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. 2 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 igned 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. 3 30.Intanglbe 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) 4 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 moneys 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. 5 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 proprietors 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. 6 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 firms 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 longterm 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. 7 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: Profit on sale of fixed assets, profit on revaluation 8 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. 1 06. 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. 117.Sources of cash: Internal sources9 (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 firms 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 firms 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. 129. Profit centre: A centre whose performance is measured in terms of both the expense incurs and revenue it earns. 10 130.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. 145. Forwards: a forward contract is customized contracts between two entities were settlement takes place on a specific date in the future at todays pre agreed price. 11 146. 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. 164. Secondary market: secondary market is the market where shares buying and selling. In India secondary market is called stock exchange. 12 165. 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 does not carry any credit risk. 183.balanced funds :funds that invest both in debt and equity markets are called balanced funds. 13 184. 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 funds 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. 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. 14 203.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. Formula :

profits available for Equity shareholders ---------------------------------------------Number of Equity shares 15 211.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 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 16 218. 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 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 lenders point of view. It indicates whether the business would earn sufficient profits to pay periodically the interest charges. 17 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 proprietors 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. 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. 18 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 account. This is called double entry. 6.Accounting period concept :- 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 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. 19 242. 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. 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. 20 258.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. 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. 21 277.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.

BASICS
Meaning of Accounting: According to American Accounting Association Accounting is the process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts. Users of Accounts: Generally 2 types. 1. Internal management. 2. External users or Outsiders- Investors, Employees, Lenders, Customers, Government and other agencies, Public. Sub-fields of Accounting: _ Book-keeping: It covers procedural aspects of accounting work and embraces record keeping function. _ Financial accounting: It covers the preparation and interpretation of financial statements. _ Management accounting: It covers the generation of accounting information for management decisions. _ Social responsibility accounting: It covers the accounting of social costs incurred by the enterprise. Fundamental Accounting equation: Assets = Capital+ Liabilities. Capital = Assets - Liabilities. Accounting elements: The elements directly related to the measurement of financial position i.e., for the preparation of balance sheet are Assets, Liabilities and Equity. The elements directly related to the measurements of performance in the profit & loss account are income and expenses. Four phases of accounting process: _ Journalisation of transactions _ Ledger positioning and balancing _ Preparation of trail balance _ Preparation of final accounts. 2 Book keeping: It is an activity, related to the recording of financial data, relating to business operations in an orderly manner. The main purpose of accounting for business is to as certain profit or loss for the accounting period. Accounting: It is an activity of analasis and interpretation of the book-keeping records. Journal: Recording each transaction of the business. Ledger: It is a book where similar transactions relating to a person or thing are recorded. Types: Debtors ledger Creditors ledger General ledger Concepts: Concepts are necessary assumptions and conditions upon which accounting is based. _ Business entity concept: In accounting, business is treated as separate entity from its owners.While recording the transactions in books, it should be noted that business and owners are separate entities.In the transactions of business, personal transactions of the owners should not be

mixed. For example: - Insurance premium of the owner etc... _ Going concern concept: Accounts are recorded and assumed that the business will continue for a long time. It is useful for assessment of goodwill. _ Consistency concept: It means that same accounting policies are followed from one period to another. _ Accrual concept: It means that financial statements are prepared on merchantile system only. 3 Types of Accounts: Basically accounts are three types, _ Personal account: Accounts which show transactions with persons are called personal account. It includes accounts in the name of persons, firms, companies. In this: Debit the reciver Credit the giver. For example: - Naresh a/c, Naresh&co a/c etc _ Real account: Accounts relating to assets is known as real accounts. A separate account is maintained for each asset owned by the business. In this: Debit what comes in Credit what goes out For example: - Cash a/c, Machinary a/c etc _ Nominal account: Accounts relating to expenses, losses, incomes and gains are known as nominal account. In this: Debit expenses and loses Credit incomes and gains For example: - Wages a/c, Salaries a/c, commission recived a/c, etc. Accounting conventions: The term convention denotes customs or traditions which guide the accountant while preparing the accounting statements. _ Convention of consistency: Accounting rules, practices should not change from one year to another. For example: - If Depreciation on fixed assets is provided on straight line method. It should be done year after year. _ Convention of Full disclosure: All accounting statements should be honestly prepared and full disclosure of all important information should be made. All information which is important to assets, creditors, investors should be disclosued in account statements. 4 Trail Balance: A trail balance is a list of all the balances standing on the ledger accounts and cash book of a concern at any given date.The purpose of the trail balance is to establish accuracy of the books of accounts. Trading a/c: The first step of the preparation of final account is the preparation of trading account. It is prepared to know the gross margin or trading results of the business. Profit or loss a/c: It is prepared to know the net profit. The expenditure recording in this a/c is indirect nature. Balance sheet: It is a statement prepared with a view to measure the exact financial position of the firm or business on a fixed date.

