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Accounting Material

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 concern concept

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.

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5. Systems of book keeping:

A. single entry system

B. double entry system9

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.

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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.

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 order 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.

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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.

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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.

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)

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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 financial institutions (called factor)

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

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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 e. private company

f. public company

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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 article 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.

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.

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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.

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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.

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:

1. Investment decision 2. Dividend decision

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3. Finance decision 4. Cash management decisions

5. Performance evaluation 6. 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 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.

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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.

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.

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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.

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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 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.

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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 is

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.

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

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

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19. 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 programs, 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.

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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.

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.

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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, and 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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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.

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.

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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.

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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.

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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: A gilt fund 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.

184. Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and the AMC

with prior approval of SEBI.

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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 takes over: if an existing MF scheme is taken over by the 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.

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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 op tion 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 denote 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.

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205. Methods of depreciation:

1. Uniform 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

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-------------------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

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

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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

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215. Fixed Assets ratio: This ratio explains whether the firm has raised adequate 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

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

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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 contribute towards sales.

Formula: Net Sales

--------------------------

Fixed Assets

222 .Pay-outs 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

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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.

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

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---------------------------------------- (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.

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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 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.

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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.

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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.

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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 determining 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 transactions 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.

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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 cumulate

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.

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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 conditions (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.

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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 Charge: 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 s tudying 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. What is Commercial Paper (CP)?

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

2. When it was introduced?

It was introduced in India in 1990.

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3. Why it was introduced?

It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to

diversify their sources of short-term borrowings and to provide an additional instrument to investors.

Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

4. Who can issue CP?

Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.

5. Whether all the corporate would automatically be eligible to issue CP

No., of corporate would be eligible to issue CP provided

The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore

Company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and

The borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

6 Is there any rating requirement for issuance of CP? And if so, what is the rating requirement?

Yes. All eligible participants shall obtain the credit rating for issuance of Commercial Paper

either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information

and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or

the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the

Reserve Bank of India from time to time, for the purpose.

The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not

fallen due for review and the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.

7 What is the minimum and maximum period of maturity prescribed for CP?

CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue.

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8 What is the limit up to which a CP can be issued.

The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of

Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower.

As regards FIs, they can issue CP within the overall umbrella limit fixed by the RBI i.e., issue

of CP together with other instruments viz., term money borrowings, term deposits, certificates of

deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

9. In what denominations a CP that can be issued?

CP can be issued in denominations of Rs.5 lakh or multiples thereof.

10. How long the CP issue can remain open?

The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.

11. Whether CP can be issued on different dates by the same issuer?

Yes. CP may be issued on a single date or in parts on different dates provided that in the latter

case, each CP shall have the same maturity date. Further, every issue of CP, including renewal, shall be

treated as a fresh issue.

12. Who can act as Issuing and Paying Agent (IPA)?

Only a scheduled bank can act as an IPA for issuance of CP.

13. Who can invest in CP?

Individuals, banking companies, other corporate bodies registered or incorporated in India and

unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can

invest in CPs. However, amount invested by single investor should not be less than Rs.5 lakh (face

value).

However, investment by FIIs would be within the limits set for their investments by Securities

and Exchange Board of India (SEBI.

14. Whether CP can be held in dematerialized form?

Yes. CP can be issued either in the form of a promissory note (Schedule I) or in a

dematerialized form through any of the depositories approved by and registered with SEBI. Banks, FIs, PDs and SDs are directed to hold CP only in dematerialized form.

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15. Whether CP is always issued at a discount?

Yes. CP will be issued at a discount to face value as may be determined by the issuer.

16. Whether CP can be underwritten?

No issuer shall have the issue of Commercial Paper underwritten or co-accepted.

17. What is the mode of redemption?

Initially the investor in CP is required to pay only the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP,

(a) when the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA.

(b) when the CP is held in demat form, the holder of the CP will have to get it redeemed through the

depository and receive payment from the IPA.

18. Whether Stand by facility is required to be provided by the bankers/FIs for CP issue?

CP being a `stand alone' product, it would not be obligatory in any manner on the part of banks and FIs to provide stand-by facility to the issuers of CP.

However, Banks and FIs have the flexibility to provide for a CP issue, credit enhancement by way of

stand-by assistance/credit backstop facility, etc., based on their commercial judgement and as per terms

prescribed by them. This will be subjected to prudential norms as applicable and subject to specific approval of the Board.

