P & L a/c is a period end account which
gives the details of revenue earned with that of the expenses charged shows the net profit or loss
for the period.
Cash flow statement is as on date statement which gives the details of flow of cash through
receipts and expenses irrespective of revenues and expenditure.

14) Operating income Vs Net income: Income generated from the regular operating activities
of the business is called operating income.

22
 Finance Notes

Income that is left after taking into consideration of operating income, expenses, non-operating
income and non-operating expenses and income taxes is called net income.

15) Gross working capital Vs Net working capital: The total of investments in all current
assets is known as gross working capital.
Excess of total current assets over total current liabilities is called net working capital.

16) Prospectus : It is defined as a public document described or issued as a prospectus and

includes any notice, circular, advertisement or other document, inviting the public to subscribe or
purchase of any shares or debentures of a body corporate.

17) Interim dividend Vs Final dividend: Dividend which is paid in the middle of the fiscal year
or before the due date in accordance with the provisions of the companies act is called as Interim
dividend.
Dividend paid as on due date as per the provisions of the companies act is called final dividend. If
the interim dividend is paid then the final dividend will be paid after excluding the interim
dividend.

18)Net worth.: The total of share holders funds and reserves and surplus after deducting
fictitious assets is called as net worth.

19) Capitalization of reserves: The process of conversion of accumulated profits and reserves
into equity shares is called as capitalization of reserves. This is used while issue of bonus shares.

20) P/E Ratio: It is the relationship between the contribution and sales values. It is expressed as
a percentage.
Contribution/sales * 100 = (Sales-Variable costs)/Sales * 100.

21) Premium on shares: When the shares are issued at a value more than the nominal value
then it is called shares issued at premium.

22) Discount on shares: When the shares are issued at less than the nominal value then it is
called shares issued at discount.

23) Bull market/Bear market: When stock prices are rising for an extended period, it is called
bull market which is an opposite to that of bear market.

24) Retained Earnings: Which is nothing but the balance carried forward in the profit and loss
account to the next year shown under reserves and surplus.
OR
The percentage of net earnings not paid out as dividends, but retained by the company to be
reinvested in its core business or to pay debt. It is recorded under reserves and surplus on the
balance sheet.

25) Fixed asset/Financial Asset: The property of the company which aids the production
includes machinery, land, equipment and others.
The assets of the company which earns the revenue to the company in terms of interest or
dividend is called financial asset.

26) Sunk costs: Historical costs incurred in the past are known as sunk costs.

27) SEBI Vs SEC: SEBI: it is called as the stock exchange board of India which is regulatory
authority in India established under the act to safeguard the interests of the shareholders.

23
 Finance Notes

SEC: It is called as the Securities exchange and commission act which is a regulatory authority in
USA established under the act similar to that of SEBI in India.

28) Intangible Assets Vs Fictious Assets

Intangible Assets: These are the assets which are useful for the appreciation of the business and
helps for the growth of the business but they are not tangible like Good will, patents, trademarks
e.t.c.
Fictitious Assets: These are the debit balances of expenditure which are treated assets to be
written off over a period of time like preliminary expenditure written off, miscellaneous
expenditure written off e.t.c.

29) Gross Profit Vs Net Profit: The surplus balances in the trading account which is carried
forward to the P&L a/c is called as the Gross profit which is arrived from trading or production
activities.
The surplus balance in the P&L account which is reflected in the balance sheet is called as Net
profit arrived after taking into account of operating and non-operating revenues, operating and
non-operating expenses.

30) Equity Vs Preferred: Equity holders are those who are the real owners of the company and
are entitled to ownership rights, preferred holders are those who are entitled to preferential rights
upon the equity holders in terms of dividends and the distribution of assets at the time of
liquidation.

31) Preliminary Expenditure: Expenditure incurred before the incorporation of the company is
called as preliminary expenses.

32) Cash flow: It is a statement which gives the details about the cash generated from various
activities like operating, investing and financing and the cash expended on such activities during
the period

33) Minority interest: **Paid up equity capital held by outsider plus share of reserves and
surplus on the date of balance sheet
A significant but non-controlling ownership of less than 50% of a company's voting shares by
either an investor or another company

34) Private vs. public: Private ltd is registered company which is limited by shares and limited
by its no. of members and prohibits to publish the prospectus
Public is a registered company which is opposite to that as private company

35) Goodwill: It is treated to be intangible assets which is purchased for the appreciation as the
business that is acquired and it is amortized over a period of time

36) GAAP: These are generally accepted accounting principles called as accounting standards
which are to be followed while prepares the financial statements like profit and loss a\c and
balance sheet

37) Market capitalization: It is total value as all the outstanding shares with that as the current
market price as the share

38) Annual report: It is the report which is to be field with the register and companies details
the financial results as the company for the year and the preceding year, the report consists as
company’s projects and other year end statistics

24
 Finance Notes

38) IPO: When a company initial listing with the stock exchanges board of India. Then it is called
as Initial public offering.

39) SM\AGM\EGM: SM: Every company limited by share and every company limited by
guarantee and having a share capital shall with in a period of not less that one month or more
than six months from the date of which the company is entitled to commence business , hold a
general meeting of the members of the company. This is called as Statuatory meeting.
AGM: Every company shall in each year hold in addition to any other meeting a general meeting
as its annual general meeting and shall specify the meeting as such in the notice calling it.
EGM: any meeting other than the two above is called E.G.M. It is conducted for special and urgent
business.

40) QUORUM: The minimum no of members who must be present in order to constitute a valid
meeting and transact business there off.

5 members in the case of a public company.

2 in the case of public company.

Subsidiary Company: It is a registered company whose maximum share is held by holding

company.

Prepaid Vs O/s Exp: Any expenditure which is paid in advance is called as prepaid expense. It
is treated as an asset and deducted from the current expenditure.
Any Expenditure which is payable shall be treated as o/s expenses and it is treated as current
liability in the balance sheet.

Operating Vs Non-Operating: Operating Exp are those which are incurred in the regular course
of business for generating revenues.
Non-Operating Exp are one time Expenditure which are expended not for regular course of
business.

NAV-Net Assets Value: The value of assets applicable to one unit. This is calculated as total
assets minus all prior charges and divided by the member of the total outstanding units.

AOA Vs MOA: MOA is the most important document which is called as charter of the company
and regulates the external affairs of the company.
AOA specifies the rules regulations and bye-laws for the internal management of the affairs of the
company.

Minority Interest: The portion of net assets of subsidiary onthe date of consolidation not
controlled by the parent itself or through its subsidiary.
Paid up share capital held by the outsider (outside group) + share of reserves.

A significant but non-controlling ownership of less than 50% of a company's voting shares by
either an investor or another company

Capital Employed: It is defined as the amount which is invested in the business to generate
production and revenue with the aid of such capital employed capital. It is calculated as
Share capital + Reserves & Surplus + Debenture & long term debt – fictituous assets
Or
Fixed Assets + intangible assets + Net working capital.

25
 Finance Notes

Deferred tax asset/ liability: Difference between the tax expense which is calculated on
accrual basis and current tax liability to be paid for particular period as per income tax act is called
deferred tax asset/liability.

Call Option: A contract giving the holders a right to buy an underlying security at a specified
price with in a specified time period.

Diversification: An investment strategy to reduce risks by investing in securities, common stock,

debenture or bonds of several companies.

Share Warrant: A Share warrant is a bearer document issued only by a public company to the
holder on the approval of central govt. it is negotiable without any instrument of transfer.

Rights issue: Where a company proceeds to issue any further shares after the expiry of
Two years from the date of incorporation of the company
One year after the first allotment of shares. Which ever is earlier.
Such an allotment should be made to the shareholders of the company in proportion to the
capital paid.

Reserves Vs Provisions: Reserves are amounts appropriated out of profit which are not
intended to meet any liability contingency, commitement or diminuition in the value of assets
known to exit at the date of balance sheet.
Amounts calculated or transferred form profits to make food the diminuition in asset values due to
the fact that that some of them have been lost or destroyed as a result of some natural calamities
or debts have proved to be irrecoverable are also described as provisions.

Revenue Reserves: Represents profits that are available for distribution to shareholders held for
the time being or any on or more purpose.

Capital Reserve: A capital reserve represents surplus of profit earned in respect of certain types
of transactions like sale of fixed assets at a price in excess of cost realization of profits on issue of
forfeited shares or balances. It generally used for writing down fictituous assets or losses for
issuing bonus shares.

Capital redemption reserve: When there is redemption of redeemable preference shares out of
accumulated profit. It will be necessary to transfer to the CRR account an amount equal to the
amount repaid on the redemption of preference shares on a/c of face value less proceeds of a
fresh issue of capital made for the purpose of redemption.

NPL Vs NPA: An asset shall be treated as non performing when income on it is not received for
certain period.
A loan amount is said to be non performing when the interest and the principle amount is not
received for certain period.

Share is one of a finite number of equal portions in the capital of a company, entitling the owner
to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the
value of the company in case of liquidation

Bank reconciliation allows companies or individuals to compare their account records to the bank's
records of their account balance in order to uncover any possible discrepancies

Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations

to pay their creditors.

26
 Finance Notes

Cash flow is a term that refers to the amount of cash being received and spent by a business
during a defined period of time, sometimes tied to a specific project. Measurement of cash flow
can be used

Preferred stock differs from common stock in that it typically does not carry voting rights but is
legally entitled to receive a certain level of dividend payments before any dividends can be issued
to other shareholders.

Retained earnings refer to the portion of net income which is retained by the corporation rather
than distributed to its owners. Similarly, if the corporation makes a loss, then that loss is retained.
Retained earnings are cumulative from year to year.

American Depositary Receipt (or ADR) represents ownership in the shares of a foreign company
trading on US financial markets

Nifty, an index for large cap stocks on the National Stock Exchange of India

Accounting is the discipline of measuring, communicating and interpreting financial activity.

Accounting is also widely referred to as the "language of business".[

ROE It measures a firm's efficiency at generating profits from every dollar of net assets (assets
minus liabilities), and shows how well a company uses investment dollars to generate earnings
growth.

ROCE It basically can be used to show how much a business is gaining for its assets, or how much
it is losing for its liabilities

Finance means the study of different ways in which individuals, businesses and organizations raise
and allocate monetary resources and use the same for business purposes keeping the risks
involved in mind

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27
 Finance Notes

Forward contract, an agreement between two parties to buy or sell an asset at a pre-agreed
future point in time.

Futures contract is a standardized contract traded on a futures exchange, to buy or sell a certain
underlying instrument at a certain date in the future, at a specified price. The future date is called
the delivery date or final settlement date

Options are financial instruments that convey the right, but not the obligation, to engage in a
future transaction on some underlying security.

Amortization is the process of decreasing or accounting for an amount over a period of time.

The primary is that part of the capital markets that deals with the issuance of new securities.

The secondary market is the financial market for trading of securities that have already been
issued in an initial private or public offering.

Stock exchange, share market or bourse is a corporation or mutual organization which provides
facilities for stock brokers and traders, to trade company stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities as well as other
financial instruments and capital events including the payment of income and dividends

Stock split increases the number of shares in a public company. The price of adjusted such that
the before and after market capitalization of the company remains the same and dilution does not
occur. Options and warrants are included. Also known as a Stock Divide.

Initial Public Offering (IPO) is the first sale of stock by a private company to the public. IPO’s are
often issued by smaller, younger companies seeking capital to expand, but can also be done by
large privately-owned companies looking to become publicly traded

The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed
of 30 stocks with the base April 1979 = 100. It consists of the 30 largest and most actively traded
stocks, representative of various sectors, on the Bombay Stock Exchange

Portfolio management involves deciding what assets to include in the portfolio, given the goals of
the portfolio owner and changing economic conditions. Selection involves deciding what assets to
purchase, how many to purchase, when to purchase them, and what assets to divest. These
decisions always involve some sort of performance measurement, most typically expected return
on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return).
Typically the expected return from portfolios comprised of different asset bundles are compared.

Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement for
companies that indicates how Revenue (money received from the sale of products and services
before expenses are taken out, also known as the "top line") is transformed into net income (the
result after all revenues and expenses have been accounted for, also known as the "bottom line").
The purpose of the income statement is to show managers and investors whether the company
made or lost money during the period being reported.

Capital budgeting (or investment appraisal) is the planning process used to determine a firm's
long term investments such as new machinery, replacement machinery, new plants, new
products, and research and development projects

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Global Depository Receipt or (GDR) is a certificate issued by a depository bank, which purchases
shares of foreign companies and deposits it on the account.

Zero-based processing one can forget about last year, pretend that the program is brand-new,
and see if one can provide a detail of expenses for what one would need to fully accomplish the
program

venture capital fund is a pooled investment vehicle (often a limited partnership) that primarily
invests the financial capital of third-party investors in enterprises that are too risky for the
standard capital markets or bankloans.

Net worth (sometimes "net assets") is the total assets minus total liabilities of an individual or a
company. For a company, this is called shareholders' equity and may be referred to as book value.
Net worth is stated for a particular point in time

Accounting on the other hand is the measurement, disclosure or provision of assurance about
financial information that helps managers, investors, tax authorities and other decision makers
make resource allocation decisions. Financial accounting is one branch of accounting and
historically has involved processes by which financial information about a business is recorded,
classified, summarized, interpreted, and communicated. There are different categories in which
accounting can be distributed, like cost accounting, financial accounting, internal and external
accounting, etc.

Tax Related Questions

What are the exemptions from salary?

What is Excise & Service Tax? What's Diffarance Excise & Service Tax?
Why are component values not adding up to total values in some tables?
Why are component values not adding up to total values in some tables?
What is the difference between income year, financial year and FBT year?
What is the present rate of T.D.S and what is the tax for person salary at present
What is business?
What is the meaning of dealer?
What is the meaning of dealer?
How a dealer shall be registered under O.S.T. & C.S.T. Act?
What is Profession Tax?
What is the mode of payment of Entry Tax?
At is the mode of payment of Entry Tax?
What is Entry Tax as enforceable from 1.12.1999?
What is Entry Tax as enforceable from 1.12.1999?
what is luxury tax?
What is Entertainment Tax?
How the dealer is paying Admitted Tax?
What do you mean by Commercial Tax?

