FAQs Compendium

Monetrix FAQ Compendium MDI Gurgaon
FAQ Compendium
FREQUENTLY ASKED QUESTIONS
Basic Questions
1. What is the difference between financial accounting and management accounting?
Financial accounting has its focus on the financial statements which are distributed to
stockholders, lenders, financial analysts, and others outside of the company. It covers
generally accepted accounting principles which must be followed when reporting the results
of a corporation's past transactions on its balance sheet, income statement, statement of cash
flows, and statement of changes in stockholders' equity.
Managerial accounting has its focus on providing information within the company so that its
management can operate the company more effectively. Managerial accounting and cost
accounting also provide instructions on computing the cost of products at a manufacturing
enterprise. These costs will then be used in the external financial statements. In addition to
cost systems for manufacturers, it includes topics such as cost behavior, break-even point,
profit planning, operational budgeting, capital budgeting, relevant costs for decision making,
activity based costing, and standard costing.
2. What is the difference between Accounts and Finance?
Accounting: Accountant’s (sometimes called: Controller) primary function is to develop and

provide data measuring the performance of the firm, assessing its financial position, and
paying taxes. The accountant is responsible for preparing financial statements such as the
income statement, balance sheets, and cash flows.
Finance: The financial manager or consultant places primary emphasis on decision making.
It uses the financial statements prepared by accountants to make decisions about the firm’s
financial condition and to advise others about possible losses and profits. In some cases,
finance is more a type of leadership position.
A financial manager has to deal not only with finance, but also with economics, accounting,
statistics, math, and management. For example, people working with stocks and bonds have
to understand and analyse how the underlying companies are performing. How a given
company is going to perform during recession? Should they sell or buy stocks or bonds?
Finance also deals a lot with risk.
Thus, Accounting is the process of creating and managing financial statements which record
the day to day transactions of the business. Finance has a broader scope and is responsible
for initiating transactions to aid in cash, investment and other working capital management.
3. What are Financial Statements of a company and what do they tell about a
company?
Financial Statements of a company are statements, in which the company keeps a formal
record about the company’s position and performance over time. The objective of Financial
Statements is to provide financial information about the reporting entity that is useful to
existing and potential investors, creditors and lenders in making decisions about whether to
invest, give credit or not. There are mainly three types of financial statements which a
company prepares.
1. Income Statement – Income Statement tells us about the performance of the company
over a specific account period. Financial performance is given in terms of revenue and
expense generated through operating and non-operating activities.
2. Balance Sheet – Balance Sheet tells us about the position of the company at a specific
point in time. Balance Sheet consists of Assets, Liabilities and Owner’s Equity. Basic
equation of Balance Sheet: Assets = Liabilities – Owner’s Equity.
3. Cash Flow Statement – Cash Flow Statement tells us the amount of cash inflow and
outflow. Cash Flow Statement tells us how the cash present in the balance sheet changed
from last year to current year.
4. Where is a contract with a customer reported on the balance sheet?
A contract to perform future services for a customer is not reported on the balance sheet of
the company that will be providing the services. For example, if Company Jay and one of its
customers sign a contract in December agreeing that Company Jay will deliver $20,000 of
services beginning in January, the contract is not reported on Company Jay's December 31
balance sheet. (If the customer makes a deposit of $3,000 at the time of signing the contract,
the $3,000 will be recorded by Company Jay in December with a $3,000 debit to Cash and a
$3,000 credit to the liability account Customer Deposits or Unearned Revenues. With no
down payment or advance payment in December, there is no entry recorded.)
The $20,000 contract is not reported as an asset on Company Jay's December 31 balance
sheet. The reason is that Company Jay has not earned any of the contract amount and
therefore does not have a right or a receivable to the $20,000 as of December 31. Similarly,
Company Jay's income statement for December and its December 31 owner's equity cannot
include any earnings associated with the contract.
5. A company buys an asset; walk me through the impact on the 3 financial statements
Purchase of Asset is a transaction done by the company which will impact all the three
statements of the company. Let’s say that the asset is an equipment of $5million.
● In Balance Sheet, cash will go down by $5million; decreasing the asset side of the
balance sheet and at the same time the asset will be recorded as equipment of
$5million which will increase the asset side of the balance sheet by the same amount.
Hence, the balance sheet of the company will be tallied.
● In Income Statement, there will be no impact on the first year of income statement but
after the first year the company will have to charge depreciation expense on the
purchased equipment which the company will have to show it in the Income
Statement of the company.
● Cash Flow Statement, assuming that only cash has been paid by the company to
purchase the equipment. The Cash Flow from Investing will result in the cash outflow
of $5million.
6. What causes a change in the equity section of a balance sheet?
Here is a list of the items that would cause an increase in the total amount of a corporation's
stockholders' equity:
● Positive net earnings or net income reported on the corporation's income statement.
● Some positive other Comprehensive Income items occurred but they are not to be
reported on the income statement.
● Additional shares of stock were issued in exchange for cash or other assets.
● Donated capital was received.
Here is a list of items that could cause a decrease in the total amount of a corporation's
stockholders' equity:
● Negative net earnings or a net loss reported on the corporation's income statement.
● Some negative other Comprehensive Income items occurred but they are not to be
reported the income statement.
● The corporation declared cash dividends.
7. Explain three sources of short-term Finance used by a company
Short-term financing is done by the company to fulfill its current cash needs. Short-term
sources of finance are required to be repaid within 12 months from financing date. Some of
the short-term sources of financing are: Trade Credit, Unsecured Bank Loans, Bank
Overdrafts, Commercial Papers, Secured Short-term loans.
● Trade Credit is an agreement between buyer and a seller of goods. In this case, the
buyer of the goods purchases the goods on a credit i.e. the buyer pays no cash to the
seller at the time of buying the goods, only to pay at a later specified date. Trade
credit is based on mutual trust that the buyer of the goods will pay the amount of
cash after a specified date
● Bank Overdraft is a type of short-term credit which is offered to an individual or a