19. Whether non-bank entities/corporate can provide guarantee for credit enhancement of the

CP issue.

Yes. Non-bank entities including corporate can provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided:

a. the issuer fulfils the eligibility criteria prescribed for issuance of CP;

b. the guarantor has a credit rating at least one notch higher than the issuer by an approved credit rating agency and

c. the offer document for CP properly discloses: the networth of the guarantor company, the names of

the companies to which the guarantor has issued similar guarantees, the extent of the guarantees offered by the guarantor company, and the conditions under which the guarantee will be invoked.

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20. Role and responsibilities of the Issuer/Issuing and Paying Agent and Credit Rating Agency

Issuer:

a. Every issuer must appoint an IPA for issuance of CP.

b. The issuer should disclose to the potential investors its financial position as per the standard market practice.

c. After the exchange of deal confirmation between the investor and the issuer, issuing company shall

issue physical certificates to the investor or arrange for crediting the CP to the investor's account with a depository.

Investors shall be given a copy of IPA certificate to the effect that the issuer has a valid agreement with the IPA and documents are in order (Schedule III).

Issuing and Paying Agent

a. IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and amount mobilised through issuance of CP is within the quantum indicated by CRA for the specified rating.

b. IPA has to verify all the documents submitted by the issuer viz., copy of board resolution, signatures

of authorised executants (when CP in physical form) and issue a certificate that documents are in order. It should also certify that it has a valid agreement with the issuer (Schedule III).

c. Certified copies of original documents verified by the IPA should be held in the custody of IPA.

Credit Rating Agency

a. Code of Conduct prescribed by the SEBI for CRAs for undertaking rating of capital market instruments shall be applicable to them (CRAs) for rating CP.

b. Further, the credit rating agency has the discretion to determine the validity period of the rating

depending upon its perception about the strength of the issuer. Accordingly, CRA shall at the time of rating, clearly indicate the date when the rating is due for review.

c. While the CRAs can decide the validity period of credit rating, CRAs would have to closely monitor

the rating assigned to issuers vis-a-vis their track record at regular intervals and would be required to

make its revision in the ratings public through its publications and website

21. Is there any other formalities and reporting requirement with regard to CP issue?

Fixed Income Money Market and Derivatives Association of India (FIMMDA), as a self-regulatory

organization (SRO) for the fixed income money market securities, may prescribe, in consultation with

the RBI, any standardized procedure and documentation for operational flexibility and smooth functioning of CP market.

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Every CP issue should be reported to the Chief General Manager, Industrial and Export Credit

Department (IECD), Reserve Bank of India, Central Office, Mumbai through the Issuing and Paying

Agent (IPA) within three days from the date of completion of the issue, incorporating details as per

Schedule II.

Price Earnings Ratio (PE Ratio): Definition:

Price earnings ratio (P/E ratio) is the ratio between market price per equity share and earning per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether or not to buy shares in a particular

company.

Formula of Price Earnings Ratio:

Following formula is used to calculate price earnings ratio:

[Price Earnings Ratio = Market price per equity share / Earnings per share]

Example:

The market price of a share is $30 and earning per share is $5. Calculate price earnings ratio.

Calculation: Price earnings ratio = 30 / 5 = 6

The market value of every one dollar of earning is six times or $6. The ratio is useful in

financial forecasting. It also helps in knowing whether the share of a company are under or over valued. For example, if the earning per share of AB limited is $20, its market price $140 and earning ratio of similar companies is 8, it means that the market value of a share of AB Limited should be $160 (i.e., 8

20). The share of AB Limited is, therefore, undervalued in the market by $20. In case the price earnings ratio of similar companies is only 6, the value of the share of AB Limited should have been

$120 (i.e., 6 20), thus the share is overvalued by $20.

Significance of Price Earning Ratio:

Price earnings ratio helps the investor in deciding whether to buy or not to buy the shares of a particular company at a particular market price.

Generally, higher the price earning ratio the better it is. If the P/E ratio falls, the management

should look into the causes that have resulted into the fall of this ratio.

Put Options - Definition

Put Options are stock options that gives its holder the POWER, but not the obligation, to SELL the underlying stock at a FIXED PRICE by a fixed EXPIRATION DATE.