Audit Related Questions

What type of questions will be asked in the interviews?

Corporate frauds
Secretarial audit
Duties of auditor
Investigation vs. audit
Cost audit system
Investigation vs. audit

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 Finance Notes

Cost audit system

Comptroller auditor general of India functions
Audit papers
Audit programme
Internal check system
Internal audit
What duty to auditors and independent examiner have to report problems to the Commission?
When is income from rented accommodation to be treated as investment income and when as
trading income?
Is materiality by fund balance or transactions?
A company charity (gross income <? 250k) wishes to take advantage of the audit exemption
regime. However, there is an audit provision in the company's Articles. Should they be required to
change the Articles?

Unearned income refers to income that is not a wage.

It includes interest, dividends or realized capital gains from investments, rent from land or
property ownership, and any other income that does not derive from work.

Unearned income has often been treated differently for tax purposes than earned income, in order
to redistribute income. Such a tax structure is most often seen implemented by a socialist
government.

A consortium is an association of two or more individuals, companies, organizations or

governments (or any combination of these entities) with the objective of participating in a
common activity or pooling their resources for achieving a common goal

A prospectus is a legal document that institutions and businesses use to describe the securities
they are offering for participants and buyers. A prospectus commonly provides investors with
material information about mutual funds, stocks, bonds and other investments, such as a
description of the company's business, financial statements, biographies of officers and directors,
detailed information about their compensation, any litigation that is taking place, a list of material
properties and any other material information. In the context of an individual securities offering
such as an initial public offering, a prospectus is distributed by underwriters or brokerages to
potential investors.

The main stock exchanges in the world include:

 American Stock Exchange

 Australian Stock Exchange
 Bermuda Stock Exchange
 Bolsa Mexicana de Valores
 Bombay Stock Exchange
 Budapest Stock Exchange
 Casablanca Stock Exchange
 Euronext Amsterdam
 Euronext Brussels
 Euronext Lisbon
 Euronext Paris

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 Frankfurt Stock Exchange

 Ghana Stock Exchange
 Helsinki Stock Exchange
 Hong Kong Stock Exchange
 Istanbul Stock Exchange
 Jakarta Stock Exchange
 JASDAQ
 Johannesburg Securities Exchange
 Karachi Stock Exchange
 Korea Stock Exchange
 Kuwait Stock Exchange
 Lahore Stock Exchange
 London Stock Exchange
 Madrid Stock Exchange
 Malaysia Stock Exchange
 Milan Stock Exchange
 Nagoya Stock Exchange
 National Stock Exchange of India
 NASDAQ
 New York Stock Exchange
 Osaka Securities Exchange
 Philippine Stock Exchange
 Santiago Stock Exchange
 São Paulo Stock Exchange
 Shanghai Stock Exchange
 Singapore Exchange
 Stockholm Stock Exchange
 Taiwan Stock Exchange
 Tokyo Stock Exchange
 Toronto Stock Exchange
 Zurich Stock Exchange

A bull market tends to be associated with increasing investor confidence, motivating investors to
buy in anticipation of further capital gains

A bear market is described as being accompanied by widespread pessimism. Investors anticipating

further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle

A stock market is a private or public market for the trading of companystock and derivatives of
company stock at an agreed price; both of these are securities listed on a stock exchange as well
as those only traded privately.

The movements of the prices in a market or section of a market are captured in price indices
called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext
indices.

The Open Directory Project (ODP), also known as dmoz (from directory.mozilla.org, its original
domain name), is a multilingual open contentdirectory of World Wide Web links owned by
Netscape that is constructed and maintained by a community of volunteer editors

Stock Market Boom:

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A stock market bubble is a type of economic bubble taking place in stock markets when price of
stocks rise and become overvalued by any measure of stock valuation.

The existence of stock market bubbles is at odds with the assumptions of efficient market theory
which assumes rational investor behaviour. Behavioral finance theory attribute stock market
bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in
real-world markets, with their inherent uncertainty and noise, but also in highly predictable
experimental markets [1]. In the laboratory, uncertainty is eliminated and calculating the expected
returns should be a simple mathematical exercise, because participants are endowed with assets
that are defined to have a finite lifespan and a known probability distribution of dividends. Other
theoretical explanations of stock market bubbles have suggested that they are rational [2], intrinsic
[3]
, and contagious [4].

Amortization or amortisation is the process of decreasing or accounting for an amount over a

period of time

Deferred revenue expenditure is that where the benefit the expenditure can be had for more than
ONE accounting period and less than FIVE accounting periods.

A mutual fund is a professionally-managed form of collective investments that pools money from
many investors and invests it in stocks, bonds, short-term money market instruments, and/or
other securities.[1] In a mutual fund, the fund manager, who is also known as the portfolio
manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the
dividend or interestincome

A bonus share is a free share of stock given to current shareholders in a company, based upon the
number of shares that the shareholder already owns. An issue of bonus shares is referred to as a
bonus issue.

Securities and Exchange Board of India (SEBI) it is chaired by Mr. M. Damodaran,

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-
executive. It drafts rules in its legislative capacity, it conducts enquiries and enforcement action in
its executive function and it passes rulings and orders in its judicial capacity. Though this makes it
very powerful, there is an appeals process to create accountability.

CRR

The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum
reserves each bank must hold to customer deposits and notes. These reserves are designed to
satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank
vault (vault cash), or with a central bank.

The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's
economy, borrowing, and interest rates.[

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking
system of the United States. The Federal Reserve System, created in 1913, is a quasi-public,
quasi-private banking system composed of (1) the presidentially-appointed Board of Governors of
the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (

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One major area of criticism focuses on the failure of the Federal Reserve System to stop inflation;
this is seen as a failure of the Fed's legislatively mandated duty [52] to maintain stable prices.

The Federal Reserve System was created via the Federal Reserve Act of December 23rd, 1913.[17]
The Reserve Banks opened for business on November 16, 1914. Federal Reserve Notes were
created as part of the legislation, to provide a supply of currency. The notes were to be issued to
the Reserve Banks for subsequent transmittal to banking institutions.

The Federal Reserve System tries to control the size of the money supply by conducting open
market operations, in which the Federal Reserve lends or purchases specific types of securities
with authorized participants, known as primary dealers, such as the United States Treasury.

The Indian stock market mainly consists of the Bombay Stock Exchange and the National Stock
Exchange. The market is one of the fast growing emerging markets in the world, and the BSE is
the oldest stock exchange in Asia. More than 6500 scripts are traded at the BSE and more than
2500 scripts are traded at the NSE. It contains different kind of markets: 1 metal market 2 oil
market 3 banking stock market and lots more

Debentures:

A type of debt instrument that is not secured by physical asset or collateral. Debentures are
backed only by the general creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond in order to secure capital. Like other types of
bonds, debentures are documented in an indenture.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief
that the bond issuer is unlikely to default on the repayment. An example of a
government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill
(T-bill). T-bonds and T-bills are generally considered risk free because governments, at
worst, can print off more money or raise taxes to pay these type of debts.

Any type of debenture that can be converted into some other security.

For example, a convertible bond can be converted into stock.

PVT. Co:

A company whose ownership is private. As a result, it does not need to meet the strict Securities
and Exchange Commission filing requirements of public companies.

Private companies may issue stock and have shareholders. However, their shares do not trade on
public exchanges and are not issued through an initial public offering. In general, the shares of
these businesses are less liquid and the values are difficult to determine.

Public Co:

A company that has issued securities through an initial public offering and which are traded on at
least one stock exchange or over-the-counter market.

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 Finance Notes

These companies must file documents and meet stringent reporting requirements set out by the
Securities and Exchange Commission, including the public disclosure of financial statements. Any
company whose shares are available to the public is a public company.

Director:

In relation to a company, a director is an officer of the company charged with the conduct and
management of its affairs. A director may be an inside director (a director who is also an officer)
or an outside, or independent, director. The directors collectively are referred to as a board of
directors. Sometimes the board will appoint one of its members to be the chair of the board of
directors.

Theoretically, the control of a company is divided between two bodies: the board of directors, and
the shareholders in general meeting. In practice, the amount of power exercised by the board
varies with the type of company. In small private companies, the directors and the shareholders
will normally be the same people, and thus there is no real division of power. In large public
companies, the board tends to exercise more of a supervisory role, and individual responsibility
and management tends to be delegated downward to individual professional executive directors
(such as a finance director or a marketing director) who deal with particular areas of the
company's affairs.

Margin of safety:

A principle of investing in which an investor only purchases securities when the market price is
significantly below its intrinsic value. In other words, when market price is significantly
below your estimation of the intrinsic value, the difference is the margin of safety. This difference
allows an investment to be made with minimal downside risk.

The term was popularized by Benjamin Graham (known as "the father of value investing") and his
followers, most notably Warren Buffett. Margin of safety doesn't guarantee a successful
investment, but it does provide room for error in an analyst's judgment. Determining a company's
"true" worth (its intrinsic value) is highly subjective. Each investor has a different way of
calculating intrinsic value which may or may not be correct. Plus, it's notoriously difficult to predict
a company's earnings. Margin of safety provides a cushion against errors in calculation.

Margin of safety is a concept used in many areas of life, not just finance. For example, consider
engineers building a bridge that must support 100 tons of traffic. Would the bridge be built to
handle exactly 100 tons? Probably not. It would be much more prudent to build the bridge to
handle, say, 130 tons, to ensure that the bridge will not collapse under a heavy load. The same
can be done with securities. If you feel that a stock is worth $10, buying it at $7.50 will give you a
margin of safety in case your analysis turns out to be incorrect and the stock is really only worth
$9.

There is no universal standard to determine how wide the "margin" in margin of safety should
be. Each investor must come up with his or her own methodology.

BEP:

1. In general, the point at which gains equal losses.

2. In options, the market price that a stock must reach for option buyers to avoid a loss if
they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the
strike price minus the premium paid.

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 Finance Notes

Also referred to as a "breakeven".

For businesses, reaching the break-even point is the first major step towards profitability.

Put Option:

An option contract giving the owner the right, but not the obligation, to sell a specified amount of
an underlying security at a specified price within a specified time. This is the opposite of a call
option, which gives the holder the right to buy shares.

A put becomes more valuable as the price of the underlying stock depreciates relative to the strike
price. For example, if you have one Mar 07 Taser 10 put, you have the right to sell 100 shares
of Taser at $10 until March 2007 (usually the third Friday of the month). If shares of Taser fall to
$5 and you exercise the option, you can purchase 100 shares of Taser for $5 in the market and
sell the shares to the option's writer for $10 each, which means you make $500 (100 x $10-$5)
on the put option.

Call Option:

An agreement that gives an investor the right (but not the obligation) to buy a stock, bond,
commodity, or other instrument at a specified price within a specific time period.

It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You
profit on a call when the underlying asset increases in price.

Intanigible Asset:

An asset that is not physical in nature. Corporate intellectual property (items such as patents,
trademarks, copyrights, business methodologies), goodwill and brand recognition are all common
intangible assets in today's marketplace. An intangible asset can be classified as either indefinite
or definite depending on the specifics of that asset. A company brand name is considered to be an
indefinite asset, as it stays with the company as long as the company continues operations.
However, if a company enters a legal agreement to operate under another company's patent, with
no plans of extending the agreement, it would have a limited life and would be classified as a
definite asset.

While intangible assets don't have the obvious physical value of a factory or equipment, they can
prove very valuable for a firm and can be critical to its long-term success or failure. For example,
a company such as Coca-Cola wouldn't be nearly as successful were it not for the high value
obtained through its brand-name recognition. Although brand recognition is not a physical asset
you can see or touch, its positive effects on bottom-line profits can prove extremely valuable to
firms such as Coca-Cola, whose brand strength drives global sales year after year.

Tanigible Asset:

An asset that has a physical form such as machinery, buildings and land.

This is the opposite of an intangible asset such as a patent or trademark. Whether an asset is
tangible or intangible isn't inherently good or bad. For example, a well-known brand name can be

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 Finance Notes

very valuable to a company. On the other hand, if you produce a product solely for a trademark,
at some point you need to have "real" physical assets to produce it.

Rights issue:

Issuing rights to a company's existing shareholders to buy a proportional number of additional

securities at a given price (usually at a discount) within a fixed period.

Rights are often transferable, allowing the holder to sell them on the open market.

Rights:
A security giving stockholders entitlement to purchase new shares issued by the corporation at a
predetermined price (normally less than the current market price) in proportion to the number of
shares already owned. Rights are issued only for a short period of time, after which they expire.

This also known as "subscription rights" or "share purchase rights".

Employee Stock Option:

The payment of stock in lieu of cash for services provided

This is a common method used by corporations to compensate executives. The theory is that
executives will work harder since they want their own stock to rise in value and, therefore, have
the best interests of shareholders in mind.

Insider Trading:

Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock
options) by corporate insiders such as officers, directors, or holders of more than ten percent of
the firm's shares. Insider trading may be perfectly legal, but the term is frequently used to refer
to a practice, illegal in many jurisdictions, in which an insider or a related party trades based on
material non-public information obtained during the performance of the insider's duties at the
corporation, or otherwise misappropriated.[1]

All insider trades must be reported in the United States. Many investors follow the summaries of
insider trades, published by the United States Securities and Exchange Commission (SEC), in the
hope that mimicking these trades will be profitable. Legal "insider trading" may not be based on
material non-public information. Illegal insider trading in the US requires the participation
(perhaps indirectly) of a corporate insider or other person who is violating his fiduciary duty or
misappropriating private information, and trading on it or secretly relaying it.

Insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall
economic growth.[2]

Venture Capital:

Financing for new businesses. In other words, money provided by investors to startup firms and
small businesses with perceived, long-term growth potential. This is a very important source of
funding for startups that do not have access to capital markets. It typically entails high risk for the
investor, but it has the potential for above-average returns.