business entity having a current account which is subject to the bank’s regulation.
In this case, an individual or a business entity can withdraw cash more than what is
present in the account. Interest is charged on the amount of overdraft which is
withdrawn as a credit from the bank.
● Unsecured Bank Loan is a type of credit which banks are ready to give and is
payable within 12 months. The reason why it is called an unsecured bank loan is
that no collateral is required by the individual or a business entity taking this loan.
8. What is the difference between a nominal account and a real account?
The difference between a nominal account and a real account has to do with the balances in
the accounts at the end of the accounting year:
● The balance in a nominal account is closed at the end of the accounting year. As a
result, a nominal account begins each accounting year with a zero balance. Since
the balance does not carry forward to the next accounting year, a nominal account
is also referred to as a temporary account.
● The balance in a real account is not closed at the end of the accounting year.
Instead, a real account begins each accounting year with its balance from the end
of the previous year. Because the end-of-the-year balance is carried forward to the
next accounting year, a real account is also known as a permanent account.
The nominal accounts are almost always the income statement accounts such as the accounts
for recording revenues, expenses, gains, and losses. When the income statement accounts are
closed at the end of the accounting year (perhaps through an income summary account) the
net amount will ultimately end up in a balance sheet equity account such as the proprietor's
capital account or the corporation's retained earnings account. The real accounts are the
balance sheet accounts such as the accounts for recording assets, liabilities, and the owner's
(or stockholders') equity. However, the sole proprietor’s drawing account, which is reported
on the balance sheet during the year, is a temporary account because it is closed directly to
the owner's capital account at the end of the year.
9. What is goodwill? How does it affect net income?
Goodwill refers to the value that a company gained when it acquired another company or
another business. However, such goodwill cannot be assigned to a particular asset of that
business. Goodwill finds place on a company’s balance sheet. When a company buys
another, the value it pays is usually much larger than what the acquired firm is actually
worth. This extra amount which the company pays becomes the intangible asset called
goodwill.
Goodwill does not affect Net Income unless it is impaired (written down) as a part of
Amortizations. This practice spreads the value of goodwill over several years, and is very
similar to how depreciation of physical assets is spread over a number of years. This
goodwill impairment actually reduces the Net Income for the year.
10. How do you generate internal goodwill?
Goodwill is internally generated during the course of the business (brand value/image,
customer relationships and creditor trust etc.). The treatment of this goodwill only changes if
the company is acquired, converting the goodwill from internally-generated to acquired.
Internally generated goodwill is not shown on the balance sheet. The rationale behind this is
that any expenditure incurred does not result in an asset that is an identifiable resource – it is
not separable, nor does it arise from a contractual or other legal rights – or that is controlled
by the entity. In addition, any costs incurred are unlikely to be specifically identifiable as
generating the goodwill.
11. What are the limitations of the balance sheet?
One limitation of the balance sheet is that only the assets acquired in transactions can be
included. Therefore, some of a company's most valuable assets will not be reported on the
balance sheet. For example, assume that a company developed an internet business that now
attracts millions of visitors each day and has $10 million in annual revenues. Since the
internet business was not purchased from another company and its cost to develop was not
significant, the company's balance sheet will include the business's cash, receivables and
some related payables. However, the company's balance sheet will not be reporting the
internet business at anywhere near the $30 million that the company was offered for the
internet business.
Similarly, the immensely talented designers and content writers employed by an internet
business cannot be reported as assets on the company's balance sheet since they were not
acquired (and accountants are not able to compute a precise amount for these human
resources). This is also the case for a company's reputation, its brand names that were
developed through years of effective marketing, its customers' future demand for its unique
services, etc.
12. What is the impact of a share buyback on the financial statements?
On the income statement:

It impacts the EPS and the Cash Flow per Share. Since a share buyback reduces the number
of shares outstanding, the impact would be to increase the share price, keeping other things
like P/E constant.
On the balance sheet:

A share repurchase will reduce the company’s cash holdings, and consequently its total assets
base, by the amount of the cash expended in the buyback. The buyback will simultaneously
also shrink shareholders' equity on the liabilities side by the same amount. As a result,
performance metrics such as return on assets (ROA) and return on equity(ROE) typically
improve subsequent to a share buyback.
On the Cash Flow Statement:

Companies generally specify the amount spent on share repurchases in their quarterly
earnings reports. The amount spent on share buybacks can also be obtained from the
Statement of Cash Flows in the “Financing Activities” section, as well as from the Statement
of Changes in Equity or Statement of Retained Earnings.
13. How do drawings affect the financial statements?
Drawings or withdrawals by a sole proprietorship will affect the company's balance sheet
through the reduction of the asset withdrawn and a reduction in owner's equity. A draw of
cash will also be reported in the financing activities section of the statement of cash flows (if
an asset other than cash is withdrawn, it is reported as supplemental information on the
statement of cash flows). The income statement is not affected by the owner's drawings.
14. What is a reconciliation statement?