Outstanding Expenses: These expenses are related to the current year but they are not yet paid before the last date of the financial year. Prepaid Expenses: There are several items of expenses which are paid in advance in the normal course of business operations. Income and expenditure a/c: In this only the current period incomes and expenditures are taken into consideration while preparing this a/c. Royalty: It is a periodical payment based on the output or sales for use of a certain asset. For example: - Mines, Copyrights, Patent. Hirepurchase: It is an agreement between two parties. The buyer acquires possession of the goods immediately and agrees to pay the total hire purchase price in instalments. Hire purchase price = Cash price + Interest. Lease: A contractual arrangement whereby the lessor grants the lessee the right to use an asset in return for periodic lease rental payments. Double entry: Every transaction consists of two aspects 1. The receving aspect 2. The giving aspect The recording of two aspect effort of each transaction is called double entry. The principle of double entry is, for every debit there must be an equal and a corresponding credit and vice versa. 5 BRS: When the cash book and the passbook are compared, some times we found that the balances are not matching. BRS is preparaed to explain these differences. Capital Transactions: The transactions which provide benefits to the business unit for more than one year is known as capital Transactions. Revenue Transactions: The transactions which provide benefits to a business unit for one accounting period only are known as Revenue Transactions. Deffered Revenue Expenditure: The expenditure which is of revenue nature but its benefit will be for a very long period is called deffered revenue expenditure. Ex: Advertisement expences A part of such expenditure is shown in P&L a/c and remaining amount is shown on the assests side of B/S. Capital Receipts: The receipts which rise not from the regular course of business are called Capital receipts. Revenue Receipts: All recurring incomes which a business earns during normal cource of its activities. Ex: Sale of good, Discount Received, Commission Received. Reserve Capital: It refers to that portion of uncalled share capital which shall not be able to call up except for the purpose of company being wound up. Fixed Assets: Fixed assets, also called noncurrent assets, are assets that are expected to produce benefits for more than one year. These assets may be tangible or intangible. Tangible fixed assets include items such as land, buildings, plant, machinery, etc Intangible fixed assets include items such as patents, copyrights, trademarks, and goodwill.