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 Finance Notes

Venture capital can also include managerial and technical expertise. Most venture capital comes
from a group of wealthy investors, investment banks and other financial institutions that pool such
investments or partnerships. This form of raising capital is popular among new companies, or
ventures, with limited operating history, who cannot raise funds through a debt issue. The
downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in
addition to a portion of the equity.

Seed Capital:

The initial equity capital used to start a new venture or business.

This initial amount is usually quite small because the venture is still in the idea or conceptual
stage. Also, there's a high risk that the venture will fail.

Bridge Financing:

A method of financing, used by companies before their IPO, to obtain necessary cash for the
maintenance of operations.

These funds are usually supplied by the investment bank underwriting the new issue. As payment,
the company acquiring the bridge financing will give a number of shares at a discount of the issue
price to the underwriters that equally offsets the loan. This financing is, in essence, a forwarded
payment for the future sales of the new issue.

Stock Split:

A type of corporate action where a company's existing shares are divided into multiple shares.
Although the amount of shares outstanding increases by a specific multiple, the total dollar value
of the shares remains the same compared to pre-split amounts, because no real value has been
added as a result of the split.

In the U.K., a stock split is referred to as a "scrip issue", "bonus issue", "capitalization issue" or
"free issue".

For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or
she holds.

One reason as to why stock splits are performed is that a company's share price has grown so
high that to many investors the shares are too expensive to buy in round lots.

For example, if a XYZ Corp's shares were worth $1,000 each, investors would need to purchase
$100,000 in order to own 100 shares. Whereas, if each share was worth $10 each, investors only
need to pay $1,000 to own 100 shares.

Reverse Takeover – RTO:

A type of merger used by private companies to become publicly traded without resorting to an
initial public offering. Initially, the private company buys enough shares to control a publicly
traded company. At this point, the private company's shareholder uses their shares in the private
company to exchange for shares in the public company. At this point, the private company has
effectively become a publicly traded one.

A reverse takeover can also refer to situation where a smaller company acquires a larger
company.

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 Finance Notes

With this type of merger, the private company does not need to pay the expensive fees associated
with arranging an initial public offering. The problem, however, is the company does not acquired
any additional funds through the merger and it must have enough funds to complete the
transaction on its own.

Deep-Discounted bonds:

1. A bond that sells at a significant discount from par value.

2. A bond that is selling at a discount from par value and has a coupon rate significantly
less than the prevailing rates of fixed-income securities with a similar risk profile.

1. Typically, a deep-discount bond will have a market price of 20% or more below its face
value. These bonds are perceived to be riskier than similar bonds and are thus priced
accordingly.

2. These low-coupon bonds are typically long term and issued with call provisions.
Investors are attracted to these discounted bonds because of their high return or minimal
chance of being called before maturity.
Merger:
The combining of two or more companies, generally by offering the stockholders of one
company securities in the acquiring company in exchange for the surrender of their stock.
Basically, when two companies become one. This decision is usually mutual between both
firms.

Factoring:

Factoring is a financial service designed to help firms to arrange their receivable better. Under
a typical factoring arrangement a factor collects the accounts on due dates, effects payments
to the firm on these dates and also assumes the credit risks associated with the collection of
the accounts.

Sometimes the factor provides an advance against the values of receivable taken over by it. In
such cases factoring serves as a source of short-term finance for the firm.

Capital budgeting:

The process of determining whether or not projects such as building a new plant or investing in a
long-term venture are worthwhile.

Also known as "investment appraisal".

Popular methods of capital budgeting include net present value (NPV), internal rate of return
(IRR), discounted cash flow (DCF) and payback period.

Bankruptcy:

The state of a person or firm unable to repay debts.

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 Finance Notes

If the bankrupt entity is a firm, the ownership of the firm's assets is transferred from the
stockholders to the bondholders. Shareholders are the last people to get paid if a company goes
bankrupt. Secure creditors always get first grabs at the proceeds from liquidation.

Diversification:

A risk-management technique that mixes a wide variety of investments within a portfolio. The
rationale behind this technique contends that a portfolio of different kinds of investments will, on
average, yield higher returns and pose a lower risk than any individual investment found within
the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the
positive performance of some investments will neutralize the negative performance of others.
Therefore, the benefits of diversification will hold only if the securities in the portfolio are not
perfectly correlated.

Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to
30 stocks will yield the most cost-effective amount of risk reduction. Investing in more securities
will still yield further diversification benefits, albeit at a drastically smaller rate.

Further diversification benefits can be gained by investing in foreign securities because they
tend be less closely correlated to domestic investments. For example, an economic downturn in
the U.S. economy may not affect Japan's economy in the same way. Therefore, having Japanese
investments would allow an investor to have a small cushion of protection against losses due to an
American economic downturn.

Most non-institutional investors have a limited investment budget, and may find it difficult to
create an adequately diversified portfolio. This fact alone can explain why mutual funds have been
increasing in popularity. Buying shares in a mutual fund can provide investors with an inexpensive
source of diversification.

Annual report:

A corporation's annual statement of financial operations. Annual reports include a balance sheet,
income statement, auditor's report, and a description of the company's operations.

This is usually a sleek, colorful, high gloss publication. Make sure to look beyond the marketing
and dig into the numbers. This is the best way to discover the direction of the company.

The 10-K is the version of the annual report which gets submitted to the SEC. It contains more
detailed financial information.

Annual general meeting:

A mandatory yearly meeting of shareholders that allows stakeholders to stay informed and
involved with company decisions and workings.

This yearly meeting is the single event whereby shareholders are able to gather and ask the board
of directors questions pertaining to corporate health and strategy. Proper notice must be given to
shareholders with regards to meeting times and agenda.

Subsidiary company:

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 Finance Notes

A company whose voting stock is more than 50% controlled by another company, usually referred
to as the parent company.

As long as the parent company has more than 50% of the voting stock in the subsidiary, it has
control. In the case of a foreign subsidiary, the company under which the subsidiary
is incorporated must adhere to the laws of the country in which the subsidiary operates, although
the parent company still carries the foreign subsidiary's financials on its books (consolidated
financial statements).

Price Earning Ratio:

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

For example, if a company is currently trading at $43 a share and earnings over the last 12
months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the
estimates of earnings expected in the next four quarters (projected or forward P/E). A third
variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

Also sometimes known as "price multiple" or "earnings multiple".

In general, a high P/E suggests that investors are expecting higher earnings growth in the future
compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by
itself. It's usually more useful to compare the P/E ratios of one company to other companies in the
same industry, to the market in general or against the company's own historical P/E. It would not
be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a
technology company (high P/E) to a utility company (low P/E) as each industry has much different
growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are
willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20,
the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to
avoid basing a decision on this measure alone. The denominator (earnings) is based on an
accounting measure of earnings that is susceptible to forms of manipulation, making
the qualitythe P/E only as good as the quality of the underlying earnings number.

Return on Investments:

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 Finance Notes

A performance measure used to evaluate the efficiency of an investment or to compare the

efficiency of a number of different investments. To calculate ROI, the benefit (return) of an
investment is divided by the cost of the investment; the result is expressed as a percentage or a
ratio.

Return on investment is a very popular metric because of its versatility and simplicity. That is, if
an investment does not have a positive ROI, or if there are other opportunities with a higher ROI,
then the investment should be not be undertaken.

Keep in mind that the calculation for return on investment can be modified to suit the situation -it
all depends on what you include as returns and costs. The term in the broadest sense just
attempts to measure the profitability of an investment and, as such, there is no one "right"
calculation. For example, a marketer may compare two different products by dividing
the revenue that each product has generated by its respective expenses. A financial analyst,
however, may compare the same two products using an entirely different ROI calculation, perhaps
by dividing the net income of an investment by the total value of all resources that have been
employed to make and sell the product.

This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's
purposes, and the result can be expressed in many different ways. When using this metric, make
sure you understand what inputs are being used.

Debt to Equity Ratio:

A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is
using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the
calculation.

If a lot of debt is used to finance increased operations (high debt to equity), the company could
potentially generate more earnings than it would have without this outside financing. If this were
to increase earnings by a greater amount than the debt cost (interest), then the shareholders
benefit as more earnings are being spread among the same amount of shareholders. However, the
cost of this debt financing may outweigh the return that the company generates on the debt
through investment and business activities and become too much for the company to handle. This
can lead to bankruptcy, which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates. For example,
capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2,
while personal computer companies have a debt/equity of under 0.5.

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Market Capitalization:

A measure of a company's total value. It is estimated by determining the cost of buying an entire
business in its current state.

Often referred to as "market cap", it is the total dollar value of all outstanding shares. It is
calculated by multiplying the number of shares outstanding by the current market price of one
share.

Brokerages vary on their exact definitions, but the current approximate classes of market
capitalization are:

Mega Cap:Marketcapof $200 billion and greater

Big/Large Cap: $10 billion to $200 billion
Mid Cap: $2 billion to $10 billion
Small Cap: $300 million to $2 billion
Micro Cap: $50 million to $300 million
Nano Cap: Under $50 million

If a business has 50 shares, each with a market value of $10, the business's market capitalization
is $500 (50 shares x $10/ share).

Derivatives:

In finance, a security whose price is dependent upon or derived from one or more underlying
assets. The derivative itself is merely a contract between two or more parties. Its value is
determined by fluctuations in the underlying asset. The most common underlying assets
include stocks, bonds, commodities, currencies, interest rates and market indexes. Most
derivatives are characterized by high leverage.

Futures contracts, forward contracts, options and swaps are the most common types of
derivatives. Because derivatives are just contracts, just about anything can be used as an
underlying asset. There are even derivatives based on weather data, such as the amount of rain
or the number of sunny days in a particular region.

Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For
example, a European investor purchasing shares of an American company off of an American
exchange (using American dollars to do so) would be exposed to exchange-rate risk while holding
that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified
exchange rate for the future stock sale and currency conversion back into euros.

Zero based budget:

method of budgeting in which all expenditures must be justified each new period, as opposed to
only explaining the amounts requested in excess of the previous period's funding.

For example, if an organization used ZBB, each department would have to justify its funding every
year. That is, funding would have a base at zero. A department would have to show why its
funding efficiently helps the organization toward its goals.
ZBB is especially encouraged for Government budgets because expenditures can easily run out of
control if it is automatically assumed what was spent last year must be spent this year.

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Assets under Management (AUM)

 In general, the market value of assets an investment company manages on behalf of investors

 There are widely differing views on what the term means. Some financial institutions include bank
deposits, mutual funds and institutional money in their calculations. Others limit it to funds under
discretionary management where the client delegates responsibility to the company.

Profitability Ratios

 A class of financial metrics that are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of time. For
most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from
a previous period is indicative that the company is doing well.
 Some examples of profitability ratios are profit margin, return on assets and return on equity. It is
important to note that a little bit of background knowledge is necessary in order to make relevant
comparisons when analyzing these ratios
 For instances, some industries experience seasonality in their operations. The retail industry, for
example, typically experiences higher revenues and earnings for the Christmas season. Therefore,
it would not be too useful to compare a retailer's 4th quarter profit margin with its 1st quarter
profit margin. On the other hand, comparing a retailer's 4th quarter profit margin with the profit
margin from the same period a year before would be far more informative

Return On Assets (ROA)

 An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to
how efficient management is at using its assets to generate earnings. Calculated by dividing a
company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this
is referred to as "return on investment".

Note: Some investors add interest expense back into net income when performing this calculation
because they'd like to use operating returns before cost of borrowing.

 ROA tells you what earnings were generated from invested capital (assets). ROA for public
companies can vary substantially and will be highly dependent on the industry. This is why when
using ROA as a comparative measure, it is best to compare it against a company's previous ROA
numbers or the ROA of a similar company
 The assets of the company are comprised of both debt and equity. Both of these types of financing
are used to fund the operations of the company. The ROA figure gives investors an idea of how
effectively the company is converting the money it has to invest into net income. The higher the
ROA number, the better, because the company is earning more money on less investment. For
example, if one company has a net income of $1 million and total assets of $5 million, its ROA is
20%; however, if another company earns the same amount but has total assets of $10 million, it
has an ROA of 10%. Based on this example, the first company is better at converting its
investment into profit. When you really think about it, management's most important job is to
make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of
money at a problem, but very few managers excel at making large profits with little investment.

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Return On Capital Employed (ROCE)

 A ratio that indicates the efficiency and profitability of a company's capital investments.

Calculated as:

 ROCE should always be higher than the rate at which the company borrows, otherwise any
increase in borrowing will reduce shareholders' earnings.

A variation of this ratio is return on average capital employed (ROACE), which takes the average
of opening and closing capital employed for the time period.

Return On Equity (ROE)

 A measure of a corporation's profitability that reveals how much profit a company generates with
the money shareholders have invested.
Calculated as:

Also known as “Return on Net worth (RONW).

The ROE is useful for comparing the profitability of a company to that of other firms in the same
industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by
subtracting preferred dividends from net income and subtracting preferred equity from
shareholders' equity, giving the following: return on common equity (ROCE) = net income -
preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income by average shareholders'
equity. Average shareholders' equity is calculated by adding the shareholders' equity at the
beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders'
equity figure from the beginning of a period as a denominator to determine the
beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to
determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to
determine the change in profitability over the period.

Revenue Per Occupied Room (RevPOR

 An industry metric used to evaluate companies in the hotel and lodging industries. RevPOR is used
in conjunction with, or in place of, the more standard revenue per available room (RevPAR)
statistic. RevPAR is calculated by taking the RevPOR value and multiplying it by the occupancy
rate.

RevPOR may also be expressed as "total RevPOR", which includes not only the room rate itself,

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but also any extra services such as room service, laundry services and in-room movie viewing,
among others.

