Professional Documents
Culture Documents
S
The statement in which the bank reconciliation is done is called B.R.S
[OR] The statement in which we do bank reconciliation is done is called
B.R.S B.R.S a Complete and satisfactory explanation for the difference
between Cash book balance and pass book balance and helps to
equalize cash book balance to pass book balance.
MINORITY INTEREST
1. A significant but non-controlling ownership of less than 50% of a
company's voting shares by either an investor or another company.
2. A non-current liability that can be found on a parent company's
balance sheet that represents the proportion of its subsidiaries owned
by minority shareholders.
In accounting terms, if a company owns a minority interest in another
company but only has a minority passive position (i.e. it is unable to
exert influence), then all that is recorded from this investment are the
dividends received from the minority interest. If the company has a
minority active position (i.e. it is able to exert influence), then both
dividends and a percent of income are recorded on the company's
books.
Example :If ABC Corp. owns 90% of XYZ Inc., which is a $100 million
company, on ABC Corp.'s balance sheet, there would be a $10 million
liability in minority interest account to represent the 10% of XYZ Inc.
that ABC Corp does not own.
Depreciation
An expense that is supposed to reflect the loss in value of a fixed
asset. For
Example, if a machine will completely wear out after ten year's use,
the cost of the machine is charged as an expense over the tenyear life
rather than all at once, when the machine is purchased. Straight line
depreciation charges the same amount to expense each year.
Accelerated depreciation charges more to expense in early years, less
in later years.
Depreciation is an accounting expense. In real life, the fixed asset may
grow in value or it may become worthless long before the depreciation
period ends.
Working Capital :
which can be use to conduct day to day activities of the business is
working capital [To run without disturbances]
FORFEITED SHARE
A share in a company that the owner loses (forfeits) by failing to meet
the purchase requirements. Requirements may include paying any
allotment or call money owed, or avoiding selling or transferring shares
during a restricted period. When a share is forfeited, the shareholder
no longer owes any remaining balance, surrenders any potential
capital gain on the shares and the shares become the property of the
issuing company. The issuing company can re-issue forfeited shares at
par, a premium or a discount as determined by the board of directors.
VARIABLE COST
A corporate expense that varies with production output. Variable costs
are those costs that vary depending on a company's production
volume; they rise as production increases and fall as production
decreases. Variable costs differ from fixed costs such as rent,
advertising, insurance and office supplies, which tend to remain the
same regardless of production output. Fixed costs and variable costs
comprise total cost.
Reserves
1. It is created by debiting the profit and loss appropriation account.
2. It is created to meet an unknown liability, or to strengthen the
financial position of the company or for equalization of dividends etc.
3. A reserve is created only when there is profit in the business.
4. It can be distributed among shareholders as dividend.
5. The reserve is created without taking into consideration the actual
amount required except in the case of redemption of debentures when
a definite sum is set aside.
6. Creation of reserve depends upon the financial policy of the
business and discretion of its management.
liabilities with its short-term assets because it does not include inventory and other
current assets that are more difficult to liquidate (i.e., turn into cash). By excluding
inventory (and other less liquid assets) the quick ratio focuses on the companys more
liquid assets.
Investment objective
Safety, Growth of capital, Income,
Tax Minimization, Marketability, and liquidity
Capital Budgeting
It is the process by which the firm decides which long-term
investments to make. Capital Budgeting projects, i.e., potential longterm investments, are expected to generate cash flows over several
years. The decision to accept or reject a Capital Budgeting project
depends on an analysis of the cash flows generated by the project and
its cost. The following three Capital Budgeting decision rules will be
presented:
Payback Period
Net Present Value (NPV)
Internal Rate of Return (IRR)
RATIO ANALYSIS
Quantitative analysis of information contained in a companys financial
statements. Ratio analysis is based on line items in financial
statements like the balance sheet, income statement and cash flow
statement; the ratios of one item or a combination of items - to
another item or combination are then calculated. Ratio analysis is used
to evaluate various aspects of a companys operating and financial
performance such as its efficiency, liquidity, profitability and solvency.
The trend of these ratios over time is studied to check whether they
are improving or deteriorating. Ratios are also compared across
different companies in the same sector to see how they stack up, and
to get an idea of comparative valuations. Ratio analysis is a
cornerstone of fundamental analysis.