A reconciliation statement is a document that begins with a company's own record of an

account balance, adds and subtracts reconciling items in a set of additional columns, and then
uses these adjustments to arrive at the record of the same account held by a third party. The
intent of the reconciliation statement is to provide an independent verification of the veracity
of the balance in the company account, as well as to clarify the differences between the two
versions of the account.
The differences between the two accounts are detailed in the reconciliation statement, which
makes it easier to determine which of the reconciling items may be invalid and in need of
adjustment. Reconciliation statements are an extremely useful tool for both internal and
external auditors. External auditors will likely want to use internally-prepared reconciliation
statements as part of their auditing procedures, since the statements allow them to focus on
reconciling items.
Reconciliation statements are commonly constructed in the following situations:
Bank accounts - The bank reconciliation compares the balances between a company's
version of its cash balance and the bank's version, typically with many reconciling items for
such items as deposits in transit and uncashed cheques
Debt accounts - The debt reconciliation compares the debt amounts outstanding according to
the company and its lender. There can be differences requiring reconciliation when the
company pays the lender, and the lender has not yet recorded the payment in its books.
Accounts receivable - The receivables reconciliation is usually constructed on an informal

basis for individual customers, and compares their version of outstanding receivable balances
to the company's version.
Accounts payable - The payables reconciliation is also usually constructed on an informal

basis by individual supplier, and compares their version of outstanding payable balances to
the company's version.
15. What’s the relationship between net income and cash flow?
When a company reports its cash flow statement using the indirect method, the operating
cash flow starts with the net income which is reported in the income statement. This is then
reconciled for non-cash expenses (ex. - depreciation and amortisation are added back), non-
operating income (ex. - income from investing and financing activities are subtracted) and
balance sheet operating accounts (ex. – increase in accounts receivable; a use of cash; is
subtracted whereas an increase in accounts payable is added. The final value then gives the
net cash flow from operations for the company.
Examples of a few factors which one can look at while analysing net income and cash flow
are:
a) If cash flows from operations are consistently lower than net income, what could this
be an indication of?
The problem is not the diversion of net income from cash flows, rather, the reason for the
diversion needs to be examined. Temporary differences between cash flows and accounting
based profit (net income) are normal. For example, if a company invoices customers, you
would expect revenues to be greater than actual cash flows collected in certain periods.
In addition, since investments like the purchase of PP&E and other assets are depreciated
over time, thereby impacting net income more smoothly than the one-time hit of a large
purchase on the cash flow statement, large deviations in any given period are not necessarily
nefarious.
The problem emerges when the difference is persistent over time. For example, invoiced
customers must at some point pay in cash and so if you don’t see the cash coming in during
the next period, it might be a red flag. Similarly, a major PP&E investment in one period
would certainly explain lower cash flows than net income in that particular period, but in the
subsequent period, you’d expect a swing back, since the net income is still capturing the
depreciation expense from the prior-period purchase but there is no cash flow impact
anymore.
There are many possible explanations for persistent divergences, most of which are not very
good. For example, if a company is aggressively booking revenues from customers that
ultimately don’t pay, you could potentially see several years’ worth of higher revenue than
cash receipts before the jig is up. Similarly, if capital investment made in the past is not
generating sufficient returns, this can be somewhat obfuscated with deprecation assumptions
that don’t accurately capture the value of the investment in net income. A more sinister
explanation is blatant earnings manipulation.
b) Can a company showing increasing operating cash flows relative to net income be in
financial distress?
Yes. As a company enters financial distress, it will hoard cash, not paying vendors, and
collecting aggressively from suppliers. In the meantime, it will reduce capital investments,
and not pay creditors. In such a case, operating cash flows will increase, even though net
income stagnates or falls. However, this increase is not due to any improvement in the
company’s operations.
c) Can a company showing negative cash flows be in great financial health?
Yes. For example: Imagine an aircraft manufacturer secures several key long term contracts
to deliver airplanes to major airliners. Depending on the agreement, cash flows from the
airliners may come in after the company begins massive capital investments to service the
contracts. This would show a poor negative cash flow position, despite an income statement
that captures those expected revenues.
Some other areas where cash flows and net income don’t align are:
● A pre-payment of an expense like insurance would involve more cash-out than what
was expensed.
● Investment in things like new equipment which would involve substantial cash-out
but the equipment can only be expensed in accounting using depreciation (i.e. written
off as an expense proportionally over its years of useful life)
● A loan repayment will impact significantly on your cash-out but only the interest
component of the repayment will be deducted as an expense from the revenue to
determine profits. (The principal component of the loan repayment reduces the
company's liability but does not affect the profit)
16. What is Interest on Capital?
Capitalized interest is the interest added to the cost of a self-constructed, long-term asset. It
involves the interest on debt used to finance the asset’s construction.
In short, there must be debt involved (cash and common stock are not considered). The
interest is added to the cost of the project, instead of being expensed on the current period’s
income statement. This capitalized interest will be part of the asset’s cost (reported on the
balance sheet), and will be part of the asset’s depreciation expense (reported in future income
statements).
17. What is Minority Interest?
A minority interest, which is also referred to as non-controlling interest (NCI), is ownership