 For many hotel operators, the total revenue received per room can be much more than the per-
day "boilerplate" rate, and is a more full expression of how much the company is receiving per
customer. RevPOR is used by analysts to determine the total revenue and profit potential of a
company; occupancy rates will rise and fall with the general and local economy, but RevPOR is a
metric that stands independent of how full the hotel is at any point in time.

Capital Expenditure (CAPEX)

 Funds used by a company to acquire or upgrade physical assets such as property, industrial
buildings or equipment. This type of outlay is made by companies to maintain or increase
the scope of their operations. These expenditures can include everything from repairing a roof to
building a brand new factory.
 The amount of capital expenditures a company is likely to have depends on the industry it
occupies. Some of the most capital intensive industries include oil, telecom and utilities.
In terms of accounting, an expense is considered to be a capital expenditure when the asset is
a newly purchased capital asset or an investment that improves the useful life of an existing
capital asset. If an expense is a capital expenditure, it needs to be capitalized; this requires the
company to spread the cost of the expenditure over the useful life of the asset. If, however, the
expense is one that maintains the asset at its current condition, the cost is deducted fully in the
year of the expense.

Capital Reserve

 A type of account on a municipality's or company's balance sheet that is reserved for long-term
capital investment projects or any other large and anticipated expense(s) that will be incurred in
the future. This type of reserve fund is set aside to ensure that the company or municipality has
adequate funding to at least partially finance the project.
 Contributions to the capital reserve account can be made from government subsidies, donated
funds, or can be set aside from the firm's or municipalities regular revenue-generating operations.
Once recorded on the reporting entity's balance sheet, these funds are only to be spent on the
capital expenditure projects for which they were initially intended, excluding any unforeseen
circumstances

Reserve Fund

 An account set aside by an individual or business to meet any unexpected costs that may arise in
the future as well as the future costs of upkeep. In most cases, the fund is simply a savings
account or another highly liquid asset, as it is impossible to predict when an unexpected cost may
arise. However, if the fund is set up to meet the costs of scheduled upgrades, less liquid assets
may be used.
 An individual, for example, may put money into a reserve account to save money in case of
unexpected unemployment. A business, such as one dealing with rental properties, will put some
rental income into a fund used to pay for any unexpected repairs to the properties. Condominiums
often will set up reserve funds in which condo owners pay a set monthly amount to maintain the
quality of the condominium

Enterprise Value (EV)

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A measure of a company's value, often used as an alternative to straightforward market

capitalization. EV is calculated as market cap plus debt, minority interest and preferred shares, minus
total cash and cash equivalents.

Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer
would have to take on the company's debt, but would pocket its cash. EV differs significantly from
simple market capitalization in several ways, and many consider it to be a more accurate
representation of a firm's value. The value of a firm's debt, for example, would need to be paid by the
buyer when taking over a company, and thus EV provides a much more accurate takeover valuation
because it includes debt in its value calculation.

Embedded Value

A common valuation measure used outside North America, particularly in the insurance industry. It is
calculated by adding the adjusted net asset value and the present value of future profits of a firm.
The present value of future profits considers the potential profits that shareholders will receive in the
future, while adjusted net asset value considers the funds belonging to shareholders that have been
accumulated in the past.

Embedded value is a conservative valuation method, as it excludes certain aspects of goodwill from
its calculation of a company's worth. Goodwill includes intangible assets that increase the value of a
company beyond its assets minus liabilities, such as strong management, good location and a happy
workforce. Furthermore, to add to its conservatism, the EV calculation of a firm does not allow for any
increase in future business.

Net Asset Value (NAV)

. A mutual fund's price per share or exchange-traded fund's per-share value. In both cases, the per-
share dollar amount of the fund is derived by dividing the total value of all the securities in its
portfolio, less any liabilities, by the number of fund shares outstanding.

2. In terms of corporate valuations, the value of assets less liabilities equals net asset value, or "book
value".

1. In the context of mutual funds, net asset value per share is computed once a day based on the
closing market prices of the securities in the fund's portfolio. All mutual fund buy and sell orders
are processed at the NAV of the trade date; however, investors must wait until the until the
following day to get the trade price.

Mutual funds pay out (distribute) virtually all of their income and capital gains. As a result,
changes NAV are not the best gauge of mutual fund performance, which is best measured by
their annual total return.

Because exchange-traded funds and closed-end funds trade like stocks, their shares trade at
market value, which can be a dollar value above (trading at a premium) or below (trading at a
discount) their net asset values.

Book Value

1. The value at which an asset is carried on a balance sheet. In other words, the cost of an asset
minus accumulated depreciation.

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2. The net asset value of a company, calculated by total assets minus intangible assets (patents,
goodwill) and liabilities.

3. The initial outlay for an investment. This number may be net or gross of expenses such as
trading costs, sales taxes, service charges and so on.

In the U.K., book value is known as "net asset value".

2. Book value is the accounting value of a firm. It has two main uses:

1. It is the total value of the company's assets that shareholders would theoretically receive if a
company were liquidated.

2. By being compared to the company's market value, the book value can indicate whether a
stock is under- or overpriced.

3. In personal finance, the book value of an investment is the price paid for a security or debt
investment. When a stock is sold, the selling price less the book value is the capital gain (or loss)
from the investment.

Initial Public Offering (IPO)

The first sale of stock by a private company to the public. IPOs are often issued by smaller,
younger companies seeking capital to expand, but can also be done by large privately-owned
companies looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what
type of security to issue (common or preferred), best offering price and time to bring it to market.

Also referred to as a "public offering".

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock
will do on its initial day of trading and in the near future since there is often little historical data
with which to analyze the company. Also, most IPOs are of companies going through a transitory
growth period, and they are therefore subject to additional uncertainty regarding their future
value

Leverage Ratio

1. Any ratio used to calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet financial obligations.
There are several different ratios, but the main factors looked at include debt, equity,
assets and interest expenses.

2. A ratio used to measure a company's mix of operating costs, giving an idea of how
changes in output will affect operating income. Fixed and variable costs are the two types
of operating costs; depending on the company and the industry, the mix will differ.

1. The most well known financial leverage ratio is the debt-to-equity ratio. For example, if a
company has $10M in debt and $20M in equity, it has a debt-to-equity ratio of 0.5
($10M/$20M).

2. Companies with high fixed costs, after reaching the breakeven point, see a greater

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increase in operating revenue when output is increased compared to companies with high
variable costs. The reason for this is that the costs have already been incurred, so every
sale after the breakeven transfers to the operating income. On the other hand, a high
variable cost company sees little increase in operating income with additional output,
because costs continue to be imputed into the outputs. The degree of operating leverage is
the ratio used to calculate this mix and its effects on operating income.

Debt Ratio

A ratio that indicates what proportion of debt a company has relative to its assets. The
measure gives an idea to the leverage of the company along with the potential risks the
company faces in terms of its debt-load.

A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile,
a debt ratio of less than 1 indicates that a company has more assets than debt. Used in
conjunction with other measures of financial health, the debt ratio can help investors
determine a company's level of risk.

Debt/Equity Ratio

A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt the company
is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the
calculation.

A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could
potentially generate more earnings than it would have without this outside financing. If this were
to increase earnings by a greater amount than the debt cost (interest), then the shareholders
benefit as more earnings are being spread among the same amount of shareholders. However, the
cost of this debt financing may outweigh the return that the company generates on the debt
through investment and business activities and become too much for the company to handle. This
can lead to bankruptcy, which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates. For example,
capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2,
while personal computer companies have a debt/equity of under 0.5.
Debt-To-Capital Ratio

A measurement of a company's financial leverage, calculated as the company's debt divided by its
total capital. Debt includes all short-term and long-term obligations. Total capital includes
the company's debt and shareholders' equity, which includes common stock, preferred stock,
minority interest and net debt.

Calculated as:

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Companies can finance their operations through either debt or equity. The debt-to-
capital ratio gives users an idea of a company's financial structure, or how it is financing its
operations, along with some insight into its financial strength. The higher the debt-to-capital ratio,
the more debt the company has compared to its equity. This tells investors whether a company
is more prone to using debt financing or equity financing. A company with high debt-to-capital
ratios, compared to a general or industry average, may show weak financial strength because the
cost of these debts may weigh on the company and increase its default risk.

Because this is a non-GAAP measure, in practice, there are many variations of this ratio.
Therefore, it is important to pay close attention when reading what is or isn't included in the ratio
on a company's financial statements.

Operating Ratio
A ratio that shows the efficiency of management by comparing operating expense to net sales:

The smaller the ratio, the greater the organization's ability to generate profit if revenues decrease.
When using this ratio, however, investors should be aware that it doesn't take into account debt
repayment or expansion.
Net Sales
The amount of sales generated by a company after the deduction of returns, allowances for
damaged or missing goods and any discounts allowed. The sales number reported on a company's
financial statements is a net sales number, reflecting these deductions.

This measure gives a more accurate picture of the actual sales generated by the company, or the
money that they expect to receive. A company will book its revenue once the good or service is
delivered or performed for the customer. However, in the case of returns, even after a good has
been sold it can often be returned under a company's return policy. If the good is returned by the
customer it is not considered a sale, as the customer will receive a credit or money back, so it
needs to be deducted from the gross sales. The allowances for damage or missing good reflect the
situations in which the goods are damaged in transit or are not what the customer expected. Most
companies also will offer discounts, especially on credit sales where the customer pays off the
amount early, which reduces overall revenue and is the reason for its deduction from gross sales.
All these deductions from the gross sales are represented in the net sales figure.

Asset Turnover
The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales
in dollars by assets in dollars.

Formula:

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the
higher the number the better. It also indicates pricing strategy: companies with low profit margins
tend to have high asset turnover, while those with high profit margins have low asset turnover.
Fundamental Analysis

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A method of evaluating a security by attempting to measure its intrinsic value by examining

related economic, financial and other qualitative and quantitative factors. Fundamental analysts
attempt to study everything that can affect the security's value, including macroeconomic factors
(like the overall economy and industry conditions) and individually specific factors (like the
financial condition and management of companies).
The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price in hopes of figuring out what sort of position to take with
that security (underpriced = buy, overpriced = sell or short).

This method of security analysis is considered to be the opposite of technical analysis.

Fundamental analysis is about using real data to evaluate a security's value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for just
about any type of security.

For example, an investor can perform fundamental analysis on a bond's value by looking at
economic factors, such as interest rates and the overall state of the economy, and information
about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this
method uses revenues, earnings, future growth, return on equity, profit margins and other data to
determine a company's underlying value and potential for future growth. In terms of stocks,
fundamental analysis focuses on the financial statements of a the company being evaluated.

One of the most famous and successful users of fundamental analysis is the Oracle of Omaha,
Warren Buffett, who has been well known for successfully employing fundamental analysis to pick
securities. His abilities have turned him into a billionaire.

Types Of EPS

Gertrude Stein said, "A rose is a rose is a rose," but the same cannot be said about earnings per
share (EPS).

While the math may be simple, there are many varieties of EPS being used these days, and
investors must understand what each one represents if they're to make informed investment
decisions. For example, the EPS announced by the company may differ significantly from what is
reported in the financial statements and in the headlines. As a result, a stock may appear over- or
undervalued depending on the EPS being used. This article will define some of the varieties of EPS
and discuss their pros and cons.

By definition, EPS is net income divided by the number of shares outstanding; however, both the
numerator and denominator can change depending on how you define "earnings" and "shares
outstanding". Because there are so many ways to define earnings, we will first tackle shares
outstanding.

Shares Outstanding
Shares outstanding can be classified as either primary (primary EPS) or fully diluted (diluted EPS).

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Primary EPS is calculated using the number of shares that have been issued and held by investors.
These are the shares that are currently in the market and can be traded.

Diluted EPS entails a complex calculation that determines how many shares would be outstanding
if all exercisable warrants, options, etc. were converted into shares at a point in time, generally
the end of a quarter. We prefer diluted EPS because it is a more conservative number that
calculates EPS as if all possible shares were issued and outstanding. The number of diluted shares
can change as share prices fluctuate (as options fall into/out of the money), but generally the
Street assumes the number is fixed as stated in the 10-Q or 10-K.

Companies report both primary and diluted EPS, and the focus is generally on diluted EPS, but
investors should not assume this is always the case. Sometimes, diluted and primary EPS are the
same because the company does not have any "in-the-money" options, warrants or convertible
bonds outstanding. Companies can discuss either, so investors need to be sure which is being
used.

Earnings
As has been evident in recent headlines, EPS can be whatever the company wants it to be,
depending on assumptions and accounting policies. Corporate spin-doctors focus media attention
on the number the company wants in the news, which may or may not be the EPS reported in
documents filed with the Securities & Exchange Commission (SEC). Based on a set of
assumptions, a company can report a high EPS, which reduces the P/E multiple and makes the
stock look undervalued. The EPS reported in the 10Q, however, can result in a much lower EPS
and an overvalued stock on a P/E basis. This is why it is critical for investors to read carefully and
know what type of earnings is being used in the EPS calculation.

We will focus on five types of EPS and define them in the context of the type of "earnings" being
used.

Reported EPS (or GAAP EPS)

We define reported EPS as the number derived from generally accepted accounting principles
(GAAP), which are reported in SEC filings. The company derives these earnings according to the
accounting guidelines used. (Note: A discussion of how a company can manipulate EPS under
GAAP is beyond the scope of this article, but investors should remember that it is possible. Our
focus is on how earnings can be distorted even if there is no intent to manipulate results.)

A company's reported earnings can be distorted by GAAP. For example, a one-time gain from the
sale of machinery or a subsidiary could be considered as operating income under GAAP and cause
EPS to spike. Also, a company could classify a large lump of normal operating expenses as an
"unusual charge" which can boost EPS because the "unusual charge" is excluded from calculations.
Investors need to read the footnotes in order to decide what factors should be included in
"normal" earnings and make adjustments in their own calculations.

Ongoing EPS
This EPS is calculated based upon normalized or ongoing net income and excludes anything that is
an unusual one-time event. The goal is to find the stream of earnings from core operations which
can be used to forecast future EPS. This can mean excluding a large one-time gain from the sale
of equipment as well as an unusual expense. Attempts to determine an EPS using this
methodology is also called "pro forma" EPS.