Put-options Introduction

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Put Options are the least understood of the 2 kinds of stock options. The other being Call Options that give you the right to buy the underlying stock for a fixed price. Put Options enable you to

sell the underlying stock at a price fixed right now no matter how low it falls in future. That said, rarely are put options really used as a tool to sell your stocks but as a tool to capture value as the underlying

stock drops and then sell the put options at a profit! Apart from being an incredibly flexible and risk limited leverage instrument, Put Options are fantastic hedging instruments for any stock portfolios.

Put Options allows investors to do something relatively unfamiliar to the stock trading world and that is, to profit from a downturn in stocks without going into margin or shorting anything.

Shorting stocks exposes the investor to unlimited upside risk whereas buying put options incurs nothing more than the price you paid for the put options! There are no shorting needed! No shorting, No

margin, Limited Loss and Unlimited profits is what sets the buying of Put Options apart from shorting stocks!

How Do Put Options Work?

Put Options are financial contracts between a buyer and a seller. The seller or "writer" of Put

Options is giving the Buyer of those Put Options the right to sell to him stocks at a price fixed and agreed upon in the Put Options contract. The buyer or "holder" of these Put Options can now hold on to them, hoping that the stocks will drop in price over time, before the Put Options contract expires, and

then either sell the Put Options on to another buyer at a higher price or buy the stocks at the prevailing market price and then exercise the right vested in the Put Options to sell the stock to the seller at the

higher agreed price, turning a profit.

Clearly, the seller or "writer" of Put Options is expecting the stocks to stay stagnant or to go up so that he/she can make a profit out of that sale without having to really buy the stocks from the holder of the Put Options.

The buyer of those Put Options is clearly expecting those same stocks to go down and is willing to pay a small price to speculate on such a move. This expectation is also captured in the popular investor sentiment indicator known as Put Call Ratio. Put Call Ratio is the ratio of the amount of put

options traded versus call options traded.

Call Options Definition

Call Options are stock options that give its holder the POWER, but not the obligation, to BUY the underlying stock at a FIXED PRICE by a fixed EXPIRATION DATE.

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Call Options - Introduction

Call Options are definitely the more popular of the 2 kinds of stock options. The other being Put Options that gives you the right to sell the underlying stock for a fixed price. Call Options enable you to

buy the underlying stock at a price fixed right now no matter how high it rallies in future for just a small price relative to the price of the underlying stock. Call options give you the power to profit from a

rally in its underlying stock for just a very small price without first having to buy the underlying stock! Apart from being an incredibly flexible and risk limited leverage instrument, Call Options are fantastic hedging instruments for any stock portfolios.

Manipulated properly, Call Options allows anyone to profit from any move in the underlying stock, take advantage of new trends or swings very quickly and hedge away financial risks. Small retail investors use Call Options as speculative instruments to turn a big profit from very small amounts of

money and big institutional investors use Call Options to protect their stock portfolios and to increase marginal revenue. In fact, employee stock options are Call Options too. Such widespread application

and flexibility makes learning about how Call Options work, one of the most important investment knowledge of modern times.

How Do Call Options Work?

Call Options are financial contracts between a buyer and a seller. The seller or "writer" of Call Options is giving the Buyer of those Call Options the right to buy his stocks at a price fixed and agreed

upon in the Call Options contract. The buyer or "holder" of these Call Options can now hold on to them, hoping that the stocks will rise in price over time, before the Call Options contract expires, and

then either sell the Call Options on to another buyer at a higher price or exercise the right vested in the Call Options to buy the stock from the seller at the lower agreed price, turning around for a profit by selling those stocks in the open market.

Clearly, the seller or "writer" of Call Options is expecting his stocks to stay stagnant or to go

down. Since the seller expects his stocks to go down, selling Call Options on those stocks actually results in additional income, offsetting the expected drop in the stocks if he is right. This hedges the

risk of owning those stocks without having to sell the stocks.

The buyer of those Call Options is clearly expecting those same stocks to go up and is willing to pay a small price to speculate on such a move. This expectation is also captured in the popular investor

sentiment indicator known as Put Call Ratio. Put Call Ratio is the ratio of the amount of put options traded versus call options traded.

Capital expenditures

Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital

expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a

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company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's

basis (the cost or value of an asset as adjusted for tax purposes). Capex is commonly found on the Cash Flow Statement as "Investment in Plant Property and Equipment" or something similar in the Investing

subsection.