Amortization
COST OF CAPITAL'
The cost of funds used for financing a business. Cost of capital depends
on the mode of financing used it refers to the cost of equity if the
business is financed solely through equity, or to the cost of debt if it is
financed solely through debt. Many companies use a combination of
debt and equity to finance their businesses, and for such companies,
their overall cost of capital is derived from a weighted average of all
capital sources, widely known as the weighted average cost of capital
(WACC). Since the cost of capital represents a hurdle rate that a
company must overcome before it can generate value, it is extensively
used in the capital budgeting process to determine whether the
company should proceed with a project.
Operating Expenses
Operating expenses are the costs a business incurs as part of its
regular business activities, not including the cost of goods sold. These
costs include administrative expenses such as office supplies and
salaries for administrative personnel. Commissions and advertising are
examples of sales expenses. You also have general operating expenses
such as rent and utilities.
Non-Operating Expenses
Some business expenditures are incurred for reasons that dont involve
normal business operations. One example of a non-operating expense
is interest on borrowed money. Non-operating expenses also include
one-time or unusual costs. The expenditure required for a business
reorganization or to pay expenses due t a lawsuit are examples.
Charges for obsolescence of equipment or currency exchange are also
non-operating expenses.
Operating Income
Operating income is operating revenues less operating expenses and
depreciation. A company generates operating revenues from the goods
and services it provides to its customers. Operating expenses are tied
to the production, sale and delivery of these goods and services and
include associated overhead and administrative expenses. Operating
income excludes interest payments and income taxes. Operating
income is also called operating profit. It is sometimes referred to as
EBIT -- earnings before interest and taxes -- but EBIT occasionally
includes non-operating items such as asset sales.
Non-Operating Income
Non-operating income is revenues and expenses generated by a
business that does not derive from ordinary business operations. Nonoperating income includes regularly occurring items such as interest
expense and income taxes. Interest expense shows the impact of a
company's debt structure on the income statement, and income taxes
can vary if the company has tax credits or prior net operating losses.
Non-operating income also includes nonrecurring items such as the
gain or loss from selling a large asset or subsidiary.
CONTINGENT LIABILITY
A potential obligation that may be incurred depending on the outcome
of a future event. A contingent liability is one where the outcome of an
existing situation is uncertain, and this uncertainty will be resolved by
a future event. A contingent liability is recorded in the books of
A holding company
It is a company or firm that owns other companies' outstanding stock.
The term usually refers to a company that does not produce goods or
services itself; rather, its purpose is to own shares of
other companies to form a corporate group. A parent corporation,
limited liability company or limited partnership that owns enough
voting stock in another company to control its policies and
management.
SUBSIDIARY
A company whose voting stock is more than 50% controlled by another
company, usually referred to as the parent company or holding
company. A subsidiary is a company that is partly or completely owned
by another company that holds a controlling interest in the subsidiary
company.
ASSOCIATE COMPANY
A corporation whose parent company possesses only a minority stake
in the ownership of the corporation. An associate company is partly
owned by another company or group of companies. The parent
company or companies do not consolidate the associate company's
financial statements. The parent company typically owns 20 to 50% of
the voting shares; if more than 50% of the shares are owned by a
parent company, it creates a subsidiary (where the parent company
consolidates the financial statements).
DERIVATIVE
A security whose price is dependent upon or derived from one or more
underlying assets. The derivative itself is merely a contract between
A financial statement
(Or financial report) is a formal record of the financial activities of a
business, person, or other entity. Relevant financial information is
presented in a structured manner and in a form easy to understand.
They typically include basic financial statements, accompanied by
a management discussion and analysis:[1]
1. A balance sheet, also referred to as a statement of financial
position, reports on a company's assets, liabilities, and equity at
a given point in time.
2. An income statement, also known as a statement of
comprehensive income, statement of revenue &
expense, P&L or profit and loss report, reports on a
company's income, expenses, and profits over a period of time. A
profit and loss statement provides information on the operation
of the enterprise. These include sales and the various expenses
incurred during the stated period.
3. A statement of cash flows reports on a company's cash flow
activities, particularly its
operating, investing and financing activities.
