Basic Accounting and Financial Accounting Interview Questions and Answers
by sonia, on May 17, 2017 10:56:20 AM
Q1. Why did you select accounting as your profession?
Ans: Well, I was quite good in accounting throughout but in my masters, when I got distinction I decided to adopt this field as a profession.
Q2. Do you have any professional experience of this field?
Ans: Yes, I have worked as an accountant at two different places.
Q3. Did you use accounting applications at your previous companies or prefer working manually??
Ans: Yes, I have used Advanced Business Solutions and AME Accounting Software in my previous jobs.
Q4. Can you name any other accounting application?
Ans: Yes, I am familiar with CGram Software, Financial Force, Microsoft Accounting Professional, Microsoft Dynamics AX and Microsoft Small Business Financials.
Q5. Which accounting application you prefer most and why?
Ans: I think all are good though but Microsoft Accounting Professional is best because it offers reliable and fast processing of accounting transactions that saves time and increases proficiency.
Q6. What is the abbreviation for the accounting terms debit and credit?
Ans: Debit abbreviation is “dr” and credit abbreviation is “cr”.
Q7. How many types of business transactions are there in accounting?
Ans: There are two types of transactions in accounting i.e. revenue and capital.
Q8. What is balance sheet?
Ans: It is a statement that states all the liabilities and assets of the company at certain point.
Q9. Have you ever heard about TDS, what it is?
Ans: Yes, TDS abbreviates Tax Deduction at Source.
Q10. In balance sheet, where do you show TDS?
Ans: It is shown on the assets section, right after the head current asset.
Q11. Do you have any idea about Service Tax or Excise?
Ans: It is a kind of hidden tax that is included in the service provided by the service provider and paid by the service receiver.
Q12. Do you think there is any difference between inactive and dormant accounts?
Ans: Yes, both are different terms in accounting. Inactive accounts means that accounts have been closed and will not be used in future as well. While, dormant accounts are those that are not functional today but may be used in future.
Q13. What is tally accounting?
Ans: It is the software used for accounting in small business and shops for managing routine accounting transactions.
Q14. How can you define departmental accounting?
Ans: It is a type of accounting in which separate account is created for departments. It is managed separately as well as shown independently in the balance sheet.
Q15. Define fictitious assets?
Ans: These are the assets that cannot be shown or touch. Fictitious assets can only be felt such as good will, rights etc.
Q16. By saying, perpetual or periodic inventory system; what do we mean?
Ans: In the first one i.e. the perpetual inventory system, the accounts are adjusted on continual basis. In the periodic inventory system, the accounts are adjusted periodically.
Q17. In accounting, how do you define premises?
Ans: Premises refer to fixed assets that are shown in the balance sheet.
Q18. In accounting, VAT abbreviates what?
Ans: VAT means Value Added Tax.
Q19. Do you possess any knowledge about accounting standards?
Ans: Yes, as per my knowledge there are total 33 accounting standards published so far by ICAI. The purpose of these standards is to implement same policies and practices in any country.
Q20. What is ICAI?
Ans: It is the abbreviation of Institute of Chartered Accountants in India.
Q21. How can you explain the basic accounting equation?
Ans: We know that accounting is all about assets, liabilities and capital. Therefore, the accounting equation is:
Assets = Liabilities + Owners Equity.
Q22. Define Executive accounting?
Ans: It is a type of accounting that is specifically designed for the business that offers services to users.
Q23. Define Public accounting?
Ans: Public accounting offers audits and CPAs to review company financial records to ensure accountability. It is for general public.
Q24. What is a CPA?
Ans: CPA stands for Certified Public Accountant. To become a CPA, one should have to do many other qualifications as well. It is a qualification with 150 hour requirement; it means that one should complete 150 credit hours at any accredited university.
Q25. What do you think is bank reconciliation statement?
Ans: A reconciliation statement is prepared when the passbook balance differs from the cashbook balance.
Q26. Differentiate Public and Private Accounting?
Ans: Public accounting is a type of accounting that is done by one company for another company. Private accounting is done for your own company.
Q27. What is project implementation?
Ans: Project implementation involves six steps in total such as:
- Identify Need
- Generate and Screen Ideas
- Conduct Feasible Study
- Develop the Project
- Implement the Project
- Control the Project
Q28. Do you think Accounting Standards are mandatory and why?
Ans: Yes, I do believe that accounting standards play a very important role to prepare good quality and accurate financial reports. It ensures reliability and relevance in financial reports.
Q29. Can you name different branches of accounting?
Ans: There are three branches of accounting named as “Financial Accounting”, “Management Accounting” and “Cost Accounting”.
Q30. Differentiate Accounting and Auditing?
Ans: Accounting is all about recording daily business activities while auditing is the checking that whether all these events have been noted down correctly or not.
Q31. Define dual aspect term in accounting?
Ans: As the name implies, the dual aspect concept states that every transaction has two sides. For example, when you buy something, you give the cash and get the thing. Similarly, when you sale something, you lose the thing and gets the money. So this getting and losing is basically two aspects of every transaction.
Q32. What do we mean by purchase return in accounting?
Ans: It is the term introduced in the records for every defective or unsatisfactory good returned back to its supplier.
Q33. Define the term material facts in accounting?
Ans: Material facts are the bills or any document that becomes the base of every account book. It means that all those documents, on which account book is prepared, are called material facts.
Q34. Have you ever prepared MIS reports and what are these?
Ans: Yes, I have prepared few MIS reports during my previous jobs. MIS reports are created to identify the efficiency of any department of a company.
Q35. Define company’s payable cycle?
Ans: It is the time required by the company to pay all its account payables.
Q36. Define retail banking?
Ans: It is a type of banking that involves a retail client. These clients are the normal people and not any organizational customers.
Q37. How much mathematics knowledge is necessary or required in accounting?