Current Assets: Assets which normally get converted into cash during the operating cycle of the firm. Ex: Cash, inventory, receivables. Flictitious assets: They are not represented by anything tangible or concrete. Ex: Goodwill, deffered revenue expenditure, etc Contingent Assets: It is an existence whose value, ownership and existence will depend on occurance or non-occurance of specific act. 6 Fixed Liabilities: These are those liabilities which are payable only on the termination of the business such as capital which is liability to the owner. Longterm Liabilities: These liabilities which are not payable with in the next accounting period but will be payable with in next 5 to 10 years are called longterm liabilities. Ex: Debentures. Current Liabilities: These liabilities which are payable out of current assets with in the accounting period. Ex: Creditors, bills payable, etc Contingent Liabilities: A contingent liability is one, which is not an actual liability but which will become an actual one on the happening of some event which is uncertain. These are staded on balance sheet by way of a note. Ex: Claims against company, Liability of a case pending in the court. Bad Debts: Some of the debtors do not pay their debts. Such debt if unrecoverable is called bad debt. Bad debt is a business expense and it is debited to P&L account. Capital Gains/losses: Gains/losses arising from the sale of assets. Fixed Cost: These are the costs which remains constant at all levels of production. They do not tend to increase or decrease with the changes in volume of production. Variable Cost: These costs tend to vary with the volume of output. Any increase in the volume of production results in an increase in the variable cost and vice-versa. Semi-Variable Cost: These costs are partly fixed and partly variable in relation to output. Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations, processess or products. This differs from marginal costing where fixed costs are excluded. Operating Costing: It is used in the case of concerns rendering services like transport. Ex: Supply of water, retail trade, etc... 7 Costing: Cost accounting is the recording classifying the expenditure for the determination of the costs of products.For thepurpuses of control of the costs. Rectification of Errors: Errors that occur while preparing accounting statements are rectified by replacing it by the correct one. Errors like: Errors of posting, Errors of accounting etc Absorbtion: When a company purchases the business of another existing company that is called absorbtion. Mergers: A merger refers to a combination of two or more companies into one company. Variance Analasys: The deviations between standard costs, profits or sales and actual costs. Profits or sales are known as variances.

Types of variances 1: Material Variances 2: Labour Variances 3: Cost Variances 4: Sales or ProfitVariances General Reserves: These reserves which are not created for any specific purpose and are available for any future contingency or expansion of the business. SpecificReserves: These reserves which are created for a specific purpose and can be utilized only for that purpose. Ex: Dividend Equilisation Reserve Debenture Redemption Reserve Provisions: There are many risks and uncertainities in business. In order to protect from risks and uncertainities, it is necessary to provisions and reserves in every business. 8 Reserve: Reserves are amounts appropriated out of profits which are not intended to meet any liability, contingency, commitment in the value of assets known to exist at the date of the B/S. Creation of the reserve is to increase the workingcapital in the business and strengthen its financial position. Some times it is invested to purchase out side securities then it is called reserve fund. Types: 1: Capital Reserve: It is created out of capital profits like premium on the issue of shares, profits and sale of assets, etcThis reserve is not available to distribute as dividend among shareholders. 2: Revenue Reserve: Any Reserve which is available for distribution as dividend to the shareholders is called Revenue Reserve. Provisions V/S Reserves: 1. Provisions are created for some specific object and it must be utilised for that object for which it is created. Reserve is created for any future liability or loss. 2. Provision is made because of legal necessity but creating a Reserve is a matter of financial strength. 3. Provision must be charged to profit and loss a/c before calculating the net profit or loss but Reserve can be made only when there is profit. 4. Provisions reduce the net profit and are not invested in outside securities Reserve amount can invested in outside securities. Goodwill: It is the value of repetition of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry. Methods: Average profits method Super profits method Capitalisatioin method 9 Depreciation: It is a perminant continuing and gradual shrinkage in the book value of a fixed asset.