Fictitious Asset
Capital Lease
Operating Lease
Lease
criteria Ownershi
p
Lease
criteria Bargain
Purchase
Option
Usually found on the balance sheet, this is the account to which the
amount of money paid (or promised to be paid) by a shareholder for a
share is credited to, only if the shareholder paid more than the cost of
the share.
Accounting Concepts
a. Separate Entity Concept
b. Going Concern Concept
c. Money Measurement Concept
d. Cost Concept
e. Dual Aspect Concept
f. Periodic Matching of Cost and Revenue Concept
g. Realization Concept
Accounting Conventions
a. Convention of Conservatism
b. Convention of Full Disclosure
c. Convention of Consistency
d. Convention of Materiality
Accounting Principles
a. Cost Principle
b. Revenue Principle
c. Matching Principle
d. Objectivity Principle
e. Consistency Principle
f. Full Disclosure Principle
g. Conservatism Principle
h. Materiality Principle
i. Uniformity and Comparability Principle.
STOCK SPLIT
A corporate action in which a company divides its existing shares into
multiple shares. Although the number of shares outstanding increases
by a specific multiple, the total dollar value of the shares remains the
same compared to pre-split amounts, because the split did not add any
real value. The most common split ratios are 2-for-1 or 3-for-1, which
means that the stockholder will have two or three shares for every
share held earlier.
Also known as a "forward stock split."
First, a split is usually undertaken when the stock price is quite high,
making it pricey for investors to acquire a standard board lot of 100
shares. If XYZ Corp.'s shares were worth $100 each, an investor would
need to purchase $10,000 to own 100 shares. If each share was worth
$50, the investor would only need to pay $5,000 to own 100 shares.
Stock Valuation
In financial markets, stock valuation is the method of calculating
theoretical values of companies and their stocks. The main use of
these methods is to predict future market prices, or more generally,
potential market prices, and thus to profit from price movement
stocks that are judged undervalued (with respect to their theoretical
value) are bought, while stocks that are judged overvalued are sold, in
the expectation that undervalued stocks will, on the whole, rise in
value, while overvalued stocks will, on the whole, fall.
AMALGAMATION
The combination of one or more companies into a new entity. An
amalgamation is distinct from a merger because neither of the
combining companies survives as a legal entity. Rather, a completely
new entity is formed to house the combined assets and liabilities of
both companies.
BRIDGE FINANCING'
A mutual fund
It is a professionally-managed trust that pools the savings of many
investors and invests them in securities like stocks, bonds, short-term
money market instruments and commodities such as precious metals.
Investors in a mutual fund have a common financial goal and their
money is invested in different asset classes in accordance with the
funds investment objective. Investments in mutual funds entail
comparatively small amounts, giving retail investors the advantage of
having finance professionals control their money even if it is a few
thousand rupees.
Based on the maturity period
Open-ended Fund
An open-ended fund is a fund that is available for subscription and can
be redeemed on a continuous basis. It is available for subscription
throughout the year and investors can buy and sell units at NAV related
prices. These funds do not have a fixed maturity date. The key feature
of an open-ended fund is liquidity.
Close-ended Fund
A close-ended fund is a fund that has a defined maturity period, e.g. 36 years. These funds are open for subscription for a specified period at
the time of initial launch. These funds are listed on a recognized stock
exchange.
Interval Funds
Interval funds combine the features of open-ended and close-ended
funds. These funds may trade on stock exchanges and are open for
sale or redemption at predetermined intervals on the prevailing NAV.
Based on investment objectives
Equity/Growth Funds
Equity/Growth funds invest a major part of its corpus in stocks and the
Typical Investment
Equity or Growth
Fund
Balanced Fund
Fund of funds
Other Schemes
Tax-Saving (Equity linked Savings Schemes) Funds
Tax-saving schemes offer tax rebates to investors under specific
provisions of the Income Tax Act, 1961. These are growth-oriented
schemes and invest primarily in equities. Like an equity scheme, they
largely suit investors having a higher risk appetite and aim to generate
capital appreciation over medium to long term.