Ans: Not much knowledge but basic mathematical background is required in accounting for operations like addition, subtraction, multiplication and division.
Q38. Define bills receivable?
Ans: All types of exchange bills, bonds and other securities owned by a merchant that is payable to him are said as bills receivable.
Q39. Define depreciation and its types?
Ans: By depreciation we mean that a value of an asset is decreasing as it is in use. It has two types such as “Straight Line Method” and “Written Down Value Method”.
Q40: Differentiate between consignor and consignee?
Ans: Consigner is the owner of the goods or you can say he is the person who delivers the goods to the consignee. The consignee is the person who receives the goods.
Q41. Define balancing in accounting?
Ans: Balancing means to equate both sides of the T-account i.e. the debit and credit sides of a T-account must be equal/balanced.
Q42. How much statistics knowledge is necessary or required in accounting?
Ans: You must be very good at statistics if you want to do well in accounting. Otherwise, with minimum knowledge you cannot manage your day to day transactions effectively in accounting.
Q43. Define Scrap value in accounting?
Ans: It is the residual value of an asset. The residual value is the value that any asset holds after its estimated life time.
Q44. Define Marginal Cost?
Ans: Suppose you have to produce an additional unit of output. The estimated cost of additional inputs to produce that output is actually the marginal cost.
Q45.Define Partitioning in accounting?
Ans: It is a kind of groups made on the basis of same responses by a system.
Q46. Differentiate between provision and reserve?
Ans: Provisions are the liabilities or the anticipated items such as depreciation. You can say provisions are expenses. Reserves are the profits of any company and a part of that profit is placed back to the business to keep it sustainable in tough times of a company.
Q47. Define Offset accounting?
Ans: Offset accounting is one that decreases the net amount of another account to create a net balance.
Q48. Define overhead in terms of accounting?
Ans: It is the indirect expenditure of a company such as salaries, rent dues etc.
Q49. Define trade bills?
Ans: We know that all types of transactions need to be documented. The trade bills are the documents, generated against each transaction.
Q50. Define fair value accounting?
Ans: As per fair value accounting, a company has to show the value of all of its assets in terms of price on balance sheet on which that asset can be sold.
Q51. Explain what is compound journal entry?
Ans: A compound journal entry is just like other accounting entry where there is more than one debit, more than one credit, or more than one of both debits and credits. It is essentially a combination of several simple journal entries.
Q52. What are the accounting events that are frequently involved in compound entries?
Ans: The accounting events that are frequently involved in compound entries are;
- Record multiple line items in a supplier invoice that address to different expenses
- Record all bank deductions associated to a bank reconciliation
- Record all deduction and payments related to a payroll
- Record the account receivable and sales taxes related to a customer invoice
Q53. Mention the types of accounts involved in double entry book-keeping?
Ans:Double entry book-keeping involves five types of accounts,
- Income accounts
- Expense accounts
- Asset accounts
- Liability accounts
- Capital accounts
Q54: Mention what are the rules for debit and credit for different accounts to increase the amount in your business accounts?
Ans: The rules for debit and credit for different accounts,
- for a capital account, you credit to increase it and debit to decrease it
- for an asset account, you debit to increase it and credit to decrease it
- for a liability account, you credit to increase it and debit to decrease it
- for an expense account, you debit to increase it, and credit to decrease it
- for an income account, you credit to increase it and debit to decrease it
Q55. List out the Stages of Double Entry System?
- Recording of transactions in the journal
- Posting of journal entry in to the respective ledger accounts and then preparing a trial balance
- Preparing final accounts and closing of books of accounts
Q56. Mention what is the disadvantage of double entry system?
Ans: The disadvantage of double entry system,
- If there is any compensatory errors, it is difficult to find out by this system
- This system needs more clerical labour
- It is difficult to find the errors if the errors are in the transactions recorded in the books
- It is not preferable to disclose all the information of a transaction, which is not properly recorded in the journal
Q57. Mention what is General ledger account?
Ans: The General ledger account is an account where the company records all the information for its various expenses and income types into separate accounts. Such that all the debits and credits pertaining to that particular type of transaction can be entered in one place and kept balanced.
Q58. What is the general classification of accounts that usually ledger account involve?
Ans:The general classification of accounts that usually ledger account involves are
- Assets- Cash, Accounts Receivable
- Liabilities- Accounts Payable, Loans Payable
- Stockholders’ equity- Common Stock
- Operating revenues- Revenues through Sales
- Operating expenses- Rent Expense, Salaries Expense
- Non-operating revenues and gains- Investment Income, gain on Disposal of Equipment
- Non-operating revenues and losses- Interest Expense, Loss on Disposal of Equipment
Q59. Mention what are things will not be included in bank reconciliation statement?
Ans: In a bank reconciliation statement, following thing can be excluded.
- Direct payments made by bank not entered in Cash book
- Cheques deposited but not cleared
- Cheques dishonoured not recorded in cash book
- Wrong debits given by bank
- Bank Charges or Interst debited by bank
- Banks direct payment not entered in Cash book
Q60. Under the accrual basis of accounting, when revenues are reported in the accounting period?
Ans: When service or goods have been delivered, then revenues are reported in the accounting period.
Q61. Under what type of account does the unearned revenues fall?
Ans: The unearned revenues falls under “Liability” account.
Q62. Mention whether the account “Cash” will be credited or debited, when a company pays a bill?
Ans: The account “Cash” will be credited when a company pays a bill.
Q63. Mention what is assets minus liabilities?
Ans: Assets minus liabilities is equal to owners’ equity or stockholders equity.
Q64. Entries to revenues accounts such as Service Revenues are usually?
Ans: Entries to revenues accounts such as Service Revenues usually goes into credit side.
Q65. Explain what is the difference between accumulated depreciation and depreciation expense?