of less than 50% of a company's equity by an investor or another company. For accounting
purposes, minority interest is a fractional share of a company amounting to less than 50% of
the voting shares. Minority interest shows up as a noncurrent liability on the balance sheet of
companies with a majority interest in a company, representing the proportion of its
subsidiaries owned by minority shareholders.
18. What is Working Capital?
A measure of both a company's efficiency and its short-term financial health. The working
capital is calculated as:
Working Capital = Current Assets - Current Liabilities
● Positive working capital generally indicates that a company is able to pay off its
short-term liabilities almost immediately. Negative working capital generally
indicates a company is unable to do so.
● A ratio between 1.2 and 2.0 is generally sufficient.
Working Capital Ratio = Current Assets/Current Liabilities
19. What does negative working capital mean?
Negative working capital is when a company's current liabilities exceed its current assets.
This means that the liabilities that need to be paid within one year exceed the current assets
that are monetizable over the same period.
Good scenario: It can arise when a business can sell a product to the customer before it has
had to pay its bill to the vendor. In the meantime, it is effectively using the vendor's money to
grow. As long as the transactions are timed right, the company can pay each bill as it comes
due, maximizing their efficiency.
Bad scenario: If a company faces a lot of bad debts, it can lead to Negative WC. It may be
because of bad selection of customers, credit extension to customers with bad credit records,
excessively aggressive selling approach etc. The value of current assets is more than current
liabilities due to margins added in between. If we are selling at a negative margin, it will take
current assets below the current liabilities.
20. What are some of the different components under Reserves and Surplus?
Some of the components of Reserves and Surplus are:

● Capital reserve which represents unrealised revaluation profit on property, plant and
equipment and intangible assets. This also termed as Revaluation Reserve.
● Debenture Redemption reserve which represents profit set aside for redemption of
debentures.
● Capital redemption reserve which represents utilised reserve for redemption of

preference share capital or buy back of equity shares out of reserve
● Tax reserve which is special purpose reserve created to earn tax benefit. For example,
reserve for shipping business – this is created under section 33AC of the Income Tax
Act. This section requires a shipping company to create special reserve out of profit
to get tax benefit up to 50% of the business profit.
● General Reserve which represent undistributed profit reported in the Statement of

Income (Profit and Loss Account) not transferred to any special reserve.
21. Why might a company choose debt over equity financing?
There are various reasons why a company chooses debt over equity financing:
● Cost of debt is lower than cost of equity because from lender’s/investor’s point of
view debt is less risky than equity. In case a company is liquidated then lenders get
their money first and then equity investors get their money if any money is left over.
Debt is senior to equity which is why debt is repaid first and is less risky.
● Interest on debt financing is tax deductible which further lowers the cost of debt
Lenders don’t get any ownership in the company and hence ownership isn’t diluted.
22. What is a fictitious asset?
Fictitious assets are the expenses incurred by a Corporate which are not charged to P&L
account in the same year. That is why these items are shown on assets side of balance sheet
to be written off to P&L account over a period of 3 to 5 years. These assets have no tangible
existence or realizable value but represent actual cash expenditure and the benefit of such
expenditure spreads over a period; hence such expenses are known as fictitious assets. The
purpose of creating a fictitious asset is to account for expenses that cannot be placed under
any normal account heading.
E.g. Share Issue expenses, Management expenses; expenses incurred in starting a business;
assets having the nature of deferred revenue expenditures like deferred advertisement
expenses, discount on issue of shares or debentures, etc. Intangible assets, like fictitious
assets, have no physical existence. All fictitious assets are intangible but all intangible assets
are not fictitious. E.g. Goodwill, patents, trademarks, copyrights are intangible but not
fictitious.
23. What is Contingent Liability?
Contingent liability is a potential liability/obligation that may be incurred depending on

whether a future event occurs or not. A contingent liability is recorded in company’s
accounts only if the contingency is both probable and the amount involved can be reasonably
estimated. This type of contingent liability is recorded as expense or loss on the income
statement. The likelihood of loss is described as probable, reasonably possible, or remote.
Example-
● A product warranty is a contingent liability that is both probable and can be
estimated.
● An income tax dispute, like in the case of Vodafone’s acquisition of Hutch, saw
Vodafone not making any provision for contingency liability since it did not feel that
tax authorities winning the case was probable.
24. Is a security deposit for a rental agreement recorded in a liability account?
The person paying the security deposit would credit the asset account Cash and would debit
the asset account Security Deposits. The person receiving the security deposit would debit
the asset account Cash and would credit the liability account Security Deposits Returnable.
Let's use an example. Monica pays the landlord $500 as a security deposit as required by the
lease for the apartment she is renting. If she causes no damage, she has a right to the $500 at
the end of the lease. She gave up an asset (Cash of $500) but has another asset: the right to
$500 at the end of the lease. The landlord receives the $500, but has an obligation to return
the security deposit at the end of the lease. The landlord received an asset (Cash of $500) but
has a liability to return the $500 at the end of the lease (unless there are damages).
As the example showed, a security deposit is an asset for one party and the same security
deposit is a liability for the other party.
25. What is a lease?
A lease is usually a written agreement between an owner of property (land, building,