Index Funds
Index schemes replicate the performance of a particular index such as
the BSE Sensex or the S&P CNX Nifty. The portfolio of these schemes
consist of only those stocks that represent the index and the
weightage assigned to each stock is aligned to the stocks weightage
in the index. Hence, the returns from these funds are more or less
similar to those generated by the Index.
Sector-specific Funds
Sector-specific funds invest in the securities of only those sectors or
industries as specified in the Scheme Information Document. The
returns in these funds are dependent on the performance of the
respective sector/industries for example FMCG, Pharma, IT, etc. The
funds enable investors to diversify holdings among many companies
within an industry. Sector funds are riskier as their performance is
dependent on particular sectors although this also results in higher
returns generated by these funds.
Breakeven point
The amount of revenue from sales which exactly equals the amount of
Expense. Breakeven point is often expressed as the number of units
that must be sold to produce revenues exactly equal to expenses.
Sales above the breakeven point produce a profit; below produces a
loss.
Margin of safety (safety margin) is the difference between the intrinsic
value of a stock and its market price.
Another definition: In Break even analysis (accounting), margin of
safety is how much output or sales level can fall before a business
reaches its breakeven point.
Market capitalization
(or market cap) is the total value of the shares outstanding of
a publicly traded company; it is equal to the share price times the
number of shares outstanding.[2][3] As outstanding stock is bought and
sold in public markets, capitalization could be used as a proxy for the
public opinion of a company's net worth and is a determining factor in
some forms of stock valuation. If a company has 35 million shares
outstanding, each with a market value of $100, the company's market
capitalization is $3.5 billion (35,000,000 x $100 per share).
3. Inventory
Current Liabilities
1. Payables
Table of Difference between Funds Flow Statement and Cash Flow
Statement
Basis of Funds Flow Statement
Cash Flow Statement
Differenc
e
1. Basis of Funds flow statement is Cash flow statement is based
Analysis based on broader concept on narrow concept i.e. cash,
i.e. working capital.
which is only one of the
elements of working capital.
2. Source
Funds flow statement tells Cash flow statement stars
about the various sources with the opening balance of
from where the funds cash and reaches to the
generated with various closing balance of cash by
uses to which they are proceeding through sources
put.
and uses.
3. Usage
Funds flow statement is Cash flow statement is useful
more useful in assessing in understanding the shortthe long-range financial term phenomena affecting
strategy.
the liquidity of the business.
4. Schedule In funds flow statement In
cash
flow
statement
of
changes in current assets changes in current assets and
Changes and current liabilities are current liabilities are shown in
in
shown
through
the the cash flow statement
Working schedule of changes in itself.
Capital
working capital.
5. End
Funds
flow
statement Cash flow statement shows
Result
shows the causes of the causes the changes in
changes in net working cash.
capital.
6. Principal Funds flow statement is in In cash flow statement data
of
alignment
with
the obtained on accrual basis are
Accounti accrual
basis
of converted into cash basis.
ng
accounting.
Budgets are then built around what is needed for the upcoming period,
regardless of whether the budget is higher or lower than the previous
one.
Memorandum of Association
It is the document that governs the relationship between the company
and the outside. The memorandum of association gives the company's
name, names of its members (shareholders) and number
of shares held by them, and location of its registered office. It
also states the company's (1) objectives, (2) amount of authorized
share capital, (3) whether liability of its members is limited by shares
or by guaranty, and (4) what type of contracts the company is allowed
to enter into. Almost all of its provisions (except those mandated
by corporate legislation) can be altered by the company's members by
following the prescribed procedures. The memorandum is a public
document and may be inspected by anyone, usually at the
public office where it is lodged.
Article of Association
Defines the responsibilities of the directors, the kind of business to be
undertaken, and
the means by which the shareholders exert control over the board of
directors.
Memorandum and articles are public documents. They are inter-linked
and require to be registered for the formation of a company. Where
there is any ambiguity or where the memorandum is silent on any
point, the articles may serve to explain or supplement the
memorandum. Beyond this, the two documents have nothing in
common and differ from one another in the following respects:
1. Memorandum of association is the charter of the company and
defines the scope of its activities. Articles of association of the
company is a document which regulates the internal management of
the company. These are the rules made by the company for carrying
out the objects of the company as set out in the memorandum.