Ans: The difference between accumulated depreciation and depreciation expense is that
- Accumulated depreciation: It is the total amount of depreciation that has been taken on a company’s assets up to the date of the balance sheet
- Depreciation expense: It is the amount of depreciation that is reported on the income statement. Basically, it is the amount that corresponds only to the period of time indicated in the heading of the income statement.
Q66. List out some of the examples for liability accounts?
Ans: Some of the examples for liability accounts
- Accounts Payable
- Accrued Expenses
- Short-term Loans Payable
- Unearned or Deferred Revenues
- Installment Loans Payable
- Current Portion of Long-term Debt
- Mortgage Loans Payable
Q67. Explain how you can adjust entries into account?
Ans: To adjust entries into account, you can sort entries into five categories.
- Accrued expenses: Expenses have been incurred but the vendors invoices are not generated or processed yet
- Accrued revenues: Revenues have been earned but the sales invoices are not generated or processed yet
- Deferred revenues: Money was received in advance of having been paid or earned
- Deferred expenses: Money was paid for a future expense
- Depreciation expense: An asset purchased in one period must be allocated to expense in each of the accounting periods of the asset’s useful life
Q68. Explain what a deferred asset is and give an example?
Ans: A deferred asset refers to a deferred debit or a deferred charge. An example of a deferred charge is bond issue costs. These costs involves all of the fees or charges that an organization incurs in order to register and issue bonds. This fees are paid in a near time when the bonds are issued but it will not be expensed at that time.
Q69. Mention what is Bank Reconciliation?
Ans: A bank reconciliation is a process done by a company to ensure that the company’s records (check register, balance sheet, general ledger account, etc.) are correct and that the bank’s records are also correct.
Q70. Mention what is “deposit in transit”?
Ans: A deposit in transit is a checks and cash that have been received and recorded by an entity, but which have not yet been entered in the records of the bank where the funds are deposited.
Q71. Explain what is an over accrual?
Ans: An over accrual is a condition where the estimate for an accrual journal entry is too high. This estimate may apply to an accrual of expense or revenue.
Q72. Mention what is account receivable?
Ans: A short term amounts due from buyers to a seller, who have purchased goods or services from the seller on credit is referred as account receivable.
Q73. Explain what are the activities that includes in Cash Flow Statement?
Ans: The cash flow statement showcase the cash generated and used during the year or months. Various activities that are involved for the Cash Flow are
- Operating activities – business activities accounting to cash
- Investing activities – sale and purchase of equipment or property
- Financial activities- purchase of stock and own bonds
- Supplemental information- exchange of significant items that don’t involve cash
Q74. Mention what happens to company’s “Cash Account” if it borrows money from the bank by signing a note payable?
Ans: Due to double entry, the “cash account” will increase as such the liability account increases.
Q75. Mention which account is responsible for interest payable?
Ans: Account which is responsible or affected by the interest payable is “Current liability account”
Q76. Mention what is reversing journal entries?
Ans: Reversing journal entries are entries made at the beginning of an accounting period to cancel out the adjusting journal entries made at the end of the previous accounting period.
Q77. Mention where do generally accruals appear on the balance sheet?
Ans: Accrued expenses usually tend to be extremely short-term. So you would record them within the “current liabilities section” of the balance sheet.
Q78. List out some of the accrued expenses and the accounts in which you would record them?
- Wage accrual is entered with a credit to the “wages payable account”
- Interest accrual is entered with a credit to the “interest payable account”
- Payroll tax accrual is entered with a credit to the “payroll taxes payable account”
Q79. Deferred taxation is a part of which equity?
Ans: Deferred taxation is a part of owner’s equity.
Q80. Mention what does the investment of personal assets by the owner will do?
Ans: The investment of personal assets by the owner will increase total assets and increase owner’s equity.
Q81. What is the equation for Acid-Test Ratio in accounting?
Ans: The equation for Acid-Test Ratio in accounting
- Acid-Test Ratio = (Current assets – Inventory) / Current Liabilities
Q82. List out things that fall under intangible asset?
Ans: Things that fall under intangible asset are,
- Brand names
- Domain names, and so on.
Q83. Mention what is trial balance in accounting?
Ans: In accounting, trial balance is an accounting report that lists the balances in each of an organization’s general ledger accounts. This is done at the end of posting journal entry to ensure that there are no posting errors.
Q84. Where a cash discount should be recorded in journal entry?
Ans: A cash discount should be recorded in journal entry as a reduction of expense in “cash account”.
Q85. Mention why some asset accounts have a credit balance?
Ans: Some asset accounts have a credit balance due to following reasons,
- Receiving and posting an amount that was higher than the recorded receivable
- Expenses occurred faster than the agreed upon prepayments
- An error caused by posting an amount to a wrong account
- The amount of checks written exceeded the positive amount in the Cash account
- Continuing to amortize or depreciate an asset after its balance has reached zero
Q86. Define what is Bad debt expense?
Ans: A Bad debt expense is the amount of an account receivable that is considered to NOT be collectible.
Q87. Explain what is the Master Account?
Ans: A Master Account has subsidiary accounts. A master account receivable could be anything, it could be account receivable for various individual receivable accounts.
Q88. Mention in which account does the unpresented cheque will get recorded?
Ans: The unpresented cheque will get recorded as a credit to the cash account in the company’s General ledger.
Q89. What knowledge should financial accountant have?
Ans: A certified financial accountant should have knowledge about
- Accounting principles and practices
- Reporting and analysis of financial data
- Auditing practices and principles
- Account management
- Software knowledge dealing with Accounting
- Knowledge of relevant laws, codes and regulations
Q90. What are the three factors that can affect your cash flow and business profitability?
Ans: The three factors that can affect your cash flow and business profit includes
- Cash flows from investing activities:It includes shares, bonds, physical property, machineries, etc.