equipment, vehicle, etc.) and a person or business that will use the property for a stated
period of time at a specified series of payments.
The owner of the property is known as the lessor and the person using the property is the
lessee.
Some leases are for short periods of time and there is no intention of transferring ownership
of the asset in exchange for the rent payments. These type of leases are known as operational
lease. The leases which are for longer period of time and the risk associated with the asset are
transferred to the lessee is known as finance lease.
26. What is capital budgeting?
Capital budgeting is a process used by companies for evaluating and ranking potential
expenditures or investments that are significant in amount. The large expenditures could
include the purchase of new equipment, rebuilding existing equipment, purchasing delivery
vehicles, constructing additions to buildings, etc. The large amounts spent for these types of
projects are known as capital expenditures.
Capital budgeting usually involves the calculation of each project's future accounting profit
by period, the cash flow by period, the present value of the cash flows after considering the
time value of money, the number of years it takes for a project's cash flow to pay back the
initial cash investment, an assessment of risk, and other factors.
Capital budgeting is a tool for maximizing a company's future profits since most companies
are able to manage only a limited number of large projects at any one time.
27. What are some of the methods for evaluating capital expenditures?
After budgeting for the required capital expenditures, companies might use the following
techniques for evaluating other capital expenditures.
Payback. This calculates the number of years it will take to recoup the cash spent on a
project. A criticism of payback is that the time value of money is not considered and the cash
flows over the entire life of the project are not considered.
Accounting Rate of Return or Return on Investment. This approach looks at the increase
in accounting profit compared to the increased investment. This approach also ignores the
time value of money.
Internal rate of return. This method does consider the time value of money and looks at the
cash flows over the entire life of the project. The technique computes the rate that will
discount the future cash flows to be equal to the cash outlay for the project.
Net present value. This method discounts the project's future cash flows by a predetermined
rate, such as the targeted or needed rate. If the cash flows discounted by the targeted rate
exceed the cash investment, the project is accepted. That is, the project provides the targeted
return or more.
28. How can a company have a profit but not have cash?
A company can have a profit but not have cash because profit is computed using revenues
and expenses, which are different from the company's cash receipts and cash disbursements.
In other words, there is a difference between revenues and receipts. There is also a difference
between expenses and expenditures.
To illustrate, let's assume that a new company uses the accrual method of accounting. It
provides $10,000 of services to its clients in its first month and the clients are allowed to pay
in 30 days. The company will have $10,000 of revenues in its first month, but the cash will
not be received until the second month. If the company's expenses are $7,000 in the first
month, the company will report a profit of $3,000 but will not have received any cash from
its clients.
Another company might have a profit of $60,000 in its first year, but during its first year it
uses $65,000 of cash to acquire equipment that will be put into service at the beginning of the
second year. This company will have a profit, but will not have the cash.
Other examples where cash is paid out, but the profits are not reduced at the time of the
payment, include prepayments of insurance, payments to increase the inventory of
merchandise on hand, and payments to reduce liabilities.
29. What is a sunk cost?
A sunk cost is a cost that was incurred in the past and cannot be undone. Since most
transactions cannot be undone, most amounts spent in the past can be described as sunk. In
other words, a past or sunk cost will be there regardless of what you decide to do today or in
the future.
To illustrate a sunk cost, let's assume that a company spent $100,000 last year to purchase
and install a machine. Today, a better machine is available for $80,000 and it will reduce
expenses by $50,000 in each of the next 10 years. Now the old machine can be sold for just
$10,000. When deciding whether to purchase the new machine, the $100,000 that was spent
on the old machine is a sunk cost.
Basically, the decision is whether to spend an additional $70,000 today ($80,000 minus
$10,000) in order to save $50,000 each year for 10 years. (Current and future income taxes
will also be relevant.) It may be difficult, but we need to exclude sunk costs from our
decisions.
30. What is the difference between assessed value and appraised value?
Assessed value pertains to the amount that a local or state government has designated for
specific property. This assessed value will be used when a property tax is levied by the
government. For example, a city tax assessor is responsible for determining the assessed
value for every parcel of land and every building within the city. The city government then
establishes a real estate tax rate (or rates) that will be applied to the assessed values. Some
local and state governments will also determine assessed values for personal property. The
assessed value of real or personal property is not necessarily equal to the property's market
value.
Appraised value pertains to the amounts contained in an appraisal report for specific
property. The appraisal report is generally prepared by a professional appraiser who looks at
the property's features including size, type of construction, location, condition, and recent
sales of comparable property in the vicinity. The appraised value is an attempt to determine
the property's market value. The appraisal report for real estate is likely to report the
appraised value of the land separate from the appraised value of the buildings. Hence,
accountants might use the relationship of these values in order to allocate the cost of real
estate into the cost of the land and the cost of the buildings.
Appraised values have relevance because a company's balance sheet will report land and
buildings at the cost when they were acquired. (The balance sheet will also report the
accumulated depreciation of the buildings.)
31. How do you write off a bad account?