Pro Forma EPS

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The words "pro forma" indicate that assumptions were used to derive whatever number is being
discussed. Different from reported EPS, pro forma EPS generally excludes some expenses/income
that were used in calculating reported earnings. For example, if a company sold a large division, it
could, in reporting historical results, exclude the expenses and revenues associated with that unit.
This allows for more of an "apples-to-apples" comparison.

Another example of pro forma is a company choosing to exclude some expenses because
management feels that the expenses are non-recurring and distort the company's "true" earnings.
Non-recurring expenses, however, seem to appear with increasing regularity these days. This
raises questions as to whether management knows what it is doing or is trying to build a "rainy
day fund" to smooth EPS.

Headline EPS
The headline EPS is the EPS number that is highlighted in the company's press release and picked
up in the media. Sometimes it is the pro forma number, but it could also be an EPS number that
has been calculated by the analyst/pundit that is discussing the company. Generally, soundbites
do not provide enough information to determine which EPS number is being used.

Cash EPS
Cash EPS is operating cash flow (not EBITDA) divided by diluted shares outstanding. We think
cash EPS is more important than other EPS numbers because it is a "purer" number. Cash EPS is
better because operating cash flow cannot be manipulated as easily as net income and represents
real cash earned, calculated by including changes in key asset categories such as receivables and
inventories. For example, a company with reported EPS of $0.50 and cash EPS of $1.00 is
preferable to a firm with reported EPS of $1.00 and cash EPS of $0.50. Although there are many
factors to consider in evaluating these two hypothetical stocks, the company with cash is generally
in better financial shape.

Other EPS numbers have overshadowed cash EPS, but we expect it to get more attention because
of the new GAAP rule (FAS 142), which allows companies to stop amortizing goodwill. Companies
may start talking about "cash EPS" in order to differentiate between pre-FAS 142 and post-FAS
142 results; however, this version of "cash EPS" is more like EBITDA per share and does not
factor-in changes in receivables and inventory. Consequently, I think it is not as good as
operating-cash-flow EPS, but is better in certain cases than other forms of EPS.

The Bottom Line

Caveat investor (investor beware)! There are many types of EPS being used, and investors need
to know what the EPS represents and determine if it is a valid representation of the company's
earnings. A stock may look like a great value because it has a low P/E, but that ratio may be
based on assumptions with which you may not agree

Net Debt
A metric that shows a company's overall debt situation by netting the value of a company's
liabilities and debts with its cash and other similar liquid assets.

Calculated as:

When investing in a company, one of the most important factors you need to consider is how
much debt the company is carrying. Here are some questions to ask yourself when analyzing a
company's debt: How much debt really exists? What kind of debt is it (long/short-term
maturities)? What is the debt for (repay or refinance old debts)? Can the company afford the

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debt if it runs into financial trouble? And, finally, how does it compare to the debt levels of
competing companies?
Acid-Test Ratio
A stringent test that indicates whether a firm has enough short-term assets to cover its
immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than
the working capital ratio, primarily because the working capital ratio allows for the inclusion of
inventory assets.

Calculated by:

Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at
with extreme caution. Furthermore, if the acid-test ratio is much lower than the working
capital ratio, it means current assets are highly dependent on inventory. Retail stores are
examples of this type of business.

The term comes from the way gold miners would test whether their findings were real gold
nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when
submerged in acid, it was said to have passed the acid test. If a company's financial
statements pass the figurative acid test, this indicates its financial integrity.

Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations.

Calculated as:

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
the current ratio, the more capable the company is of paying its obligations. A ratio under 1
suggests that the company would be unable to pay off its obligations if they came due at that
point. While this shows the company is not in good financial health, it does not necessarily mean
that it will go bankrupt - as there are many ways to access financing - but it is definitely not a
good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to
turn its product into cash. Companies that have trouble getting paid on their receivables or have
long inventory turnover can run into liquidity problems because they are unable to alleviate their
obligations. Because business operations differ in each industry, it is always more
useful to compare companies within the same industry.

This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory
and prepaids as assets that can be liquidated. The components of current ratio (current assets and
current liabilities) can be used to derive working capital (difference between current assets and

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current liabilities). Working capital is frequently used to derive the working capital ratio, which is
working capital as a ratio of sales.
Discretionary Cash Flow
Discretionary cash flow is any money left over once all possible capital projects with positive net
present values have been financed, and all mandatory payments have been paid. The capital can
be used to pay for other responsibilities such as giving out cash dividends to stockholders, buying
back common stock and paying off any outstanding debt.

How discretionary cash flow is distributed is the responsibility of management. They decide how to
use the funds to benefit the company the most. The way these funds are allocated can have huge
affects on the performance of the company, and as a result the evaluation of the effectiveness of
management.

Operating Cash Flow Ratio

A measure of how well current liabilities are covered by the cash flow generated from a company's
operations.

Formula:

The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow
as opposed to income is sometimes a better indication of liquidity simply because, as we
know, cash is how bills are normally paid off.

Operating Cash Flow (OCF)

The cash generated from the operations of a company, generally defined as revenues less all
operating expenses, but calculated through a series of adjustments to net income. The OCF can be
found on the statement of cash flows.

Also known as "cash flow provided by operations" or "cash flow from operating activities".

One method of calculated OCF is:

Operating cash flow is the cash that a company generates through running its business.

It's arguably a better measure of a business's profits than earnings because a company can show
positive net earnings (on the income statement) and still not be able to pay its debts. It's cash
flow that pays the bills!

You can also use OCF as a check on the quality of a company's earnings. If a firm reports record
earnings but negative cash, it may be using aggressive accounting techniques.

Operating Income
The amount of profit realized from a business's own operations, but excluding operating expenses
(such as cost of goods sold) and depreciation from gross income.
Also referred to as "operating profit" or "recurring profit".

Calculated as:

Operating income would not include items such as investments in other firms, taxes or interest
expenses. In addition, nonrecurring items such as cash paid for a lawsuit settlement are often not
included.

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Operating income is required to calculate operating margin, which describes a company's

operating efficiency.
Operating Expense
A category of expenditure that a business incurs as a result of performing its normal business
operations. One of the typical responsibilities that management must contend with is
determining how low operating expenses can be reduced without significantly affecting the firm's
ability to compete with its competitors.

Also known as "OPEX"

For example, the payment of employees' wages and funds allocated toward research and
development are operating expenses. In the absence of raising prices or finding new markets or
product channels in order to raise profits, some businesses attempt to increase the bottom line
purely by cutting expenses.

While laying off employees and reducing product quality can initially boost earnings and may
even be necessary in cases where a company has lost its competitiveness, there are only so
many operating expenses that management can cut before the quality of business operations is
damaged.
Operating Profit
The amount of profit earned from a firm's normal core business operations. This value does not
include any profit earned from the firm's investments (such as earnings resulting from firms that
the company has partial interest in) and the effects of interest and taxes.

Also known as "earnings before interest and tax (EBIT)".

Calculated as:

For example, suppose ABC Printing Company earned $50 million from its core printing related
operations, $10 million from its 40% stake in XYZ Corp and $3.5 million from interest earned from
its money market and bank accounts. Also, the company spent $10 million in production related
costs as well.

Overall the company's operating profit is: $40 million, calculated as the $50 million operating
revenues million minus the $10 million in production costs. The other $10 million and $3.5 million
in earnings are not included in operating income, since they are investment income.

Earnings
The amount of profits that a company produces during a specific period, which is usually defined
as a quarter (three calendar months) or a year. Earnings typically refer to after-tax
net income.Ultimately, a business's earnings are the main determinant of its share price,
because earnings and the circumstances relating to them can indicate whether the business will be
profitable and successful in the long run.

Earnings are perhaps the single most studied number in a company's financial statements
because they show a company's profitability. A business's quarterly and annual earnings are
typically compared to analyst estimates and guidance provided by the business itself. In most
situations, when earnings do not meet either of those estimates, a business's stock price will tend
to drop. On the other hand, when actual earnings beat estimates by a significant amount, the
share price will likely surge.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

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An indicator of a company's financial performance which is calculated as follows:

EBITDA can be
used to analyze and compare profitability between companies and industries because it eliminates
the effects of financing and accounting decisions. However, this is a non-GAAP measure that
allows a greater amount of discretion as to what is (and is not) included in the calculation. This
also means that companies often change the items included in their EBITDA calculation from one
reporting period to the next.
EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to
indicate the ability of a company to service debt. As time passed, it became popular in industries
with expensive assets that had to be written down over long periods of time. EBITDA is now
commonly quoted by many companies, especially in the tech sector - even when it isn't
warranted.
A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to
evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working
capital and the replacement of old equipment, which can be significant. Consequently, EBITDA
is often used as an accounting gimmick to dress up a company's earnings. When using this metric,
it's key that investors also focus on other performance measures to make sure the company is not
trying to hide something with EBITDA.

Amortization
1. The paying off of debt in regular installments over a period of time.

2. The deduction of capital expenses over a specific period of time (usually over the asset's
life). More specifically, this method measures the consumption of the value of intangible
assets, such as a patent or a copyright.

Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the
patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each
year as an amortization expense.

While amortization and depreciation are often used interchangeably, technically this is an incorrect
practice because amortization refers to intangible assets and depreciation refers to tangible
assets.

Depreciation
1. In accounting, an expense recorded to allocate a tangible asset's cost over its useful
life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing
reported earnings.

2. A decrease in the value of a particular currency relative to other currencies.

1. Depreciation is used in accounting to try to match the expense of an asset to the income that
the asset helps the company earn. For example, if a company buys a piece of equipment for $1
million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every
accounting year, the company will expense $100,000 (assuming straight-line depreciation), which
will be matched with the money that the equipment helps to make each year.

2. Examples of currency depreciation are the infamous Russian ruble crisis in 1998, which saw the
ruble lose 25% of its value in one day.

Earnings Before Interest, Taxes, Depreciation, Depletion, Amortization and Exploration Expenses
(EBITDAX)

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An indicator of a company's financial performance calculated as:

= Revenue - Expenses (excluding tax, interest, depreciation, depletion, amortization and

exploration expenses)

EBITDAX is used when reporting earnings for oil and mineral exploration companies. It excludes
costly exploration expenses and gives the true EBITDA of the firm.

This is especially useful when a company wants to acquire another company. The EBITDAX would
cover any loan payments needed to finance the takeover.
Goodwill
An account that can be found in the assets portion of a company's balance sheet. Goodwill can
often arise when one company is purchased by another company. In an acquisition, the amount
paid for the company over book value usually accounts for the target firm's intangible assets.

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

Badwill
The negative effect felt by a company when shareholders and the investment community find out
that is has done something that is not in accordance with good business practices. Although
typically not expressed in a dollar amount, badwill can play out in the form of decreased revenue,
loss of clients or suppliers, loss of market share and federal indictments for any crimes
committed.

There are several cases in which badwill caused a severe downturn in company stock, such as
Tyco, Adelphia, Martha Stewart, Enron and Worldcom. In each new bull market, we are likely
to see the same offenses committed by new people. This phenomenon has caused a rise in
"socially conscious" investing, where companies promoting badwill are excluded as a matter of
policy.
Nonrecurring Charge
An expense occurring only once on a company's financial statement.
An extraordinary item is an example of a nonrecurring charge.

Also known as "nonrecurring item".

Non-Cash Charge
A charge off, made by a company against earnings, that does not require an initial outlay of cash.

Non-cash charges are typically against the depreciation, amortization, and depletion accounts on a
company's balance sheet. Companies take these charges against earnings due to extraordinary
circumstances such as accounting policy changes or significant depreciation of asset's market
value.

Any sort of charge will usually result in lower earnings in the period when the charge was made.

Sometimes also referred to as a write down.

Write-Down
Reducing the book value of an asset because it is overvalued compared to the market value.

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This is usually reflected in the company's income statement as an expense, thereby reducing net
income.

Write-Off
A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies
are able to write off certain expenses that are required to run the business, or have been incurred
in the operation of the business and detract from retained revenues.

For example, if you spend money on dinner to take out a client, that meal is a possible write-off
towards your income because you presumably discussed business opportunities during the
dinner. Suppose, for another example, you made a sale on credit to a customer, but two weeks
later the client's business declared bankruptcy and became completely unable to pay off the credit
account with you. This uncollectible debt would then be written off by your company and recorded
as an expense by accountants.

Write-Up
An increase made to the book value of an asset because it is undervalued compared to market
values.

A write-up will increase a company's accounting book value without any expenditures. For
example, if an economy experiences significant inflation, a production company may decide to
write up its inventory to better match the market price.

Equity Method
An accounting technique used by firms to assess the profits earned by their investments in other
companies. The firm reports the income earned on the investment on its income statement and
the reported value is based on the firm's share of the company assets. The reported profit
is proportional to the size of the equity investment. This is the standard technique used when one
company has significant influence over another.

When a company holds approximately 20-25% or more of another company's stock, it is

considered to have significant control, which signifies the power that a company can exert over
another company. This power includes representation on the board of directors, partaking in
company policy development and the interchanging of managerial personnel. If a firm owns 25%
of a company with a $1 million net income, that firm would report earnings of $250,000.

Generally Accepted Accounting Principles (GAAP)

The common set of accounting principles, standards and procedures that companies use to
compile their financial statements. GAAP are a combination of authoritative standards (set by
policy boards) and simply the commonly accepted ways of recording and reporting accounting
information.

GAAP are imposed on companies so that investors have a minimum level of consistency in the
financial statements they use when analyzing companies for investment purposes. GAAP cover
such things as revenue recognition, balance sheet item classification and outstanding share
measurements. Companies are expected to follow GAAP rules when reporting their financial data
via financial statements. If a financial statement is not prepared using GAAP principles, be very
wary!

That said, keep in mind that GAAP is only a set of standards. There is plenty of room within GAAP
for unscrupulous accountants to distort figures. So, even when a company uses GAAP, you still
need to scrutinize its financial statements.