Methods: 1. Fixed Instalment method or Stright line method Dep. = Cost price Scrap value/Estimated life of asset. 2. Diminishing Balance method: Under this metod, depreciation is calculated at a certain percentage each year on the balance of the asset, which is bought forward from the previous year. 3. Annuity method: Under this method amount spent on the purchase of an asset is regarded as an investment which is assumed to earn interest at a certain rate. Every year the asset a/c is debited with the amount of interest and credited with the amount of depreciation. EOQ: The quantity of material to be ordered at one time is known EOQ. It is fixed where minimum cost of ordering and carryiny stock. Key Factor: The factor which sets a limit to the activity is known as key factor which influence budgets. Key Factor = Contribution/Profitability Profitability =Contribution/Key Factor Sinking Fund: It is created to have ready money after a particular period either for the replacement of an asset or for the repayment of a liability. Every year some amount is charged from the P&L a/c and is invested in outside securities with the idea, that at the end of the stipulated period, money will be equal to the amount of an asset. Revaluation Account: It records the effect of revaluation of assets and liabilities. It is prepared to determine the net profit or loss on revaluation. It is prepared at the time of reconsititution of partnership or retirement or death of partner. Realisation Account: It records the realisation of various assets and payments of various liabilities. It is prepared to determine the net P&L on realisation. 10 Leverage: - It arises from the presence of fixed cost in a firm capitalstructure. Generally leverage refers to a relationship between two interrelated variables. These leverages are classified into three types. 1. Operating leverage 2. Financial Leverage. 3. Combined leverage or total leverage. 1. Operating Leverage: It arises from fixed operating costs (fixed costs other than the financing costs) such as depreciation, shares, advertising expenditures and property taxes. When a firm has fixed operatingcosts, a change in 1% in sales results in a change of more than 1% in EBIT %change in EBIT % change in sales The operaying leverage at any level of sales is called degree. Degree of operatingLeverage= Contribution/EBIT Significance: It tells the impact of changes in sales on operating income. If operating leverage is high it automatically means that the breakeven point would also be reached at a highlevel of sales.

2. Financial Leverage: It arises from the use of fixed financing costs such as interest. When a firm has fixed cost financing. A change in 1% in E.B.I.T results in a change of more than 1% in earnings per share. F.L =% change in EPS / % change in EBIT Degree of Financial leverage= EBIT/ Profit before Tax (EBT) 11 Significance: It is double edged sword. A high F.L means high fixed financial costs and high financial risks. 3. Combined Leverage: It is useful for to know about the overall risk or total risk of the firm. i.e, operating risk as well as financial risk. C.L= O.L*F.L = %Change in EPS / % Change in Sales Degree of C.L =Contribution / EBT A high O.L and a high F.L combination is very risky. A high O.L and a low F.L indiacate that the management is careful since the higher amount of risk involved in high operating leverage has been sought to be balanced by low F.L A more preferable situation would be to have a low O.L and a F.L. Working Capital: There are two types of working capital: gross working capital and net working capital. Gross working capital is the total of current assets. Net working capital is the difference between the total of current assets and the total of current liabilities. Working Capital Cycle: It refers to the length of time between the firms paying cash for materials, etc.., entering into the production process/ stock and the inflow of cash from debtors (sales) Cash Raw meterials WIP Stock Labour overhead Debtors 12 Capital Budgeting: Process of analyzing, appraising, deciding investment on long term projects is known as capital budgeting. Methods of Capital Budgeting: 1. Traditional Methods Payback period method Average rate of return (ARR) 2. Discounted Cash Flow Methods or Sophisticated methods Net present value (NPV) Internal rate of return (IRR) Profitability index Pay back period: Required time to reach actual investment is known as payback period. = Investment / Cash flow ARR: It means the average annual yield on the project. = avg. income / avg. investment Or = (Sum of income / no. of years) / (Total investment + Scrap value) / 2) NPV: The best method for the evaluation of an investment proposal is the NPV