There are two ways to write off a bad account receivable. One is the direct write-off method
and the other occurs under the allowance method.
Under the direct write-off method a company writes off a bad account receivable after the
specific account is found to be uncollectible. This write off usually occurs many months
after the account receivable and the credit sale were recorded. The entry to write off the bad
account will consist of 1) a credit to Accounts Receivable in order to remove the amount
that will not be collected, and 2) a debit to Bad Debts Expense to report the amount of the
loss on the company's income statement.
Under the allowance method a company anticipates that some of its credit sales and
accounts receivable will not be collected. In other words, without knowing the specific
accounts that will become uncollectible, the company debits Bad Debts Expense and credits
Allowance for Doubtful Accounts. This Allowance account is a contra receivable account
and it allows the company to report the net amount of the receivables that it expects will be
turning to cash prior to identifying and removing a specific account receivable. When a
specific customer's account does present itself as uncollectible, the customer's account will
be written off by crediting Accounts Receivable and debiting Allowance for Doubtful
Accounts.
In the U.S. the direct write-off method is required for income tax purposes. However, for
financial reporting purposes the allowance method means recognizing the loss (the bad debts
expense) closer to the time of the credit sales. As a result, the allowance method is more in
line with the accountants' concept of conservatism and may result in a better matching of the
bad debt expense with the credit sales.
32. What is the allowance method?
The allowance method is used to calculate the amounts to be reported on a corporation's

financial statements as the result of selling goods and/or providing services on credit.
Under the allowance method, the corporation should record an adjusting entry at the end of
each accounting period for the amount of the losses it anticipates as the result of extending
credit to its customers. The adjustment that increases the amount of the losses is a debit to the
operating expense account Bad Debts Expense and a credit to the contra-asset account
Allowance for Doubtful Accounts. Under this method, the entry to write off a specific
uncollectible account will require a debit to Allowance for Doubtful Accounts and a credit to
Accounts Receivable.
There are two reasons why the allowance method is preferred over the direct write-off
method:
• The income statement will report the bad debts expense earlier
• The balance sheet will report a more realistic net amount of accounts receivable
The allowance method can be applied in one or both of the following ways:
• Focusing on the bad debts expense that is needed on the income statement
• Focusing on the balance needed in Allowance for Doubtful Accounts (which will be
reported on the balance sheet)
33. What is the direct write-off method?
The direct write-off method is one of the two methods normally associated with reporting
accounts receivable and bad debts expense. (The other method is the allowance method.)
Under the direct write-off method, bad debts expense is first reported on a company's income
statement when a customer's account is actually written off. (Often this occurs much later
than the time of the sale.) When the account is written off, the account Bad Debts Expense
will be debited and Accounts Receivable will be credited.
With the direct write-off method, there is no contra-asset account such as Allowance for
Doubtful Accounts. Therefore, the entire balance in Accounts Receivable will be reported as
a current asset on the company's balance sheet. This means that the balance sheet is likely to
report an amount that is greater than the amount that will actually be collected. It can also
result in the Bad Debts Expense being reported on the income statement in the accounting
year following the year of the sale. For these reasons, the accounting profession does not
allow the direct write-off method for financial reporting. Rather, the allowance method is to
be used for the financial statements.
However, a US company must use the direct write-off method for its U.S. income tax return.
Apparently, the Internal Revenue Service does not want a company reducing its taxable
income by anticipating an estimated amount of bad debts expense (which is what occurs
when the allowance method is used).
Depreciation
34. Why do we charge depreciation?

We charge depreciation because most of the long-lived assets used in a business have 1) a
significant cost, and 2) they will be useful only for a limited number of years. The matching
principle (a basic underlying accounting principle) requires that the actual cost of these assets
be allocated to the accounting periods in which the company will benefit from their use.
The depreciation reported on a U.S. corporation's external financial statements is computed

by spreading an asset's cost (less any salvage value) over the asset's service life or useful life.
For example, equipment with a cost of $500,000 and no salvage value at the end of an
assumed useful life of 10 years will likely result in matching $50,000 to each full accounting
year. (The U.S. income tax rules allow accelerating the depreciation amounts, but the total
cannot exceed the asset's cost.)
Examples of the assets that must be depreciated include machinery, equipment, fixtures,
furnishings, buildings, vehicles, etc. These assets are often referred to as fixed assets or plant
assets, and the amounts spent are part of a corporation's capital expenditures. (Note that land
is not depreciated because it is assumed to last indefinitely.)
35. What does Accumulated Depreciation tell us?
Accumulated Depreciation reports the amount of depreciation that has been taken from the
time an asset was acquired until the date of the balance sheet. The cost of an asset minus its
accumulated depreciation is the asset's carry value or book value.
Since depreciation is an allocation of an asset's cost based on the estimated useful life, you
should not assume that the depreciation is an indicator of what's occurring to the asset's
market value. For example, a building in an excellent location may be increasing in value
even though depreciation is taken. The present market value might be three times the original
cost and yet the accumulated depreciation is now equal to the asset's cost—meaning its book
value is $0.
The amount reported in Accumulated Depreciation merely reports the total amount of an
asset's cost that has been sent over to the income statement as Depreciation Expense since the
asset was acquired.
36. Why is depreciation not charged on land?
Depreciation is charged to keep the asset intact with the market value of the asset. Value of
assets will decrease due to the usage and also because of the efflux of time. Because of the
above said reason value of the asset will be reduced every year by way of depreciation. Rate
of depreciation, amount and method will be adopted because of the regulations and
convenience. In case of land the value keeps on increasing and does not decrease with wear
and tear. Also, the number of years in the lifetime of the land cannot be ascertained easily.
Hence we do not provide for depreciation.
37. What are the journal entries which get passed from asset purchasing to asset
retirement?
The journal entries will be at three different times