Goodwill
In accounting, the difference between what a company pays when it
buys the assets of another company and the book value of those
assets. Sometimes, real goodwill is involved a company's good
reputation, the loyalty of its customers, and so on. Sometimes,
goodwill is an overpayment.
Bombay Stock Exchange (BSE) is an Indian stock exchange located
at Mumbai, Maharashtra, India. Established in 1875 and is considered
to be one of Asias fastest stock exchanges, with a speed of 200
microseconds and one of Indias leading exchange groups and one of
the oldest stock exchanges in South Asia region. More than 5,000
companies are listed on BSE, making it the world's top exchange in
terms of listed members. The companies listed on BSE Ltd. command a
total market capitalization of USD 1.6 trillion as of June 2014.[1] It is also
one of the worlds top twenty stock exchanges by market
capitalization.
The National Stock Exchange of India Ltd. (NSE) (Hindi:
Rashtriya hare Bzar) is an Indian stock exchange located
atMumbai, Maharashtra, India. National Stock Exchange (NSE) was
established in 1992 as a demutualised electronic exchange. NSE
provides a modern, fully automated screen-based trading system, with
over two lakh trading terminals, through which investors in every nook
and corner of India can trade.
The Sensex
It is an "index". What is an index? An index is basically an indicator. It
gives you a general idea about whether most of the stocks have gone
up or most of the stocks have gone down.
The Sensex is an indicator of all the major companies of the BSE.
The Nifty is an indicator of all the major companies of the NSE.
If the Sensex goes up, it means that the prices of the stocks of most of
the major companies on the BSE have gone up. If the Sensex goes
down, this tells you that the stock price of most of the major stocks on
the BSE have gone down.
Just like the Sensex represents the top stocks of the BSE, the Nifty
represents the top stocks of the NSE.
Investment horizon
Primary Market :
Securities are offered to public for subscription
Purpose of Raising capital or fund
Primary Market - Definition:
The primary markets deal with the trading of newly issued securities.
The corporations, governments and companies issue securities like
stocks and bonds when they need to raise capital. The investors can
Secondary Market
Already existing securities are traded
Purpose of capital appreciation
Secondary Market - Definition:
The secondary market is that part of the capital market that deals with
the securities that are already issued in the primary market.
The investors who purchase the newly issued securities in the primary
market sell them in the secondary market. The secondary market
needs to be transparent and highly liquid in nature as it deals with the
already issued securities. In the secondary market, the value of a
particular stock also varies from that of the face value. The resale
value of the securities in the secondary market is dependent on the
fluctuating interest rates.
A letter of credit
It is a document from a bank guaranteeing that a seller will
receive payment in full as long as certain delivery conditions have
been met.
A letter from a bank guaranteeing that a buyer's payment to a seller
will be received on time and for the correct amount. In the event that
the buyer is unable to make payment on the purchase, the bank will be
required to cover the full or remaining amount of the purchase.
Letters of credit are often used in international transactions to ensure
that payment will be received. Due to the nature of international
dealings including factors such as distance, differing laws in each
country and difficulty in knowing each party personally, the use of
letters of credit has become a very important aspect of international
trade. The bank also acts on behalf of the buyer (holder of letter of
credit) by ensuring that the supplier will not be paid until the bank
receives a confirmation that the goods have been shipped.
CRR
or cash reserve ratio is the minimum proportion / percentage of a
bank's deposits to be held in the form of cash. Banks actually don't
hold these as cash with themselves, but deposit the same with RBI /
currency chests, which is considered equivalent to holding cash with
themselves.
When a bank's deposits increase by Rs. 100 crore, and considering the
present cash reserve ratio of 6%, bank will have to hold additional Rs.
6 crore with RBI and will be able to use only Rs. 94 crore for
investments and lending. Therefore, higher the CRR, lower the amount
that banks can lend. Thus RBI can control the liquidity by changing the
CRR i.e. increase CRR to reduce the lendable amount and vice-versa.
SLR
Bond valuation
is the determination of the fair price of a bond. As with any security or
capital investment, the theoretical fair value of a bond is the present
value of the stream of cash flows it is expected to generate. Hence, the
COMMERCIAL PAPER'
An unsecured, short-term debt instrument issued by a corporation,
typically for the financing of accounts receivable, inventories and
meeting short-term liabilities. Maturities on commercial paper rarely
range any longer than 270 days. The debt is usually issued at a
discount, reflecting prevailing market interest rates.