- Cash flows from operating activities:It does not include cash received from other sources like investments
- Cash flow from financing activities:It includes any activities that involves dividend payments that the company made to its shareholders, any money that includes stock to the public, any money borrowed from the lender etc. in other words, it is a report that tells the firm about the money borrowed and paid out in order to finance its activities.
Q91. Explain what is accrual accounting?
Ans: Accrual Accounting is a method for measuring the performance and position of the company by identifying economic events regardless of when cash transaction happened. In this method, revenue is compared with the expenditures, at the time in which the transaction happens rather than when the payment is made.
Q92. Explain the term account payable?
Ans: Account payable is referred as the amount company owes to its suppliers, its employees, and its partners. In other words, it is the basic cost levied on the company to run business process that is outstanding. Account payable for one company may be account receivable for another firm or company.
Q93. Explain the meaning of long-term notes payable is or long term liabilities?
Ans: Long-term notes payable or liabilities are referred for that loan that are not supposed to due for more than a year. These are the loans from banks or financial institution that are secured against various assets on the balance sheet, such as inventories.
Q94. Mention what is the difference between depreciation and amortization?
Ans: Capital expenses are either depreciated or amortized based upon the type of asset.
|· Depreciate means to lose value of an asset due to their usage, wear and tear, outdated, etc.
· Depreciation cost is calculated in terms of tangible assets like furniture, plant & machinery, building, etc.
· The purpose of calculating depreciation costs recovery
· The easiest way to calculate depreciation is to know the loss of value of an asset over its life.
· For example, a car worth $30,000 has estimated the lifetime of 10 years after that it will have no value in the market. The cost or loss in value throughout this 10 years is known as depreciation
· Various method for depreciation includes straight line depreciation, declining balance method, group depreciation method, unit of time/production depreciation method, etc.
|· Amortize means to write off or pay the debt over a period of time. Amortization can be for loans, or it can be for Intangible assets
· Amortization cost is calculated in terms of intangible assets like goodwill, trademark, loans, patents, etc.
· The purpose of calculating amortization is also for cost recovery
· Amortization calculates the amount spent after the intangible assets throughout the life for that asset
· For example, Pharmaceutical Company spent $20 million dollars on a drug patent with a useful life of 20 years. The amortization value for that company will be $1 million each year
· Various method for amortization is negative amortization, zoning amortization, business amortization, etc.
Q95. Mention what does financial statement of the company includes?
Ans: Financial statement of the company includes various information like
- Balance Sheet ( Assets, liabilities, and equity)
- Income statement ( Profit or Loss statement)
- Equity statement
- Cash flow statement
Q96. Explain what is working capital?
Ans: Working capital is a financial metric that calculates the resources available to the company to finance its day-to-day operations. It is typically calculated by deducting current liabilities from current assets.
Q97. Explain what is ledger?
Ans: A ledger can be referred as an accounting book that keeps the record of journal entries in a chronological order to individual accounts. The process of recording this journal entries is known as posting.
Q98. Mention the types of ledger?
Ans: There are three types of ledger
- General ledger
- Debtors ledger
- Creditors ledger
Q99. Explain what is GAAP?
Ans: GAAP means Generally Accepted Accounting Principle; it is a framework of accounting, standards, procedures & rules determined by the professional accounting industry and practiced by publicly traded U.S companies all over the U.S.A.
Q100. Explain what is double-entry accounting? Explain with an example?
Ans: Double entry accounting is an accounting system that requires recording business transaction or event in at least two accounts. It is the same concept of accounting, where every debit account should be matched with a credit account.
For example, if a company takes a loan from a bank, it receives cash as an asset but at the same time it creates a liability on a company. This single entry will affect both accounts, the asset accounts, and the liabilities accounts; such entry is referred as double entry accounting.
Q101. Explain what does the standard journal entry includes?
Ans: A standard journal entry includes, date of business transaction, name of the accounts affected, amounts to be debited or credited and a brief description of the event.
Q102. Explain what is liabilities and what all does include in current liabilities?
Ans: Liability can be defined as an obligation towards another company or party. It may consist of delivering goods, rendering services or paying money. They are the opposite of assets, and it may include
- Account payable
- Interest and dividend payable
- Bonds payable
- Consumer deposits
- Reserves for federal taxes
- Short term loans
Q103. Mention in simple terms what is the difference between Asset, equity, and liabilities?
- Asset:What financial institute (bank) or people owe you
- Liabilities:It is something you owe people or organization
- Equity:It is something you own, for example, the amount of your house loan you paid of.
Q104. Explain Financial Accounting. What are its characteristic features?
Ans: Financial Accounting is the process in which business transactions are recorded systematically in the various books of accounts maintained by the organization in order to prepare financial statements. These financial statements are basically of two types: First is Profitability Statement or Profit and Loss Account and second is Balance Sheet.
Following are the characteristics features of Financial Accounting:
1) Monetary Transactions: In financial accounting only transactions in monetary terms are considered. Transactions not expressed in monetary terms do not find any place in financial accounting, howsoever important they may be from business point of view.
2) Historical Nature: Financial accounting considers only those transactions which are of historical nature i.e the transaction which have already taken place. No futuristic transactions find any place in financial accounting, howsoever important they may be from business point of view.
3) Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the financial accounting and prepare financial statements there from. It is also obligatory to get these financial statements audited.
4) External Use: Financial accounting is for those people who are not part of decision making process regarding the organization like investors, customers, suppliers, financial institutions etc. Thus, it is for external use.
5) Disclosure of Financial Status: It discloses the financial status and financial performance of the business as a whole.
6) Interim Reports: Financial statements which are based on financial accounting are interim reports and cannot be the final ones.
7) Financial Accounting Process: The process of financial accounting gets affected due to the different accounting policies followed by the accountants. These accounting policies differ mainly in two areas: Valuation of inventory and Calculation of depreciation.
Q105. Compare Financial Accounting and Cost Accounting.