For tax purposes, capital expenditures are costs that cannot be deducted in the year in which they are paid or incurred, and must be capitalized. The general rule is that if the property acquired has a useful life longer than the taxable year, the cost must be capitalized. The capital expenditure costs are

then amortized or depreciated over the life of the asset in question. As stated above, capital expenditures create or add basis to the asset or property, which once adjusted, will determine tax

liability in the event of sale or transfer. In the US, Internal Revenue Code 263 and 263A deal extensively with capitalization requirements and exceptions.[1]

Included in capital expenditures are amounts spent on:

1. Acquiring fixed assets

2. Fixing problems with an asset that existed prior to acquisition

3. Preparing an asset to be used in business

4. Legal costs of establishing or maintaining one's right of ownership in a piece of property

5. Restoring property or adapting it to a new or different use

6. Starting a new business

An ongoing question of the accounting of any company is whether certain expenses should be capitalized or expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that was incurred that month. Costs that are capitalized, however, are amortized over

multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way,

according to the preference of the company.

Senior Debt:

Seniority refers to the order of repayment in the event of bankruptcy and liquidity. Senior debt must be repaid before subordinated debt is repaid. Bonds that have the same seniority in a compa ny's capital structure are described as being pari passu (two or more securities or obligations having equal

rights to payment).

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The levels of bond recognized in Financial products Markup Language are as follows :

Type Description

Senior Top precedence

SubTier1 Subordinate Tier 1

SubUpperTier2 Subordinate, Upper Tier 2

SubLowerTier2 Subordinate, Lower Tier 2

SubTier3 Subordinate, Tier 3

Limitations to seniority

Secured parties may receive preference to unsecured senior lenders

Notwithstanding the senior status of a loan or other debt instrument, another debt instrument (whether senior or otherwise) may benefit from security that effectively renders that other instrument

more likely to be repaid in an insolvency than unsecured senior debt. Lenders of a secured debt instrument (regardless of ranking) receive the benefit of the security for that instrument until they are

repaid in full, without having to share the benefit of that security with any other lenders. If the value of the security is insufficient to repay the secured debt, the residual unpaid claim will rank according to its documentation (whether senior or otherwise), and will receive pro rata treatment with other unsecured

debts of such rank.

Super-senior status

Senior lenders are theoretically (and usually) in the best position because they have first claim to unsecured assets.

However, in various jurisdictions and circumstances, nominally "senior" debt may not rank pari

passu with all other senior obligations.

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"Senior" debt at holding company is structurally subordinated to all debt at the subsidiary

A senior lender to a holding company is in fact subordinated to any lenders (senior or

otherwise) at a subsidiary with respect to access to the subsidiary's assets in a bankruptcy. The collapse of Washington Mutual bank in 2008 highlighted this priority of claim, as lenders to Washington

Mutual, Inc. received no benefit from the assets of that entity's bank subsidiaries.

Subordinated Debt

Subordinated Debt is debt which ranks after other debts should a company fall into receivership or be closed.

Such debt is referred to as subordinate, because the debt providers (the lenders) have

subordinate status in relationship to the normal debt. In the case of liquidation (e.g. the company winds up its affairs and dissolves) the promoter would be paid just before stockholders -- assuming there are assets to distribute after all other liabilities and debt have been paid.

Subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy, below the liquidator, government tax authorities and senior debt holders in the hierarchy of creditors. Because subordinated debt is repayable after other debts have been paid, they are

more risky for the lender of the money. It is unsecured and has lesser priority than that of an additional debt claim on the same asset.

Subordinated loans

Subordinated loans typically have a higher rate of return than senior debt due to the increased

inherent risk. Accordingly, major shareholders and parent companies are most likely to provide subordinated loans, as an outside party providing such a loan would normally want compensation for the extra risk.

Subordinated bonds

Subordinated bonds usually have a lower credit rating than senior bonds. Subordinated debt is issued by most large banking corporations in the U.S. periodically. It is believed that subordinated notes are risk-sensitive. That is, subordinated debt holders have claims on bank assets after senior debt

holders and they lack the upside gain enjoyed by shareholders.

Debtor-in-possession financing:

Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress or under Chapter 11 bankruptcy process. Usually, this security is more

senior than debt, equity, and any other securities issued by a company. It gives a troubled company a new start, albeit under strict conditions.