Commercial paper, in the global financial market, is
an unsecured promissory note with a fixed maturity of no more than
270 days.
Commercial paper is a money-market security issued (sold) by
large corporations to obtain funds to meet short-term debt obligations
(for example, payroll), and is backed only by an issuing bank or
corporation's promise to pay the face amount on the maturity date
specified on the note.
Operating leverage
A measurement of the degree to which a firm or project incurs a
combination of fixed and variable costs.
1. A business that makes few sales, with each sale providing a very
high gross margin, is said to be highly leveraged. A business that
makes many sales, with each sale contributing a very slight margin, is
SUNK COST'
A cost that has already been incurred and thus cannot be recovered. A
sunk cost differs from other, future costs that a business may face,
such as inventory costs or R&D expenses, because it has already
happened. Sunk costs are independent of any event that may occur in
the future.
SEMI-VARIABLE COST'
A cost composed of a mixture of fixed and variable components. Costs
are fixed for a set level of production or consumption, becoming
variable after the level is exceeded. The fixed cost element shall be a
part of the cost that needs to be paid irrespective of the level of
activity achieved by the entity. On the other hand the variable
component of the cost is payable proportionate to the level of activity.
The primary market is the part of the capital market that deals with
issuing of new securities. Companies, governments or public sector
institutions can obtain funds through the sale of a new stock or bond
issues through primary market. Primary markets are facilitated by
underwriting groups, which consist of investment banks that will set a
beginning price range for a given security and then oversee its sale
directly to investors.
Earnings per share (EPS) is the monetary value of earnings per
each outstanding share of a company's common stock.
Difference
1. Status
2. Return on
Investment
3. Repayment
4. Right to
Participate
5. Liquidation
6. Security
Share
Debenture
Shares are ownership
securities. The holders of Debentures are creditor ship
shares are the owners of securities. Debenture holders are
a company.
creditors of a company.
Dividend is paid on
shares by the company.
The rate of dividend is
Interest is paid on debentures at a
not fixed.
fixed rate.
Equity shares capital is
not to be returned back The amount of debentures is paid
except in the case of
back to debenture-holders after a
liquidation.
fixed time.
Shareholders have a right
to participate in the
Debenture holders cant participate
affairs of the company.
in the affairs of the company.
Equity shares get the
refund only when all
Debenture holders get payment in
liabilities have been paid priority as compared to all the
off.
creditors.
Shareholders being
owners, have to bear
Debentures are usually secured by
maximum risk.
a fixed or floating charge.
Prospectus
A formal legal document, which is required by and filed with the
Securities and Exchange Commission, that provides details about an
investment offering for sale to the public. A prospectus should contain
the facts that an investor needs to make an informed investment
decision.
A prospectus, in finance, is a disclosure document that describes a
financial security for potential buyers. It commonly provides investors
with material information about mutual funds, stocks, bonds and
other investments, such as a description of the company's
business, financial statements, biographies of officers and directors,
detailed information about their compensation, any litigation that is
taking place, a list of material properties and any other material
information. In the context of an individual securities offering, such as
an initial public offering, a prospectus is distributed
by underwriters or brokerages to potential investors.
4. Voting
Equity shareholders enjoy voting rights. Preference shareholders
do not have the right to participate in the management of the
company.
5. Payment Of Dividend
Payment of dividend to equity share is made only after paying
to preference shares. Preference shares have a preferential right to
receive dividend before equity share
DIVIDEND YIELD'
A financial ratio that shows how much a company pays out
in dividends each year relative to its share price. In the absence of
any capital gains, the dividend yield is the return on investment for a
stock. Dividend yield is calculated as follows:
SWEAT EQUITY'
Contribution to a project or enterprise in the form of effort and toil.
Sweat equity is the ownership interest, or increase in value, that is
created as a direct result of hard work by the owner(s). It is the
preferred mode of building equity for cash-strapped entrepreneurs in
their start-up ventures, since they may be unable to contribute much
financial capital to their enterprise. In the context of real estate, sweat
equity refers to value-enhancing improvements made by homeowners
themselves to their properties. The term is probably derived from the
fact that such equity is considered to be generated from the "sweat of
one's brow."