1) Financial Accounting protects the interests of the outsiders dealing with the organization e.g shareholders, creditors etc. Whereas reports of Cost Accounting is used for the internal purpose by the management to enable the same in discharging various functions in a proper manner.
2) Maintenance of Financial Accounting records and preparation of financial statements is a legal requirement whereas Cost Accounting is not a legal requirement.
3) Financial Accounting is concerned about the calculation of profits and state of affairs of the organization as whole whereas Cost accounting deals in cost ascertainment and calculation of profitability of the individual products, departments etc.
4) Financial Accounting considers only transactions of historical financial nature whereas Cost Accounting considers not only historical data but also future events.
5) Financial Accounting reports are prepared in the standard formats in accordance with GAAP whereas Cost accounting information is reported in whatever form management wants.
Q106. What are the various systems of Accounting? Explain them.
Ans: There are two systems of Accounting
1) Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.
2) Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.
Q107. What are the important things to be remembered while preparing a bank reconciliation statement?
Ans: While preparing a bank reconciliation statement following important points need to be remembered
- Bank Reconciliation Statement is prepared either by starting with the Bank pass book balance or Cash book balance.
- If the balance of the Cash book is taken as a starting point then Cash book balance is to be adjusted in accordance with the entries passed in the Bank pass book and vice versa. For example:If the balance is taken as per the Cash book then the following items will be added:
- Cheques issued but not presented for payment;
- Amount credited in Passbook but not in Cash book;
- Deposits made in the bank directly;
- Wrong credits given by bank;
- Interest credited in the Passbook.
The following items will be subtracted
- Cheques deposited but not cleared
- Interest/Bank Charges debited by bank
- Direct payments made by bank not entered in Cash book
- Cheques dishonoured not recorded in cash book
- Wrong debits given by bank
- If it is prepared with the Bank balance as per the bank passbook, then the above procedure will be reversed i.e the items will be added to the pass book which were deducted from the cash book balance and those items will be deducted from the bank pass book balance which were added to the cash book balance.
Q108. What is cost accountancy? What are the objects of Cost Accountancy?
Ans: Cost accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making.
Following are the objects of Cost Accountancy
o Ascertainment of Cost and Profitability
o Determining Selling Price
o Facilitating Cost Control
o Presentation of information for effective managerial decision
o Provide basis for operating policy
o Facilitating preparation of financial or other statements
Q109. What is capitalization? What is its importance?
Ans: Capitalization is a term which has different meanings in both financial and accounting context. Capitalization in accounting means the cost to buy an asset which is included in the price of the asset whereas in financial terms it is the cost which is required to buy an asset which includes price of a particular asset and it also include the retained earnings of a company with stock debt and long term debt. There are two kinds of capitalization which are called as Over-capitalization and another is called as Under-capitalization. Capitalization is very import aspect in determining the value of the company in the market which is based on the economic structure of the company. This aspect depends on the previous records and economics of the company. This also shows a particular behaviour of the companies’ structure and allows them to create a plan to do the marketing.
Q110. What in your opinion makes a good financial model?
Ans: It's important to have strong financial modeling fundamentals. Wherever possible model assumptions (inputs) should be in one place and distinctly colored (typically bank models use blue font for model inputs). Good Excel models also make it easy for users to understand how inputs are translated into outputs. Good Excel models also include error checks to ensure the model is working correctly (e.g. the balance sheet balances, the cash flow calculations are correct, etc.). The contain enough detail, but not too much, and they have a dashboard that clearly displays the key outputs with charts and graphs. For more, check out our complete guide to financial modeling.
Q111. If it were up to you, what would the budgeting process look like?
Ans: This is somewhat subjective. In my opinion a good budget is one that has buy-in from all departments in the company, is realistic yet strives for achievement, has been risk adjusted to allow for a margin of error, and is tied in to the the company's overall strategic plan. In order to achieve this the budget needs to be an iterative process that includes all departments. It can be zero-based (starting from scratch each time), or building off the previous year, but it depends what type of business you're running as to which is better. It's important to have a good budgeting / planning calendar that everyone can follow. This is an important part of how to be a world class financial analyst.
Q112. Walk me through the 3 financial statements.
Ans: The balance sheet shows a company’s assets, its liabilities and shareholders’ equity. The income statement outlines the company’s revenues and expenses. The cash flow statement shows the cash flows from operating, investing and financing activities.
Q113. If I had only 1 statement and wanted to review the overall health of a company, which statement would I use and why?
Ans: Cash is king. The cash flow statement gives a true picture of how much cash the company is generating. Ironically, it often gets the least attention. You can probably pick a different answer for this question, but you have to have a good justification (i.e. the balance sheet because assets are the true drier of cash flow etc etc.)
Q114. When should a company consider issuing debt instead of equity?
Ans: A company should always optimize its capital structure. If it has taxable income it can benefit from the tax shield of issuing debt. If the firm has immediately steady cash flows and is able to make their interest payments it may make sense to issue debt if it lowers the WACC.
Basic Accounting Terms:
- 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”.
- Book keeping: It is mainly concerned with recording of financial data relating to the business operations in a significant and orderly manner.
- Concepts of accounting:
Separate entity concept
Going concern concept
Money measurement concept
Dual aspect concept
Accounting period concept
Periodic matching of costs and revenue concept
4 Conventions of accounting:
- Full disclosure
- Systems of book keeping:
single entry system
double entry system
- Systems of accounting:
- Cash system accounting
- Mercantile system of accounting.
- Principles of accounting:
- Personal a/c: Debit the receiver
Credit the giver
Real a/c: Debit what comes in
Credit what goes out
Nominal a/c: Debit all expenses and losses
Credit all gains and incomes
- Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business enterprise whether real, nominal, personal.
- Posting: It means transferring the debit and credit items from the journal to their respective accounts in the ledger.
- Trial balance: Trial balance is a statement containing the various ledger balances on a particular date.