American Depositary Receipt (ADR)

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A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one
share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars,
with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce
administration and duty costs that would otherwise be levied on each transaction.

This is an excellent way to buy shares in a foreign company while realizing any dividends and
capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for
the underlying shares in another country. For example, dividend payments in euros would be
converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with
the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq.

American Depositary Share (ADS)

A share issued under deposit agreement that represents an underlying security in the issuer's
home country.

The terms American depositary receipt (ADR) and American depositary share (ADS) are often
thought to mean the same thing. However, an ADS is the actual share trading, while an ADR
represents a bundle of ADSs.
Global Depositary Receipt (GDR)

1. A bank certificate issued in more than one country for shares in a foreign company. The shares
are held by a foreign branch of an international bank. The shares trade as domestic shares, but
are offered for sale globally through the various bank branches.

2. A financial instrument used by private markets to raise capital denominated in either U.S.
dollars or euros.

1. A GDR is very similar to an American Depositary Receipt.

2. These instruments are called EDRs when private markets are attempting to obtain euros

International Depository Receipt (IDR)

A negotiable, bank-issued certificate representing ownership of stock securities by an investor
outside the country of origin.

An IDR is the non-U.S. equivalent of an American Depositary Receipt (ADR).

Corporate Governance

The relationship between all the stakeholders in a company. This includes the shareholders,
directors, and management of a company, as defined by the corporate charter, bylaws, formal
policy and rule of law.

Ethical companies are said to have excellent corporate governance.

Securitization
Securitization is a structured finance process in which assets, receivables or financial instruments
are acquired, classified into pools, and offered as collateral for third-party investment.[1] It
involves the selling of financial instruments which are backed by the cash flow or value of the
underlying assets.[2]

Securitization typically applies to assets that are illiquid (i.e. cannot easily be sold). It is common
in the real estate industry, where it is applied to pools of leased property, and in the

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lendingindustry, where it is applied to lenders' claims on mortgages, home equity loans, student
loans and other debts.

All assets can be securitized so long as they are associated with a steady amount of cash flow.
Investors "buy" these assets by making loans which are secured against the underlying pool of
assets and its associated income stream. Securitization thus "converts illiquid assets into liquid
assets"[3] by pooling, underwriting and selling their ownership in the form of asset-backed
securities (ABS).[4]

Securitization utilizes a special purpose vehicle (SPV) (alternatively known as a special purpose
entity [SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and
thereby obtain lower interest rates from potential lenders. A credit derivative is also generally
used to change the credit quality of the underlying portfolio so that it will be acceptable to the
final investors.

Securitization has evolved from tentative beginnings in the late 1970s to a vital funding source
with an estimated total aggregate outstanding of $8.06 trillion (as of the end of 2005, by the Bond
Market Association) and new issuance of $3.07 trillion in 2005 in the U.S. markets alone. [citation
needed]

Corporate governance
Corporate governance is the set of processes, customs, policies, laws and institutions affecting the
way in which a corporation is directed, administered or controlled. Corporate governance also
includes the relationships among the many players involved (the stakeholders) and the goals for
which the corporation is governed. The principal players are the shareholders, management and
the board of directors. Other stakeholders include employees, suppliers, customers, banks and
other lenders, regulators, the environment and the community at large.

Corporate governance is a multi-faceted subject. An important theme of corporate governance

deals with issues of accountability and fiduciary duty, essentially advocating the implementation of
policies and mechanisms to ensure good behaviour and protect shareholders. Another key focus is
the economic efficiency view, through which the corporate governance system should aim to
optimize economic results, with a strong emphasis on shareholders welfare. There are yet other
aspects to the corporate governance subject, such as the stakeholder view, which calls for more
attention and accountability to players other than the shareholders (e.g.: the employees or the
environment).

Recently there has been considerable interest in the corporate governance practices of modern
corporations, particularly since the high-profile collapses of a number of large U.S. firms such as
Enron Corporation and Worldcom.

Board members and those with a responsibility for corporate governance are increasingly using
the services of external providers to conduct anti-corruptionauditing, due diligence and training.

Definition

The term corporate governance has come to mean two things.

 the processes by which all companies are directed and controlled.

 a field in economics, which studies the many issues arising from the separation of
ownership and control.[1]

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Relevant rules include applicable laws of the land as well as internal rules of a corporation.
Relationships include those between all related parties, the most important of which are the
owners, managers, directors of the board, regulatory authorities and to a lesser extent employees
and the community at large. Systems and processes deal with matters such as delegation of
authority.

The corporate governance structure specifies the rules and procedures for making decisions on
corporate affairs. It also provides the structure through which the company objectives are set, as
well as the means of attaining and monitoring the performance of those objectives.

Corporate governance is used to monitor whether outcomes are in accordance with plans and to
motivate the organization to be more fully informed in order to maintain or alter organizational
activity. Corporate governance is the mechanism by which individuals are motivated to align their
actual behaviors with the overall participants.

In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines

corporate governance as 'an internal system encompassing policies, processes and people, which
serves the needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity and integrity. Sound corporate
governance is reliant on external marketplace commitment and legislation, plus a healthy board
culture which safeguards policies and processes'.

O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can
influence its share price as well as the cost of raising capital. Quality is determined by the financial
markets, legislation and other external market forces plus the international organisational
environment; how policies and processes are implemented and how people are led. External
forces are, to a large extent, outside the circle of control of any board. The internal environment is
quite a different matter, and offers companies the opportunity to differentiate from competitors
through their board culture. To date, too much of corporate governance debate has centred on
legislative policy, to deter fraudulent activities and transparency policy which misleads executives
to treat the symptoms and not the cause.' [2] It is a system of structuring , operating and
controlling a company with a view to achieve long term strategic goals to satisfy shareholders,
creditors, employees, customers and suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local community needs

The concept in accounting of recognizing expenses in the same accounting period when the
related revenues are recognized
The concept in accounting of recognizing expenses in the same accounting period when the
related revenues are recognized

Wasting asset: An asset which has a limited life and therefore decreases in value over time, such
as an option which is out of the money.

Wasting assets are held for too long, they will ultimately lose all their value. Derivatives such as
options are thought of as wasting assets since they have fixed expiration dates and lose value as
the time gap until expiration narrows. An asset which has a limited life and therefore decreases in
value over time, such as an option which is out of the money.

Marginal Cost (MC)

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The marginal cost of an additional unit of output is the cost of the additional inputs needed to
produce that output. More formally, the marginal cost is the derivative of total production costs
with respect to the level of output.

Marginal cost and average cost can differ greatly. For example, suppose it costs $1000 to produce
100 units and $1020 to produce 101 units. The average cost per unit is $10, but the marginal
cost of the 101st unit is $20

Marginal costs are defined as the change in total costs resulting from a one unit change in output.
They are the variable costs associated with increasing output in the short run. A change in
marginal costs might come about for example because of a change in the prices of essential raw
materials or an increase in the wage rate paid to part-time employees.

PerpetualSuccession:
A company does not die or cease to exist unless it is specifically wound up or the task for which it
was formed has been completed. Membership of a company may keep on changing from time to
time but that does not affect life of the company. Death or insolvency of member does not affect
the existence of the company.

SeparateLegalEntity:
On incorporation under law, a company becomes a separate legal entity as compared to its
members. The company is different and distinct from its members in law. It has its own name and
its own seal, its assets and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, and borrowing money, having a bank account,
employing people, entering into contracts and suing and being sued separately.

LimitedLiability:
The liability of the members of the company is limited to contribution to the assets of the company
up to the face value of shares held by him. A member is liable to pay only the uncalled money due
on shares held by him when called upon to pay and nothing more, even if liabilities of the
company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited
liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors
can force the partners to make good the deficit from their personal assets. This cannot be done in
case of a company once the members have paid all their dues towards the shares held by them in
the company.

Types of Companies
1.Public Company means a company which not a private company.

2.Private Company means a company which by its articles of association :-

a. Restricts the right of members to transfer its shares

b. Limits the number of its members to fifty. In determining this number of 50,
employee-members and ex-employee members are not to be considered.
c. Prohibits an invitation to the public to subscribe to any shares in or the debentures
of the company.

If a private company contravenes any of the aforesaid three provisions, it ceases to be private
company and loses all the exemptions and privileges which a private company is entitled.

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Following are some of the privileges and exemptions of a private limited company:-

1. Minimum number is members is 2 (7 in case of public companies)

2. Prohibition of allotment of the shares or debentures in certain cases unless statement in
lieu of prospectus has been delivered to the Registrar of Companies does not apply.
3. Restriction contained in Section 81 related to the rights issues of share capital do not
apply. A special resolution to issue shares to non-members is not required in case of a
private company.
4. Restriction contained in Section 149 on commencement of business by a company does not
apply. A private company does not need a separate certificate of commencement of
business.
5. Provisions of Section 165 relating to statutory meeting and submission of statutory report
does not apply.
6. One (if 7 or less members are present) or two members (if more than 7 members are
present ) present in person at a meeting of the company can demand a poll.
7. In case of a private company which not a subsidiary of a public limited company or in the
case of a private company of which the entire paid up share capital is held by the one or
more body corporates incorporated outside India, no person other than the member of the
company concerned shall be entitled to inspect or obtain the copies of profit and loss
account of that company.
8. Minimum number of directors is only two. (3 in case of a public company)

Profit Maximization Vs Wealth Maximization

Frequently, maximization of profits is regarded as the proper objective of the firm, but it is not as
inclusive a goal as that of maximizing stockholder wealth. For one thing, total profits are not as
important as earnings per stock. A firm could always raise total profits by issuing stock and using
the proceeds to invest in Treasury bills. Even maximization of earnings per stock, however, is not
a fully appropriate objective, partly because it does not specify the timing or duration of expected
returns. Is the investment project that will produce a $100,000 return 5 years from now more
valuable than the project that will produce annual returns of $15,000 in each of the next 5 years?
An answer to this question depends upon the time value of money. Few existing stockholders
would think favorably of a project that promised its first return in 100 years, no matter how large
this return. We must take into account the time pattern of returns in our analysis.
Another shortcoming of the objective of maximizing earnings per stock is that it does not consider
the risk or uncertainty of the prospective earnings stream. Some investment projects are far more
risky than others. As a result, the prospective stream of earnings per stock would be more
uncertain if these projects were undertaken. In addition, a company will be more or less risky
depending upon the amount of debt in relation to equity in its capital structure. This financial risk
is another uncertainty in the minds of investors when they judge the firm in the marketplace.
Finally, earnings per stock objective do not take into account any dividend the company might
pay.
For the reasons given, an objective of maximizing earnings per stock may not be the same as
maximizing market price per stock. The market price of a firm's stock represents the value that
market participants place on the firm.

Especially For Interview

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1 Dematerialization vs. Rematerialization

Dematerialization----The move from physical certificates to electronic book keeping. Actual

stock certificates are slowly being removed and retired from circulation in exchange for electronic
recording.

Rematerialization is a compiler optimization which saves time by recomputing a value instead of

loading it from memory. It is typically tightly integrated with register allocation, where it is used
as an alternative to spilling registers to memory.

2 Venture Capital-seed companies?

Venture Capital
Money made available for investment in innovative enterprises or research, especially in high
technology, in which both the risk of loss and the potential for profit may be considerable. Also
called risk capital.

3 Institutional investor

Institutional investor----A non-bank person or organization that trades securities in large

enough share quantities or dollar amounts that they qualify for preferential treatment and lower
commissions. Institutional investors face less protective regulations because it is assumed that
they are more knowledgeable and better able to protect themselves.

Foreign Institutional investor

An investor or investment fund that is from or registered in a country outside of the one in which
it is currently investing. Institutional investors include hedge funds, insurance companies, pension
funds and mutual funds.

4 Insider trading

Insider trading----The illegal buying or selling of securities on the basis of information that is
unavailable to the public.

5 P/E ratio

P/E ratio----In finance, the P/E ratio of a stock (also called its "earnings multiple", or simply
"multiple" or "PE") is used to measure how cheap or expensive share prices are. It is probably the
single most consistent red flag to excessive optimism and over-investment. It also serves,
regularly, as a marker of business problems and opportunities. By relating price and earnings per
share for a company, one can analyze the market's valuation of a company's shares relative to the
wealth the company is actually creating. A P/E ratio is calculated as:

Price per share/Earnings per share

6 Reverse merger or Reverse Takeover

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A Reverse Takeover (RTO), also known as a back door listing, or a reverse merger, is a financial
transaction that results in a privately-held company becoming a publicly-held company without
going the traditional route of filing a prospectus and undertaking an initial public offering (IPO).
Rather, it is accomplished by the shareholders of the private company selling all of their shares in
the private company to the public company in exchange for shares of the public company.

A Reverse Merger is a transaction where by the private company shareholders may gain control
of a public company by merging it in with their private company. The private company
shareholders receive a substantial majority of the shares of the public company (normally 85% to
90% or more) and the control of the board of directors. The transaction can be accomplished in as
little as two weeks, resulting in the private company becoming a public company. The transaction
does not go through a review process with state and federal regulators because the public
company has already completed the process. The transaction involves the private and shell
company exchanging information on each other, negotiating the merger terms, and signing a
share exchange agreement. At the closing the public shell company issues a substantial majority
of its shares and the board control to the shareholders of the private company. The private
company shareholders pay for the shell and contribute their private company shares to the shell
company and the private company is now public.

7 Stock split

Stock split----The dividing of a company's existing stock into multiple shares. In a 2-for-1 split,
each stockholder receives an additional share for each share he or she holds.

Stock split refers to a corporate action that increases the shares in a public company. The price
of the shares are adjusted such that the before and after market capitalization of the company
remains the same and dilution does not occur. Options and warrants are included.

For example, a company has 100 shares of stock each with a price of $50. The market
capitalization is 100 × $50 = $5000. The company splits its stock "2-for-1". There are now 200
shares of stock and each shareholder holds twice as many shares. The price of each share has
been adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the
split.