CASH PROFIT is profit after tax plus depreciation.
PROXY'
1. An agent legally authorized to act on behalf of another
party. Shareholdersnot attending a company's annual meeting may
choose to vote their shares by proxy by allowing someone else to
cast votes on their behalf.
2. Management often encourages shareholders to vote by proxy so
that ownership interests are fully represented even if shareholders
are unable to attend the company's annual meetings in person.
Formula:
BOOK VALUE'
Book value is the accounting value of a firm. It has two main uses:
1. It is the total value of the company's assets that shareholders would
theoretically receive if a company were liquidated.
2. By being compared to the company's market value, the book value
can indicate whether a stock is under- or overpriced.
3. In personal finance, the book value of an investment is the price
paid for a security or debt investment. When a stock is sold, the selling
price less the book value is the capital gain (or loss) from the
investment.
b
Hypothecation is a way of creating a charge against the security of
movable assets, which is much similar to pledge.(example purchasing
a bike from bank loan). The possession and the ownership remains with
the borrower.Since the possession remains with the borrower, he may,
at any time either create a subsequent charge by way of pledge over
same goods or may sell them. In such cases, the rights of the pledgee
usually supercedes the rights of the person in whose favour the goods
were hypothecated, if the fact of existence of such a charge is not
known to the subsequent pledgee..
Pledge
Pledge arises when the lender( pledgee) takes possession of either the
goods or bearer securities for extending a credit facility to the borrower
(pledgor). The pledgee can retain the possession of the goods until the
pledgor repays the entire debt amount and in case of a default, the
pledgee has the right to sell the goods in his possession and adjust its
proceeds towards the amount due.(example Jewel loan)
Mortgage
Mortgage is a type of charge related to immovable property.
Immovable property shall include land, benefits to arise out of land and
things attached to the earth or permanently fastened to anything
attached to the earth. It does not include standing timber, growing
crops or grass.
Differentiating between Mortgage and Reverse Mortgage
In a normal housing loan, where the property being purchased is
mortgaged to the lender, the borrower avails a loan to begin with and
at that point of time, his stake in the property purchased is low. As the
regular EMI is paid on due dates, the loan amount reduces and his
stake in the property increases.
However, in Reverse Mortgage, the position is exactly the reverse.
Under RML, the borrower initially retains a high stake in his property
and receives a regular cash flow. Over time, when the loan amount
increases, his stake in the property reduces.
Hypothecation in the investment markets
When an investor asks a broker to purchase securities on margin,
hypothecation can occur in two senses. The purchased assets can be
hypothecated so that, if the investor fails to keep upcredit repayments,
the broker can sell some of the securities.[1] The broker can also sell the
Operating profit
The profit earned from a firm's normal core business operations. This
value does not include any profit earned from the firm's investments
(such as earnings from firms in which the company has partial interest)
and the effects of interest and taxes.
Operating Profit = Operating Revenue - COGS - Operating Expenses Depreciation & Amortization
PREPAID EXPENSE'
A type of asset that arises on a balance sheet as a result of business
making payments for goods and services to be received in the near
future. While prepaid expenses are initially recorded as assets, their
value is expensed over time as the benefit is received onto the income
statement, because unlike conventional expenses, the business will
receive something of value in the near future.
General Reserve:.
1 General reserve is crated not for a specific purpose. It is created
. to strengthen the financial position of the business
2 It can be utilized for any purpose.
.
3 Dividend can be paid out of it if needed.
.
Specific Reserve:
1 It is created for some specific purpose. For example, debenture
. sinking fund is created for the purpose of repaying loan on
account of debenture.
2 It can be utilized only for the purpose for which it has been
. created. It cannot be utilized for other purposes.
3 Dividend cannot be paid out of it. But on fulfillment of the
. objective for which a fund has been created the fund will no
longer be required, when dividend may be paid out of it.
For example, on repayment of loan on account of debenture the
debenture sinking fund is not required. Then it is transferred to
general reserve fund. In other words the fund money is
distributable as dividend.