- 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.
- 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.
- Contra entry: Which accounting entry is recorded on both the debit and credit side of the cashbook is known as the contra entry.
- Petty cash book: Petty cash is maintained by business to record petty cash expenses of the business, such as postage, cartage, stationery, etc.
- Promisory note: an instrument in writing containing an unconditional undertaking signed by the maker, to pay certain sum of money only to or to the order of a certain person or to the barer of the instrument.
- Cheque: A bill of exchange drawn on a specified banker and payable on demand.
- Stale Cheque: A stale cheque means not valid of cheque that means more than six months the cheque is not valid.
- 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.
- Matching concept: Matching means requires proper matching of expense with the revenue.
- Capital income: The term capital income means an income which does not grow out of or pertain to the running of the business proper.
- Revenue income: The income, which arises out of and in the course of the regular business transactions of a concern.
- Capital expenditure: It means an expenditure which has been incurred for the purpose of obtaining a long term advantage for the business.
- Revenue expenditure: An expenditure that incurred in the course of regular business transactions of a concern.
- Differed revenue expenditure: An expenditure, which is incurred during an accounting period but is applicable further periods also. Eg: heavy advertisement.
- Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold on credit.
- Depreciation: Depreciation denotes gradually and permanent decrease in the value of asset due to wear and tear, technology changes, laps of time and accident.
- 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.
- Intanglbe Assets: Intangible assets mean the assets which is not having the physical appearance. And it’s have the real value, it shown on the assets side of the balance sheet.
- 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.
- 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.
- Suspense account: The suspense account is an account to which the difference in the trial balance has been put temporarily.
- Depletion: It implies removal of an available but not replaceable source, Such as extracting coal from a coal mine.
- Amortization: The process of writing of intangible assets is term as amortization.
- Dilapidations: The term dilapidations to damage done to a building or other property during tenancy.
- 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)
- Equity shares: Those shares which are not having pref. rights are called equity shares.
- Pref.shares: Those shares which are carrying the pref.rights are called pref. shares Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the event of company winding up.
- Leverage: It is a force applied at a particular work to get the desired result.
- Operating leverage: the operating leverage takes place when a changes in revenue greater changes in EBIT.
- Financial leverage: it is nothing but a process of using debt capital to increase the rate of return on equity
- Combine leverage: It is used to measure of the total risk of the firm = operating risk + financial risk.
- 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.
- 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.
- Factoring: It is an arrangement under which a firm (called borrower) receives advances against its receivables, from financial institutions (called factor)
- Capital reserve: The reserve which transferred from the capital gains is called capital reserve.
- General reserve: the reserve which is transferred from normal profits of the firm is called general reserve
- Free Cash: The cash not for any specific purpose free from any encumbrance like surplus cash.
- Minority Interest: Minority interest refers to the equity of the minority shareholders in a subsidiary company.
- 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.
- 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”.
- Equity share capital: The total sum of equity shares is called equity share capital.
- Authorized share capital: It is the maximum amount of the share capital, which a company can raise for the time being.
- Issued capital: It is that part of the authorized capital, which has been allotted to the public for subscriptions.
- Subscribed capital: it is the part of the issued capital, which has been allotted to the public
- Called up capital: It has been portion of the subscribed capital which has been called up by the company.
- Paid up capital: It is the portion of the called up capital against which payment has been received.
- Debentures: Debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holder.
- Cash profit: cash profit is the profit it is occurred from the cash sales.
- 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 cannot be determined with substantial accuracy.
- Reserve: The provision in excess of the amount considered necessary for the purpose it was originally made is also considered as reserve Provision is charge against profits while reserves is an appropriation of profits Creation of reserve increase proprietor’s fund while creation of provisions decreases his funds in the business.
- Reserve fund: The term reserve fund means such reserve against which clearly investment etc.,
- 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.
- Finance management: Financial management deals with procurement of funds and their effective utilization in business.
- Objectives of financial management: financial management having two objectives that Is:
- Profit maximization: The finance manager has to make his decisions in a manner so that the profits of the concern are maximized.
- 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.
- 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.
- 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.
- 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.
- 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.
- Financial break-even point: It denotes the level at which a firm’s EBIT is just sufficient to cover interest and preference dividend.
- 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.
- Payback period: Payback period represents the time period required for complete recovery of the initial investment in the project.
- ARR: Accounting or average rates of return means the average annual yield on the project.
- NPV: The Net present value of an investment proposal is defined as the sum of the present values of all future cash inflows less the sum of the present values of all cash out flows associated with the proposal.
- Profitability index: Where different investment proposal each involving different initial investments and cash inflows are to be compared.
- IRR: Internal rate of return is the rate at which the sum total of discounted cash inflows equals the discounted cash out flow.
- Treasury management: It means it is defined as the efficient management of liquidity and financial risk in business.
- 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.
- Marketable securities: Surplus cash can be invested in short term instruments in order to earn interest.
- Ageing schedule: In an ageing schedule the receivables are classified according to their age.
- Maximum permissible bank finance (MPBF): It is the maximum amount that banks can lend a borrower towards his working capital requirements.
- 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.
- Bridge finance: It refers to the loans taken by the company normally from commercial banks for a short period pending disbursement of loans sanctioned by the financial institutions.
- Venture capital: It refers to the financing of high-risk ventures promoted by new qualified ntrepreneurs who require funds to give shape to their ideas.
- Debt securitization: It is a mode of financing, where in securities are issued on the basis of a package of assets (called asset pool).
- Lease financing: Leasing is a contract where one party (owner) purchases assets and permits its views by another party (lessee) over a specified period
- Trade Credit: It represents credit granted by suppliers of goods, in the normal course of business.
- Over draft: Under this facility a fixed limit is granted within which the borrower allowed to overdraw from his account.