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Credit Facility

A type of loan made in a business or corporate finance context. Specific types of credit facilities are: revolving credit, term loans, committed facilities, letters of credit and most retail credit accounts.

Revolving credit

Revolving credit is a type of credit that does not have a fixed number of payments. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day operations.

Characteristics

The borrower may use or withdraw funds up to a pre-approved credit limit. The amount of available credit decreases and increases as funds are borrowed and then repaid. The credit may be used repeatedly. The borrower makes payments based only on the amount they've actually used or withdrawn,

plus interest. The borrower may repay over time (subject to any minimum payment requirement), or in full at

any time. In some cases, the borrower is required to pay a fee to the lender for any money that is undrawn

on the revolver; this is especially true of corporate bank loan revolving credit facilities.

Line of Credit

A line of credit is any credit facility extended to a business by a bank or financial institution. A line of credit may take several forms such as cash credit, overdraft, demand loan, export packing credit, term loan, discounting or purchase of commercial bills etc. It is like an account that can readily be

tapped into if the need arises or not touched at all and saved for emergencies. Interest is only paid on the money actually taken out.

Letter of Credit

Letter of credit is a document issued mostly by a financial institution, used primarily in trade

finance, which usually provides an irrevocable payment undertaking.

The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of

significant value, for deals between a supplier in one country and a customer in another. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of

credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary,

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the issuing bank and the confirming bank, if any. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the

shipment are insured against loss or damage in transit.

Standby Letter of Credit

SBLC is a credit enhancement device which helps secure a primary loan. Banks, after the current financial collapse, require standby letters of credit for most real estate development loans. Only

a small number of broker/lawyers provide these instruments.

How and Why Do Companies Pay Dividends?

Look anywhere on the web and you're bound to find information on how dividends affect stockholders: the information ranges from a consideration of steady flows of income, to the proverbial

"widows and orphans", and to the many different tax benefits that dividend-paying companies provide. An important part missing in many of these discussions is the purpose of dividends and why they are used by some companies and not by others. Before we begin describing the various policies that

companies use to determine how much to pay their investors, let's look at different arguments for and against dividends policies. (Read more about widows and orphans in Widow And Orphan Stocks: Do

They Still Exist?)

Arguments against Dividends

First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends. These analysts claim that this

income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can

fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.

The second argument claims that little to no dividend payout is more favorable for investors.

Supporters of this policy point out that taxation on a dividend is higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase

the market value of the stock. According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects,

repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets. (Keep reading about capital gains in Tax Effects On Capital Gains.)

Arguments for Dividends

In opposition to these two arguments is the idea that a high dividend payout is important for

investors because dividends provide certainty about the company's financial we ll-being; dividends are also attractive for investors looking to secure current income. In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security. Companies

that have a long-standing history of stable dividend payouts would be negatively affected by lowering

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or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends. Furthermore, companies without a

dividend history are generally viewed favorably when they declare new dividends. (For more, see

Dividends Still Look Good After All These Years.)

Dividend-Paying Methods

Now, should the company decide to follow either the high or low dividend method, it would use one of three main approaches: residual, stability, or a hybrid compromise between the two.

Residual

Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity

only after all project capital requirements are met. These companies usually attemp t to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they

decide on dividends only if there is enough money left over after all operating and expansion expenses are met.

For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity). Now,

suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300)

and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital requirement of $1,500, the debt requirement

would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available

levels, the company would issue new stock. Stability

The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. With the stability policy, companies may choose a cyclical

policy that sets dividends at a fixed fraction of quarterly earnings, or it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case, the aim of the

dividend stability policy is to reduce uncertainty for investors and to provide them with income.

Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400). If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. Alternatively, if CBC decided on a

cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and $40 respectively. In either instance, companies following this policy are always attempting to share

earnings with shareholders rather than searching for projects in which to invest excess cash.

Hybrid

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The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In

today's markets, this approach is commonly used by companies that pay dividends. As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which

is set as a relatively small portion of yearly income and can be easily maintained. On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.

Conclusion

If a company decides to pay dividends, it will choose one of three approaches: residual, stability

or hybrid policies. Which a company chooses can determine how profitable its dividend payments will be for investors - and how stable the income.