Reverse stock split, or reverse split, is just the same but in reverse: a reduction in number of
shares and an accompanying increase in the share price. The ratio is also reversed: 1-for-2, or 1-
for-3.

8 Contingent liabilities-accounting treatment?

Contingent liabilities----Liabilities that may or may not be incurred by a company and which
depend on the outcome of say a forthcoming event such as a court case. These are recorded in a
company's accounts as contingent liabilities.

9 Merchant banking

Merchant banking----A bank that deals mostly in (but is not limited to) international finance,
long-term loans for companies and underwriting. Merchant banks do not provide regular banking
services to the general public.

10 Can share holders offer its share price at premium during the IPO?

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11 Who regulates/controls the price of the shares?

12 Form filed for Prospectus in SEC?

13 Share warrant

Share warrant----A certificate, usually issued along with a bond or preferred stock, entitling the
holder to buy a specific amount of securities at a specific price, usually above the current market
price at the time of issuance, for an extended period, anywhere from a few years to forever. In
the case that the price of the security rises to above that of the warrant's exercise price, then the
investor can buy the security at the warrant's exercise price and resell it for a profit. Otherwise,
the warrant will simply expire or remain unused. Warrants are listed on options exchanges and
trade independently of the security with which it was issued. also called subscription warrant.

Share certificate - legal document that certifies ownership of a specific number of stock shares
(or fractions thereof) in a corporation.

14 Share Premium

Share Premium----The market value of shares in excess of their par value.

15 Proxy

Proxy----A representative; an agent; a document appointing a representative.

A proxy is a person who is designated by another to represent that individual at a meeting or

before a public body. It also refers to the written authorization allowing one person to act on
behalf of another.

16 FI and FII

Foreign Institutional Investor - FII----An investor or investment fund that is from or

registered in a country outside of the one in which it is currently investing. Institutional investors
include hedge funds, insurance companies, pension funds and mutual funds.

17 BEP (Break Even Point)

18 What is Segmentation

19 Pooling of Interest?

Pooling of Interest----An accounting method, used in mergers and acquisitions, where the
balance sheet items of the two companies are simply added together.

20 Joint Venture Vs Strategic Alliance Vs Partnership

Joint Venture----An association of two or more individuals or companies engaged in a solitary

business enterprise for profit without actual partnership or incorporation; also called a joint
adventure.

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A joint venture is a contractual business undertaking between two or more parties. It is similar to
a business partnership, with one key difference: a partnership generally involves an ongoing,
long-term business relationship, whereas a joint venture is based on a single business transaction.

A Strategic Alliance is a mutually beneficial long-term formal relationship formed between two
or more parties to pursue a set of agreed upon goals or to meet a critical business need while
remaining independent organizations.

Partnership----An association of two or more persons engaged in a business enterprise in which

the profits and losses are shared proportionally.

Consignment----The delivery of goods to a carrier to be shipped to a designated person for sale.

A bailment of goods for sale.

A consignment is an arrangement resulting from a contract in which one person, the consignor,
either ships or entrusts goods to another, the consignee, for sale. If the goods are transported by
a carrier to the consignee, the name of the consignor appears on the bill of lading as the person
from whom the goods have been received for shipment. The consignee's name appears on it as
the person to whom delivery is to be made. The consignee acts as an agent on behalf of the
consignor, a principal, in selling the goods and must take reasonable care of them while in his or
her possession. The consignor does not give up ownership of the goods until their sale.

21 shell company

Shell Company is a company that is incorporated but has no significant assets or operations.
Shell corporations are not in themselves illegal, and they may have legitimate business purposes.
However, they are a main component of underground economy, especially those based in tax
havens.

Blank check company

Blank check company - A company in a developmental stage that either doesn't have an
established business plan or has a business plan that revolves around a merger or acquisition with
another firm.

22 Reorganization Vs Restructuring

Reorganization----A process designed to revive a financially troubled or bankrupt firm. A

reorganization involves the restatement of assets and liabilities, as well as holding talks with
creditors in order to make arrangements for maintaining repayments.

Restructuring----A significant modification made to the debt, operations or structure of a

company. This type of corporate action is usually made when there are significant problems in a
company, which are causing some form of financial harm and putting the overall business in
jeopardy. The hope is that through restructuring, a company can eliminate financial harm and
improve the business.

23 Spin off Vs Split-Off

Spin off----An independent company created from an existing part of another company through a
divestiture, such as a sale or distribution of new shares.

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Split-off----The process whereby a parent corporation organizes a subsidiary corporation to which

it transfers part of its assets in exchange for all of the subsidiary's capital stock, which is
subsequently transferred to the shareholders of the parent corporation in exchange for a portion
of their parent stock.

A split-off differs from a spin-off in that the shareholders in a split-off must relinquish their shares
of stock in the parent corporation in order to receive shares of the subsidiary corporation whereas
the shareholders in a spin-off need not do so.

Reverse split

24 Takeover

Takeover----Acquiring control of a corporation, called a target, by stock purchase or exchange,

either hostile or friendly.

Takeover----The act or an instance of assuming control or management of or responsibility for

something, especially the seizure of power, as in a nation, political organization, or corporation.

25 Divestiture

Divestiture----The sale, liquidation, or spinoff of a corporate division or subsidiary.

Disposition or sale of an asset by a company. A company will often divest an asset which is not
performing well, which is not vital to the company's core business, or which is worth more to a
potential buyer or as a separate entity than as part of the company

26 Corporate Governance

Corporate governance is the set of processes, customs, policies, laws and institutions affecting
the way a corporation is directed, administered or controlled. Corporate governance also includes
the relationships among the many players involved (the stakeholders) and the goals for which the
corporation is governed. The principal players are the shareholders, management and the board of
directors. Other stakeholders include employees, suppliers, customers, banks and other lenders,
regulators, the environment and the community at large.

http://www.answers.com/corporate%20governance

27 Dividend

A share of profits received by a stockholder or by a policyholder in a mutual insurance society.

28 Prime Lending Rate

Prime rate----The lowest rate of interest on bank loans at a given time and place, offered to
preferred borrowers. Also called prime interest rate.

29 Convertible Debentures

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Any type of debenture that can be converted into some other security.

30 Certificate of Incorporation Vs Certificate of merger

31 AGM Vs EGM

AGM---- A mandatory yearly meeting of shareholders that allows stakeholders to stay informed
and involved with company decisions and workings.

EGM---- A meeting other than the annual general meeting between a company's shareholders,
executives and any other members. An EGM is usually called on short notice and deals with an
urgent matter.

Liquidation----When a business or firm is terminated or bankrupt, its assets are sold and the
proceeds pay creditors. Any leftovers are distributed to shareholders.

Dissolution---- Act or process of dissolving; termination; winding up. In this sense it is frequently
used in the phrase dissolution of a partnership

The dissolution of a corporation is the termination of its existence as a legal entity.

35 Bankruptcy

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization

to pay their creditors.

36 Winding Up

A process that entails selling all the assets of a business entity, paying off creditors, distributing
any remaining assets to the principals, and then dissolving the business.

37 Anti Dumping Vs Dumping

Dumping, selling goods at less than the normal price, usually as exports in international trade. It
may be done by a producer, a group of producers, or a nation. Dumping is usually done to drive
competitors off the market and secure a monopoly, or to hinder foreign competition. To
counterbalance international dumping, nations often resort to flexible tariffs. In international
trade, acute competition from foreign producers often leads to charges of dumping. A policy of
dumping depends for its effectiveness on the possibility of maintaining separate domestic and
foreign markets, on monopolistic influences maintaining a high price in the home market, on
export bounties, or on low import duties in the foreign market. Dumping disturbs those markets
that receive dumped goods, and it may drive local producers out of business. Governments may
condone, or even sponsor, dumping in other markets for either political reasons or to achieve a
more favorable balance of payments.

Anti Dumping----Intended to discourage importation and sale of foreign-made goods at prices

substantially below domestic prices for the same items.

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38 CFO Vs CEO

Chief Financial Officer – CFO----This is the senior manager who is responsible for overseeing
the financial activities of an entire company. This includes signing checks, monitoring cash flow,
and financial planning.

Chief Executive Officer----The highest-ranking executive in a company or organization,

responsible for carrying out the policies of the board of directors on a day-to-day basis.

39 Hedging

Hedging, in commerce, method by which traders use two counterbalancing investment strategies
so as to minimize any losses caused by price fluctuations.

It is generally used by traders on the commodities market. Typically, hedging involves a trader
contracting to buy or sell one particular good at the time of the contract and also to buy or sell the
same (or similar) commodity at a later date. In a simple example, a miller may buy wheat that is
to be converted into flour. At the same time, the miller will contract to sell an equal amount of
wheat, which the miller does not presently own, to another trader. The miller agrees to deliver the
second lot of wheat at the time the flour is ready for market and at the price current at the time of
the agreement. If the price of wheat declines during the period between the miller's purchase of
the grain and the flour's entrance onto the market, there will also be a resulting drop in the price
of flour. That loss must be sustained by the miller. However, since the miller has a contract to sell
wheat at the older, higher price, the miller makes up for this loss on the flour sale by the gain on
the wheat sale. Hedging is also employed by stock and bond traders, export-import traders, and
some manufacturers.

40 IPO

Initial Public Offering-IPO

The first sale of stock by a private company to the public. IPOs are often issued by smaller,
younger companies seeking capital to expand, but can also be done by large privately-owned
companies looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what
type of security to issue (common or preferred), best offering price and time to bring it to market.

IPOs generally involve one or more investment banks as "underwriters." The company offering its
shares, called the "issuer," enters a contract with the underwriters to sell its shares to the public.
The underwriters then approach investors with offers to sell these shares.

Primary markets and secondary markets

Primary markets----The market in which investors have the first opportunity to buy a newly issued
security

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The Primary Market is that part of the capital markets that deals with the issuance of new
securities. Companies, governments or public sector institutions can obtain funding through the
sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers.
The process of selling new issues to investors is called underwriting. In the case of a new stock
issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built into
the price of the security offering, though it can be found in the prospectus.

secondary markets----A market on which an investor purchases an asset from another investor
rather than an issuing corporation.

The Secondary Market is the financial market for trading of securities that have already been
issued in an initial private or public offering. Alternatively, secondary market can refer to the
market for any kind of used goods. The market that exists in a new security just after the new
issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock
exchange, investors and speculators can easily trade on the exchange, as market makers provide
bids and offers in the new stock.

Red herring prospectus

This is an initial prospectus to be submitted by a company which is planning to have an IPO. This
prospectus has to be filed with SEC. It contains all the information about the company except for
the offer price and the effective date, which aren't known at that time. There are several additions
and edits to this document before the final prospectus is released.

The reason it is called a Red herring is due to a section of the document colored in red which
explicitly states that the issuing company is not attempting to sell its shares before it has been
given official approval.

"Red Herring Prospectus" is a prospectus which does not have details of either price or number of
shares being offered or the amount of issue. This means that in case the price is not disclosed, the
number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer
can state the issue size and the number of shares are determined later.

41 BookBuilding

The process by which an underwriter attempts to determine at what price to offer an IPO based on
demand from institutional investors.

42 Shareholders and Stake Holders.

Shareholders----Any person, company, or other institution that owns at least 1 share in a

company. A shareholder may also be referred to as a stockholder.

stake holders----

43 Capital Budgeting

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Capital budgeting is the planning process used to determine a firm's long term investments such
as new machinery, replacement machinery, new plants, new products, and research and
development projects.

Net Present Value - NPV----The difference between the present value of cash inflows and the
present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an
investment or project.

The internal rate of return (IRR) is defined as the discount rate that gives a net present value
(NPV) of zero. The NPV is calculated from an annualized cash flow by discounting all future
amounts to the present.

The length of time required to recover the cost of an investment.

Cost of the project/Annual cash flows

44 Gross Working Capital Vs Net WC

45 Ratios

46 Leverage Financing

50 Franchise, Examples of Franchise Vs Affiliate

Franchise----A privilege granted or sold, such as to use a name or to sell products or services. In
its simplest terms, a franchise is a license from the owner of a trademark or trade name
permitting another to sell a product or service under that name or mark. More broadly stated, a
franchise has evolved into an elaborate agreement under which the franchisee undertakes to
conduct a business or sell a product or service in accordance with methods and procedures
prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through
advertising, promotion, and other advisory services.

51 Royalty

Royalty----A payment to an owner for the use of property, especially patents, copyrighted works,
franchises or natural resources.

52 Leasing Vs Hire Purchase

A lease or tenancy is an interest in personal property or real property given by a lessor to another
person (usually called the lessee or tenant) for a fixed period of time, and the lessee obtains
exclusive possession of the property in return for paying the lessor a fixed or determinable
consideration.

Hire Purchase----Purchase of a commodity on an installment plan.

53 Chapter 7

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A bankruptcy proceeding where a company stops all operations and goes completely out of
business. A trustee is appointed to liquidate (sell) the company's assets, and the money is used to
pay off debt.

54 Debtors in Possession

A company that continues to operate while under the Chapter 11 bankruptcy process.

55 Financial Value of a company

56 Mutual Funds (open ended Vs closed ended)

A fund, in the form of an investment company, in which shareholders combine their money to
invest in a variety of stocks, bonds, and money-market investments such as U.S. Treasury bills
and bank certificates of deposit.

57 Intellectual Property

Intellectual property describes a wide variety of property created by musicians, authors, artists,
and inventors. The law of intellectual property typically encompasses the areas of copyright,
patent, and trademark law. It is designed to encourage the development of art, science, and
information by granting certainproperty rights to all artists, which include inventors in both the
arts and the sciences. These rights allow artists to protect themselves from infringement, or the
unauthorized use and misuse of their creations.

Copyright The legal right granted to an author, composer, playwright, publisher, or distributor
to exclusive publication, production, sale, or distribution of a literary, musical, dramatic, or artistic
work.

Patent A government license that gives the holder exclusive rights to a process, design, or new
invention for a designated period of time.