- Cash credit: It is an arrangement under which a customer is allowed an advance up to certain limit against credit granted by bank.
- Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any tangible security.
- Share capital: The sum total of the nominal value of the shares of a company is called share capital.
- 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.
- 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
- Depreciation on fixed assets
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
- Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of tax liability (d) Payment of fixed liability
- 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 deposits made by one company in another company are called ICD.
- 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.
- 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.
- 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.
- 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.
- ADR (American depository receipts): Depository receipts 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.
- Commercial banks: Commercial banks extend foreign currency loans for international operations, just like rupee loans. The banks also provided overdraft.
- Development banks: It offers long-term and medium term loans including foreign currency loans
- International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide indirect assistance for obtaining foreign currency.
- Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for professionally or technically qualified entrepreneurs and persons possessing relevantexperience and skills and entrepreneur traits.
- Unsecured loans: It constitutes a significant part of long-term finance available to an enterprise.
- Cash flow statement: It is a statement depicting change in cash position from one period to another.
- 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.
- 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.
- 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.
- Financial analysis: The process of interpreting the past, present, and future financial condition of a company.
- Income statement: An accounting statement which shows the level of revenues, expenses and profit occurring for a given accounting period.
- 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.
- Bankrupt: A statement in which a firm is unable to meets its obligations and hence, it is assets are surrendered to court for administration
- 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.
- Opportunity cost: The cost associated with not doing something.
- Budgeting: The term budgeting is used for preparing budgets and other producer for planning,co-ordination,and control of business enterprise.
- 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.
- Capitalization: It is the sum of the par value of stocks and bonds out standings.
- Over capitalization: When a business is unable to earn fair rate on its outstanding securities.
- Under capitalization: When a business is able to earn fair rate or over rate on it is outstanding securities.
- Capital gearing: The term capital gearing refers to the relationship between equity and long term debt.
- Cost of capital: It means the minimum rate of return expected by its investment.
- Cash dividend: The payment of dividend in cash
- 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.
- 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.
- 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.
- Accrued liability: A developing but not yet enforceable claim by 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.
- 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.
- Convention of consistency: According to this convention it is essential that accounting practices and methods remain unchanged from one year to another.
- 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.
- Meaning of Charge: charge means it is a obligation to secure an indebt ness. It may be fixed charge and floating charge.
- Appropriation: It is application of profit towards Reserves and Dividends.
- Absorption costing: A method where by the cost is determine so as to include the appropriate share of both variable and fixed costs.
- Marginal Cost: Marginal cost is the additional cost to produce an additional unit of a product. It is also called variable cost.
- What are the ex-ordinary items in the P&L a/c: The transaction which is 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.
- 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”.
- Accumulated Depreciation: The total to date of the periodic depreciation charges on depreciable assets.
- Investment: Expenditure on assets held to earn interest, income, profit or other benefits.
- Capital: Generally refers to the amount invested in an enterprise by its owner. Ex; paid up share capital in corporate enterprise.
- Capital Work In Progress: Expenditure on capital assets which are in the process of construction as completion.
- Convertible Debenture: A debenture which gives the holder a right to conversion wholly or partly in shares in accordance with term of issues.
- Redeemable Preference Share: The preference share that is repayable either after a fixed (or) determinable period (or) at any time dividend by the management.
- Cumulative preference shares: A class of preference shares entitled to payment of emulates dividends. Preference shares are always deemed to be cumulative unless they are expressly made non-cumulative preference shares.
- Debenture redemption reserve: A reserve created for the redemption of debentures at a future date.
- Cumulative dividend: A dividend payable as cumulative preference shares which it unpaid Emulates as a claim against the earnings of a corporate before any distribution is made to the other shareholders.
- Dividend Equalization reserve: A reserve created to maintain the rate of dividend in future years.
- 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.
- 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.
- Valuation of closing stock: The closing stock is valued on the basis of “Cost or Market prices whichever is less” principle.
- Contingency: A condition (or) situation the ultimate out comes of which gain or loss will be known as determined only as the occurrence or non occurrence of one or more uncertain future events.
- 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 event.
- 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.
- Deficiency: the excess of liabilities over assets of an enterprise at a given date is called deficiency.
- Deficit: The debit balance in the profit and loss a/c is called deficit.
- Surplus: Credit balance in the profit & loss statement after providing for proposed appropriation & dividend, reserves.
- Appropriation Assets: An account sometimes included as a separate section of the profit and loss statement showing application of profits towards dividends, reserves.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Cash budget: It is a summary statement of firm’s expected cash inflow and outflow over a specified time period.
- 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.
- Fixed budget: It is a budget, which is designed to remain unchanged irrespective of the level of activity actually attained.
- 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 inner and allows reallocation of source from low to high priority programs.
- Goodwill: The present value of firm’s anticipated excess earnings.
- BRS: It is a statement reconciling the balance as shown by the bank pass book and balance shown by the cash book.
- 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.
- Responsibilities of accounting: It is a system of control by delegating and locating the Responsibilities for costs.
- Profit centre: A centre whose performance is measured in terms of both the expense incurs and revenue it earns.
- Cost centre: A location, person or item of equipment for which cost may be ascertained and used for the purpose of cost control.
- Cost: The amount of expenditure incurred on to a given thing.
- 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.
- Prime cost: It consists of direct material direct labour and direct expenses. It is also known as basic or first or flat cost.
- 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.
- Cost of production: In office and administration overheads are added to factory cost, office cost is arrived at.
- Total cost: Selling and distribution overheads are added to total cost of production to get the total cost or cost of sales.
- 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.
- Techniques of costing: (a) marginal costing (b) direct costing (c) absorption costing (d) uniform costing.
- Standard costing: standard costing is a system under which the cost of the product is determined in advance on certain predetermined standards.
- 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.
- Derivative: derivative is product whose value is derived from the value of one or more basic variables of underlying asset.