or discounted cash flow technique. This metod takes into account the time value of money. The sum of the present values of all the cash inflows less the sum of the present value of all the cash outflows associated with the proposal. NPV = Sum of present value of future cash flows Investment 13 IRR: It is that rate at which the sum total of cash inflows aftrer discounting equals to the discounted cash outflows. The internal rate of return of a project is the discount rate which makes net present value of the project equal to zero. Profitability Index: One of the methods comparing such proposals is to workout what is known as the Desirability Factor or Profitability Index. In general terms a project is acceptable if its profitability index value is greater than 1. Derivatives: A derivative is a security whose price ultimately depends on that of another asset. Derivative means a contact of an agreement. Types of Derivatives: 1. Forward Contracts 2. Futures 3. Options 4. Swaps. 1. Forward Contracts: - It is a private contract between two parties. An agreement between two parties to exchange an asset for a price that is specified todays. These are settled at end of contract. 2. Future contracts: - It is an Agreement to buy or sell an asset it is at a certain time in the future for a certain price. Futures will be traded in exchanges only.These is settled daily. Futures are four types: 1. Commodity Futures: Wheat, Soyo, Tea, Corn etc..,. 2. Financial Futures: Treasury bills, Debentures, Equity Shares, bonds, etc.., 3. Currency Futures: Major convertible Currencies like Dollars, Founds, Yens, and Euros. 4. Index Futures: Underline assets are famous stock market indicies. NewYork Stock Exchange. 14 3. Options: An option gives its Owner the right to buy or sell an Underlying asset on or before a given date at a fixed price. There can be as may different option contracts as the number of items to buy or sell they are, Stock options, Commodity options, Foreign exchange options and interest rate options are traded on and off organized exchanges across the globe. Options belong to a broader class of assets called Contingent claims. The option to buy is a call option.The option to sell is a PutOption. The option holder is the buyer of the option and the option writer is the seller of the option. The fixed price at which the option holder can buy or sell the underlying asset is

called the exercise price or Striking price. A European option can be excercised only on the expiration date where as an American option can be excercised on or before the expiration date. Options traded on an exchange are called exchange traded option and options not traded on an exchange are called over-the-counter optios. When stock price (S1) <= Exercise price (E1) the call is said to be out of money and is worthless. When S1>E1 the call is said to be in the money and its value is S1-E1. 4. Swaps: Swaps are private agreements between two companies to exchange casflows in the future according to a prearranged formula. So this can be regarded as portfolios of forward contracts. Types of swaps: 1: Interest rate Swaps 2: Currency Swaps. 15 1. Interest rate Swaps: The most common type of interest rate swap is Plain Venilla . Normal life of swap is 2 to 15 Years. It is a transaction involving an exchange of one stream of interest obligations for another. Typically, it results in an exchange of ficed rate interest payments for floating rate interest payments. 2. Currency Swaps: - Another type of Swap is known as Currency as Currency Swap. This involves exchanging principal amount and fixed rates interest payments on a loan in one currency for principal and fixed rate interest payments on an approximately equalant loan in another currency. Like interest rate swaps currency swars can be motivated by comparative advantage. Warrants: Options generally have lives of upto one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called warrants and are generally traded over- the- counter. American Depository Receipts (ADR): It is a dollar denominated negotiable instruments or certificate. It represents non-US companies publicly traded equity. It was devised into late 1920s. To help American investors to invest in overseas securities and to assist non US companies wishing to have their stock traded in the American markets. These are listed in American stock market or exchanges. Global DepositoryReceipts (GDR): GDRs are essentially those instruments which posseses the certain number of underline shares in the custodial domestic bank of the company i.e., GDR is a negotiable instrument in the form of depository receipt or certificate created by the overseas depository bank out side India and issued to non-resident investors against the issue of ordinary share or foreign currency convertible bonds of the issuing company. GDRs are entitled to dividends and voting rights since the date of its issue. 16 Capital account and Current account: The capital account of international purchase or sale of assets. The assets include any form which wealth may be held. Money held as cash or in the form of bank deposits, shares, debentures, debt instruments, real estate, land, antiques, etc

The current account records all income related flows. These flows could arise on account of trade in goods and services and transfer payment among countries. A net outflow after taking all entries in current account is a current account deficit. Govt. expenditure and tax revenues do not fall in the current account. Dividend Yield: It gives the relationship between the current price of a stock and the dividend paid by its issuing company during the last 12 months. It is caliculated by aggregating past years dividend and dividing it by the current stock price. Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield is considered to be evidence that a stock is under priced, where as a low dividend yield is considered evidence that a stock is over priced. Bridge Financing: It refers to loans taken by a company normally from commercial banks for a short period, pending disbursement of loans sanctioned by financial institutions. Generally, the rate of interest on bridge finance is higher as compared with term loans. 17 Shares and