Trade mark - A name, symbol, or other device identifying a product, officially registered and
legally restricted to the use of the owner or manufacturer.

58 Independent Director

Independent Director: In order for a director to qualify as an "independent director," the Board
must affirmatively determine that the director has no material relationship with Occidental (either
as a partner, stockholder or officer of an organization that has a relationship with Occidental) that
would preclude that nominee from being an independent director. For the purpose of such
determination, an "independent director" is a director who:

--Has not been employed by Occidental within the last five years;
--Has not been an employee or affiliate of any present or former internal or external auditor of
Occidental within the last three years;

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--Has not received more than $60,000 in direct compensation from Occidental, other than director
and committee fees, during the current fiscal year or any of the last three completed fiscal years;
--Has not been an executive officer or employee of a company that made payments to, or
received payments from, Occidental for property or services in an amount exceeding the greater
of $1 million or 2 percent of such other company's consolidated gross revenues during the current
fiscal year or any of the last three completed fiscal years;
--Has not been employed by a company of which an executive officer of Occidental has been a
director within the last three years;
--Is not affiliated with a not-for-profit entity that received contributions from Occidental exceeding
the greater of $1 million or 2 percent of such charitable organization's consolidated gross
revenues during the current fiscal year or any of the last three completed fiscal years;
--Has not had any of the relationships described above with an affiliate of Occidental; and
--Is not a member of the immediate family of any person described above. An "immediate family
member" includes a person's spouse, parents, children, siblings, mothers and fathers-in-law, sons
and daughters-in-law, brothers and sisters-in-law and anyone (other than domestic employees)
who shares such person's home.

59 Audit Committee

An Audit Committee is an operating committee of a publicly-held company. Committee members

are normally drawn from members of the Company's board of directors. An audit committee of a
publicly traded company in the United States is composed of independent or outside directors.

60 Quorum

In law, a quorum is the minimum number of members of a deliberative body necessary to conduct
the business of that group.

61 EPS

The portion of a company's profit allocated to each outstanding share of common stock. EPS
serves as an indicator of a company's profitability.

Net income-Dividends on preferred stocks/Average outstanding stocks

62 what are Liquid assets

Cash, or property immediately convertible to cash, such as securities, notes, life insurance policies
with cash surrender values, U.S. savings bonds, or an account receivable.

63 Treasury Stock (shares buy back)

Corporate stock that is issued, completely paid for, and reacquired by the corporation at a later
point in time.

Treasury stock or shares may be purchased by the corporation, or reacquired through donation,
forfeiture, or some other method. It is then regarded as the personal property of the corporation
and part of its assets. The corporation can sell the stock for cash or credit, for par value or market

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value, or upon any terms that it could be sold by a stockholder. Shares that the corporation has
not issued in spite of its authority to do so are ordinarily not regarded as treasury shares but are
merely unissued shares.

64 Listed and Unlisted Company

65 Public Company Vs Private Company

A company that has issued securities through an initial public offering and which are traded on at
least one stock exchange or over-the-counter market.

66 Index (Stock index)

A statistical indicator providing a representation of the value of the securities which constitute it.
Indices often serve as barometers for a given market or industry and benchmarks against which
financial or economic performance is measured.

67 Sensex

An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the
Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively-traded
stocks on the BSE. Initially compiled in 1986, the Sensex is the oldest stock index in India.

68 Nifty

69 BSE

The BSE SENSEX (also known as the BSE 30) is a value-weighted index composed of 30
scrips, with the base April 1979=100. The set of companies which make up the index has been
changed only a few times in the last 20 years. These companies account for around one-fifth of
the market capitalization of the BSE.

70 Joint Stock Company Vs Joint venture

Joint Stock Company----A company which has some features of a corporation and some features
of a partnership. The company sells fully transferable stock, but all shareholders have unlimited
liability.

Joint Stock Company----A business whose capital is held in transferable shares of stock by its joint
owners.

Joint venture----A contractual agreement joining together two or more parties for the purpose of
executing a particular business undertaking. All parties agree to share in the profits and losses of
the enterprise.

Joint venture----An association of two or more individuals or companies engaged in a solitary

business enterprise for profit without actual partnership or incorporation; also called a joint
adventure.

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71 Going concern
Going concern A going concern describes a business that functions without the intention or
threat of liquidation for the foreseeable future.

71 Form S-1 (A registration statement used in the IPO of securities.)

72 Restructuring

A significant modification made to the debt, operations or structure of a company. This type of
corporate action is usually made when there are significant problems in a company, which are
causing some form of financial harm and putting the overall business in jeopardy. The hope is that
through restructuring, a company can eliminate financial harm and improve the business.

73 Disinvestment

1. The action of an organization or government selling or liquidating an asset or subsidiary. Also

known as "divestiture".

2. A reduction in capital expenditure, or the decision of a company not to replenish depleted

capital goods

74 Underwriter

1. A person or firm engaged in the insurance business.

2. An insurance agent who assesses the risk of enrolling an applicant for coverage or a policy.
3. One that guarantees the purchase of a full issue of stocks or bonds.

A company or other entity that administers the public issuance and distribution of securities from
a corporation or other issuing body. An underwriter works closely with the issuing body to
determine the offering price of the securities, buys them from the issuer and sells them to
investors via the underwriter's distribution network.

75 Insurance Vs Reinsurance

Insurance----A contract whereby, for a specified consideration, one party undertakes to

compensate the other for a loss relating to a particular subject as a result of the occurrence of
designated hazards.

Reinsurance----The contract made between an insurance company and a third party to protect the
insurance company from losses. The contract provides for the third party to pay for the loss
sustained by the insurance company when the company makes a payment on the original
contract.

76 Preferred Stock

Preferred stock

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A preferred stock, also known as a preferred share or simply a preferred, is a share of stock
carrying additional rights above and beyond those conferred by common stock.

Rights
Unlike common stock, preferred stock usually has several rights attached to it.

----The core right is that of preference in dividends. Before a dividend can be declared on the
common shares, any dividend obligation to the preferred shares must be satisfied.

----The dividend rights are often cumulative, such that if the dividend is not paid it accumulates in
arrears.

----Preferred stock has a par value or liquidation value associated with it. This represents the
amount of capital that was contributed to the corporation when the shares were first issued.

----Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par
or liquidation value. This claim is senior to that of common stock, which has only a residual claim.

----Almost all preferred shares have a fixed dividend amount. The dividend is usually specified as
a percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6% Series
A preferred.

----Variable preferreds are rare exceptions: their changing dividends depend on prevailing interest
rates, or varying as a percentage of net income.

----Some preferred shares have special voting rights to approve certain extraordinary events
(such as the issuance of new shares or the approval of the acquisition of the company) or to elect
directors, but most preferred shares provide no voting rights associated with them.

----Usually preferred shares contain protective provisions which prevent the issuance of new
preferred shares with a senior claim. This results in corporations often having several series of
preferred shares that have a subordinate relationship.

77 VAT

Value added Tax

78 GDP

GDP----The total market value of all the goods and services produced within the borders of a
nation during a specified period.

79 Option and its Types

Option----A privilege, for which a person has paid money that grants that person the right to
purchase or sell certain commodities or certain specified securities at any time within an agreed
period for a fixed price.

80 OTC Over-the-Counter

Over-The-Counter, method of buying and selling securities outside the organized stock exchange.

81 NASDAQ (National Association of securities Dealers Automated Quotation system)

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Nasdaq Stock Market, Inc. (Nasdaq) is a provider of securities listing, trading and information
products and services.

82 Negotiable Instrument

A commercial paper, such as a check or promissory note, that contains the signature of the maker
or drawer; an unconditional promise or order to pay a certain sum in cash that is payable either
upon demand or at a specifically designated time to the order of a designated person or to its
bearer.

Negotiable instrument, bill of exchange, check, promissory note, or other written contract for
payment that may serve as a substitute for money.

1. The promise or order to pay must be unconditional;

2. The payment must be in a specific sum of money, although interest may be added to the sum;
3. The payment must be made on demand or at a definite time;
4. The instrument must be payable to bearer or to order.

83 NOW (Negotiable Order of Withdrawal)

In the United States, a Negotiable Order of Withdrawal account (NOW account) is a deposit
account that pays interest, on which checks may be written. Authorized on a national scale in
1981, these accounts typically pay a relatively small return, although some banks offer high-
interest NOW accounts in order to attract depositors. Unless your interest rate is high, the
balances in NOW accounts should be kept at the minimum necessary to provide needed funds
without incurring service charges.

84 Merchant bank

Merchant bank----A bank that deals mostly in (but is not limited to) international finance, long-
term loans for companies and underwriting. Merchant banks do not provide regular banking
services to the general public.

85 Going private

Going Private

A company "goes private" when it reduces the number of its shareholders to fewer than 300 and
is no longer required to file reports with the SEC.

A number of transactions can result in a company going private, including:

 Another company or individual makes a tender offer to buy all or most of the company’s
publicly held shares;
 The company merges with or sells the company’s assets to another company; or
 The company can declare a reverse stock split that not only reduces the number of shares
but also reduces the number of shareholders. In this type of reverse stock split, the

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company typically gives shareholders a single new share in exchange for a block—10, 100,
or even 1,000 shares—of the old shares. If a shareholder does not have a sufficient
number of old shares to exchange for new shares, the company will usually pay the
shareholder cash based on the current market price of the company’s stock.

While SEC rules don't prevent companies from going private, they do require companies to
provide information to shareholders about the transaction that caused the company to go private.
The company may have to file a merger proxy statement or a tender offer document with the
SEC. In addition, if the transaction is initiated by an affiliate (an insider) of the company, Rule
13e-3 of the Securities Exchange Act of 1934 requires the affiliate to file a Schedule 13E-3 with
the SEC.

The filing of a Schedule 13E-3 is also required when affiliated transactions result in a company’s
publicly held securities no longer being traded on a national securities exchange or an inter-dealer
quotation system, such as Nasdaq.

The Schedule 13E-3 requires a discussion of the purposes of the transaction, any alternatives that
the company considered, and whether the transaction is fair to all shareholders. The Schedule also
discloses whether and why any of its directors disagreed with the transaction or abstained from
voting on the transaction and whether a majority of directors who are not company employees
approved the transaction.

Going private transactions require shareholders to make difficult decisions. To protect

shareholders, some states have adopted corporate takeover statutes that provide shareholders
with dissenter's rights. These statutes provide shareholders the opportunity to sell their shares on
the terms offered, to challenge the transaction in court, or to hold on to the shares. Once the
transaction is concluded, remaining shareholders may find it very difficult to sell their retained
shares because of a limited trading market.

http://www.sec.gov/answers/gopriv.htm

86 Futures

Futures----Contracts that promise to purchase or sell standard commodities at a forthcoming date

and at a fixed price.

This type of contract is an extremely speculative transaction and ordinarily involves such standard
goods as rice or soybeans. Profit and loss are based upon promises to deliver—as opposed to
possession of—the actual commodities.

87 Exit strategy

Exit Strategy

1. The method by which a venture capitalist or business owner intends to get out of an investment
that he or she has made in the past. In other words, the exit strategy is a way of "cashing out" an
investment. Examples include an initial public offering (IPO) or being bought out by a larger player
in the industry. Also referred to as a "harvest strategy" or "liquidity event".

2. In the context of an active trader, a plan as to when a trade will be closed out.

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88 EOQ (Economic Order Quantity)

89 Monopoly

Exclusive control by one group of the means of producing or selling a commodity or service

90 MRTP Monopoly & Restrictive Trade Practices Act

91 Inflation Vs Deflation

Inflation
A persistent increase in the level of consumer prices or a persistent decline in the purchasing
power of money, caused by an increase in available currency and credit beyond the proportion of
available goods and services.

92 Vertical market Vs Horizontal market

93 Vertical merger Vs Horizontal merger
94 Redemption
95 Lead manager
96 Depreciation Vs Obsolescence Vs Depletion
97 Bull Vs Bear
98 Spread
99 ADR Vs GDR
100 Primary Vs Secondary Listing
101 supply chain management - SCM
102 SEDAR Vs Edgar
103 Real Estate Investment Trust - REIT
104 Exchange-Traded Fund - ETF
105 Reallowance
106 Reflation

Affiliate----A company in which another company has a minority interest.

A Patent is a set of exclusive rights granted by a state to a person (the patentee, usually the
inventor) for a fixed period of time in exchange for the regulated, public disclosure of certain
details of a device, method, process or composition of matter (substance) (known as an invention)
which is new, inventive, and useful or industrially applicable.

A Copyright is a law that gives the creator of a document, musical piece, book, etc. the right to
their creation and the control of its distribution. This protects the creators ability to sell their work.
Once copyrighted, a work can only be copied at the creator's disposal. By having copyright laws,
our government is encouraging the formation of new ideas and concepts by securing the creator's
reward for their hard work and great consumption of time.

Red herring prospectus

This is an initial prospectus to be submitted by a company which is planning to have an IPO. It

contains all the information about the company except for the offer price and the effective date,

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 Finance Notes

which aren't known at that time. There are several additions and edits to this document before the
final prospectus is released.

The reason it is called a Red herring is due to a section of the document colored in red which
explicitly states that the issuing company is not attempting to sell its shares before it has been
given official approval by the SEC.

BookBuilding is a process of fixing the share price based on the demand at various price levels.

CRISIL----Credit Rating Information Services of India Limited

Portfolio Management
The science of making decisions about investment mix and policy.

SEDAR----System for Electronic Document Analysis and Retrieval

EDGAR----Electronic Data Gathering Analysis and Retrieval

Spread----difference between bid and offer prices; also, difference between high and low prices of
a particular security over a given period.

BID----An offer or proposal made by an investor or broker to buy a security.

Offer---- A proposal or offer made by an investor or broker to sell a security.

Merchant Bank
A bank that deals mostly in (but is not limited to) international finance, long-term loans for
companies and underwriting. Merchant banks do not provide regular banking services to the
general public.

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