- Forwards: a forward contract is customized contracts between two entities were settlement takes place on a specific date in the future at today’s pre agreed price.
- 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.
- Options: An option gives the holder of the option the right to do something. The option holder option may exercise or not.
- 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.
- 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.
- 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.
- Expiration date: The date which is specified in the option contract is called expiration date.
- European option: It is the option at exercised only on expiration date itself.
- Basis: Basis means future price minus spot price.
- Cost of carry: The relation between future prices and spot prices can be summarized in terms of what is known as cost of carry.
- 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.
- Maintenance margin: This is somewhat lower than initial margin.
- 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.
- Baskets: basket options are options on portfolio of underlying asset.
- Swaps: swaps are private agreements between two parties to exchange cash flows in the future according to a pre agreed formula.
- Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects the costs faced when actually trading in index.
- Hedging: Hedging means minimize the risk.
- 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.
- Primary market: Those companies which are issuing new shares in this market. It is also called new issue market.
- Secondary market: Secondary market is the market where shares buying and selling. In India secondary market is called stock exchange.
- 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.
- Meaning of ratio: Ratios are relationships expressed in mathematical terms between figures which are connected with each other in same manner.
- Activity ratio: It is a measure of the level of activity attained over a period.
- Mutual fund: A mutual fund is a pool of money, collected from investors, and is invested according to certain investment objectives.
- 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
- Advantage of MF to investors: Portfolio diversification Professional management Reduction in risk Reduction of transaction casts Liquidity Convenience and flexibility
- Net asset value: the value of one unit of investment is called as the Net Asset Value
- 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.
- 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.
- Dividend option: investors who choose a dividend on their investments, will receive dividends from the MF, as when such dividends are declared.
- Growth option: investors who do not require periodic income distributions can be choose the growth option.
- Equity funds: equity funds are those that invest pre-dominantly in equity shares of company.
- Types of equity funds: Simple equity funds Primary market funds Sectoral funds Index funds
- Sectoral funds: Sectoral funds choose to invest in one or more chosen sectors of the equity markets.
- Index funds: The fund manager takes a view on companies that are expected to perform well, and invests in these companies
- Debt funds: the debt funds are those that are pre-dominantly invest in debt securities.
- Liquid funds: the debt funds invest only in instruments with maturities less than one year.
- Gilt funds: gilt funds invests only in securities that are issued by the GOVT. and therefore does not carry any credit risk.
- Balanced funds: Funds that invest both in debt and equity markets are called balanced funds.
- Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and the AMC with prior approval of SEBI.
- Trustee: Trustee is responsible to the investors in the MF and appoint the AMC for managing the investment portfolio.
- AMC: the AMC describes Asset Management Company; it is the business face of the MF, as it manages all the affairs of the MF.
- R & T Agents: the R&T agents are responsible for the investor servicing functions, as they maintain the records of investors in MF.
- Custodians: Custodians are responsible for the securities held in the mutual fund’s portfolio.
- Scheme takes over: if an existing MF scheme is taken over by another AMC, it is called as scheme take over.
- Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive at the price.
- Market capitalization: market capitalization means number of shares issued multiplied with market price per share.
- Price earnings ratio: The ratio between the share price and the post tax earnings of company is called as price earnings ratio.
- Dividend yield: The dividend paid out by the company, is usually a percentage of the face value of a share.
- 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.
- 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.
- 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.
- Credit risk: Credit risk refers to the probability that a borrower could default on a commitment to repay debt or band loans
- Inflation risk: Inflation risk reflects the changes in the purchasing power of the cash flows resulting from the fixed income security.
- Liquid risk: It is also called market risk, it refers to the ease with which bonds could be traded in the market.
- Drawings: Drawings denotes the money withdrawn by the proprietor from the business for his personal use.
- 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.
- 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.
- Closing stock: The term closing stock means goods lying unsold with the
- Gross profit ratio: it indicates the efficiency of the production/trading operations.Formula : Gross profit-------------------X100Net sales
- Net profit ratio: it indicates net margin on salesFormula: Net profit--------------- X 100Net sales
- Return on share holders’ funds: it indicates measures earning power of equity capital.Formula:Profits available for Equity shareholders-----------------------------------------------X 100Average Equity Shareholders Funds
- 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
- Dividend yield ratio: it shows the rate of return to shareholders in the form of dividends based in the market price of the shareFormula:Dividend per share---------------------------- X100Market price per share
- Price earnings 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 100Earnings per share (EPS)
- Current ratio: it measures short-term debt paying ability.Formula:Current Assets------------------------Current Liabilities
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- Fixed Assets Turnover ratio: This ratio indicates the extent to which the investments in fixed assets contribute towards sales.Formula: Net Sales--------------------------Fixed Assets
- Pay-outs Ratio: This ratio indicates what proportion of earning per share has been used for paying dividend.Formula: Dividend per Equity Share--------------------------------------------X100Earning per Equity share
- 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 100Capital employedThe 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’
- Fixed Interest Cover ratio: The ratio is very important from the lender’s point of view. It indicates whether the business would earn sufficient profits to pay periodically the interest charges.Formula: Income before interest and Tax---------------------------------------Interest Charges
- 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
- 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 rateInterest + Principal payment installment
- Proprietary ratio: It is a variant of debt-equity ratio . It establishes relationship between the proprietor’s funds and the total tangible assets.Formula: Shareholders funds------------------------------Total tangible assets
- Concepts of accounting:Business entity concepts: - According to this concept, the business is treated as a separate entity distinct from its owners and others.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.Money measurement concept :- This concept says that the accounting records only those transactions which can be expressed in terms of money only.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.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.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.
Realization concept: - According to this concepts, revenue is considered as being earned on the data which it is realised, i.e., the date when the property in goods passes the buyer and he become legally liable to pay.
- Difference between joint venture and partnership: 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 partnership, 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.
- 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.