1. Asset purchase
2. Asset Depreciation (it will be a multiyear process)
3. Asset retirement
Purchase
• Debit the appropriate asset account in a journal entry by the cost of the asset. A
debit increases an asset account. For example, assume you purchased $5,000 of
equipment. Debit the equipment account by $5,000.
• Credit the cash account in the same journal entry by the amount of cash you used
toward the purchase. A credit reduces cash, which is an asset account. In this
example, assume you bought the equipment using $1,000 in cash and a $4,000 loan.
Credit cash by $1,000.
• Credit the notes payable account in the same journal entry by the amount of a loan
used to finance the purchase. Unlike an asset, a liability is increased with a credit.
Continuing the example, credit $4,000 to notes payable.
Depreciation
Suppose depreciation for year 1 is $1000:
• Debit the Depreciation Expense account for $1000
• Credit the Accumulated Depreciation account for $1000
• As expense accounts are temporary, they must be closed at the end of each
accounting period. In this case move the $1000 balance from Depreciation Expense
account into Income summary account
Retirement
• Debit Accumulated depreciation account
• Credit Asset account
• Debit/ Credit: Loss/ Profit on retirement
Inventory
38. Should inventories be reported at their cost or at their selling prices?
Generally, inventories are reported at their cost. A merchant's inventory would be reported at
the merchant's cost to purchase the items. A manufacturer's inventory would be at its cost to
produce the items (the cost of direct materials, direct labor, and manufacturing overhead).
However, if the net realizable value (NRV) of the inventory is less than the cost, the NRV
will usually need to reported on the balance sheet instead of the cost. Net realizable value is
defined as the expected selling price in the ordinary course of business minus any costs of
completion, disposal, and transportation. When the cost of the inventory is written down to
its NRV, the amount of the write down is reported on the income statement. (In a few
industries, such as gold mining and meatpacking, it is accepted practice to report the
inventory at its net realizable value.)
Since the unit cost of items in inventory is likely to be changing (think inflation), the costs
used for inventory reporting will be based on a cost flow assumption. For example, the FIFO
cost flow assumption will result in the inventory being reported at the more recent costs,
since the first costs are assumed to have been the first costs out of inventory. Under the LIFO
cost flow assumption, the inventory will be valued at the older costs, since the more recent
costs are assumed to be the first costs to flow out of inventory.
39. How does an inventory write down affect the financial statements?
A write-down in a company's inventory is recorded by reducing the amount reported as

inventory. In other words, the asset account Inventory is reduced by a credit or a contra
inventory account. This is reported in an account such as Loss or Write-Down of Inventory,
on the income statement. Since the amount of the write-down of inventory reduces net
income, it will also reduce the amount reported as owner's equity. Hence for the balance
sheet and in the accounting equation, the asset inventory is reduced and the owner's or
stockholders' equity is reduced. Since there is no inflow/outflow of cash, the cash flow
statement is unaffected by this write-down.
40. What is the difference between periodic and perpetual inventory systems?
The difference between the periodic and perpetual inventory systems involves the general
ledger account Inventory.
In a periodic system the account Inventory will:

• have a constant balance (the ending balance from the previous period)
• not include the cost of purchases (they are recorded in a Purchases account)
• be adjusted at the end of the accounting period (so the balance reports the costs actually
in inventory)
• require a physical inventory at least once per year (and estimates within the year)
• require a cost flow assumption (FIFO, LIFO, average)
• require a calculation of the cost of goods sold (to be used on the income statement)
In a perpetual system, the account Inventory will:

• be debited when there is a purchase of goods (there is no Purchases account)
• be credited for the cost of the items sold (and the account Cost of Goods Sold will be
debited)
• have its balance continuously or perpetually changing because of the above entries
• require a physical inventory to correct any errors in the Inventory account
• require a cost flow assumption (FIFO, LIFO, average)
It is possible that a company will use the periodic system in its general ledger and use a
different computer system outside of its general ledger to track the flow of goods in and out
of inventory.
41. What accounts for the difference in inventory values between periodic LIFO and
perpetual LIFO?
The difference between periodic LIFO and perpetual LIFO involves the time at which costs
are removed from inventory. Under periodic LIFO, the latest costs are assumed to be
removed from inventory at the end of the year. Under, perpetual LIFO the latest costs are
assumed to be removed from inventory at the time of each sale.
We will illustrate the difference by using the following information. A company's accounting
year is January 1 through December 31 and the company sells only one type of product. In its
beginning inventory are 2 units with a cost of $10 each. The company sells 1 unit on March
1. On April 1, the company purchases 5 units at a cost of $11 each. On September 1, the
company sells 3 units. In summary, the company had 2 units on January 1, purchased 5 units
on April 1, sold 4 units during the year, and has 3 units on hand at December 31.
Under periodic LIFO, the costs of the latest purchases starting with the end of the year are
removed first. Since 4 units were sold during the year, the costs removed from inventory and
charged to the cost of goods sold will be the latest cost of 4 units, which is $11 each. This
means the cost of its December 31 inventory under periodic LIFO will be $31 (1 unit at $11
plus 2 units at $10).
Under perpetual LIFO, the costs of the latest purchases as of the date of each sale are
removed first. On March 1, the latest cost at that time for the 1 unit sold was $10. At the time
of the sales on September 1, the latest costs of the 3 units sold was $11 each. Under perpetual
LIFO its cost of goods sold will be $43 (1 at $10 and 3 at $11), and its inventory will be
reported at a cost of $32 (2 units at $11 and 1 unit at $10).
42. Why does a company debit Purchases instead of Inventory?
Under the periodic inventory system, a company determines its inventory value based on an
estimated or actual physical count of goods multiplied by the unit costs of the items. As a
result, the costs of the goods purchased by the company will be debited to the temporary
account Purchases. Under the periodic inventory system, there will also be temporary
accounts that will be credited for Purchase Returns and Allowances and for Purchase
Discounts.
If a company wants its Inventory account to have a running dollar amount, it will use the
perpetual inventory system. Under the perpetual inventory system, the costs of the goods
purchased are debited to Inventory. The perpetual system also requires that the Inventory
account be credited for the cost of the goods sold, for purchase returns and allowances, and
for purchase discounts.
Ratios Related Questions
43. What is EPS and how is it calculated?
EPS is Earnings per Share of the company. This is calculated for the common stockholders of
the company. As the name suggests, it is the per share earnings of the company. It acts as an
indicator of profitability. Calculation:
EPS = (Net Income – Preferred Dividends) / weighted average number of shares outstanding
during the year
Different types of EPS
There are basically three types of EPS which an analyst can use to calculate the company’s
earnings: Basic EPS, Dilutive EPS and Anti-Dilutive EPS.
● Basic EPS: It is useful for the companies which have simple capital structure.
In other words, it can be used to calculate earnings of the company which has
no convertible securities outstanding like convertible bonds or convertible

preference shares.
● Dilutive EPS: It has a dilutive characteristic attached to it. When a company

has complex capital structure, it is better to calculate Dilutive EPS instead of
Basic EPS. In other words, when a company has convertible securities such as
convertible bonds, convertible preference shares and/or stock options which
after conversion, dilutes the earnings i.e. lower the earnings calculated for
common shareholders of the company.
● Anti-Dilutive EPS: This is the kind of EPS in which the convertible securities
after conversion, increases the earnings for the common shareholders of the
company.
44. What is P/E Ratio and how do you use it?
P/E ratio is the most commonly used valuation metric. It can be calculated either by taking
the ratio of price per share to earnings per share or by taking the ratio of market capitalization
to the net income. Different investors calculate earnings per share in different ways. In
simple words, it tells you how much an investor is willing to pay for Rs 1 of earnings per
year. It is a relative valuation metric and varies from industry to industry.
Generally, earnings per share (EPS) can be calculated for the last 12 months in which case
the P/E ratio is called as P/E (TTM), where TTM refers to trailing twelve months or by
taking the expected EPS of the next 12 months in which case P/E ratio is called as forward
P/E. Some analysts may also use last 6 months EPS and expected 6 months EPS to arrive at
12 months EPS.
Based on these two comparisons:

If P/E of Sun Pharma is greater than its historical average and its peer group’s average P/E,
then Sun Pharma is overvalued.
If P/E of Sun Pharma is less than its historical average and its peer group’s average P/E, then
Sun Pharma is undervalued.
Factors that could contribute to a High P/E multiple include but are not limited to:
• Superior Growth potential of the company
• Stable and Visible profitability of the company
• Superior Corporate Governance practices of a company
• Monopolistic nature of the business and industry leadership
• Efficient business models with efficient utilisation of assets
Factors that could contribute to a Low P/E multiple include but are not limited to:
• Lack of visibility of earnings of a company
• Poor corporate governance practices and lack of management credibility
• Low growth potential or de-growth prospects of the company
While an investor conducts PE analysis and tries to determine if a company is cheap or

expensive, the following questions must be asked:
• Is the PE Ratio of the company similar to its industry peers i.e. compare the stock’s
P/E and industry PE?
• Is the PE Ratio of the company in a range as compared to its own historic PE Ratio
i.e. compare the stock’s P/E and its own historical PE?
• Is the PE Ratio of the company similar to its global peers i.e. stock’s PE in
comparison to global industry peers?
However, before concluding if the stock is undervalued, fairly priced or overvalued one
should always look for the fundamentals of the company. If company has sound
fundamentals e.g. not over leveraged, higher margin, efficient working capital management,
no pending or potential litigation etc. then one should go with P/E valuation else P/E might
not be a good way of analysing the stock.
45. What if 2 companies have same P/E, which company do you think is better?
Moreover, where is PEG ratio used?
P/E ratio alone is not a good way of comparing two companies even if they are in the same
business. Leave alone the same P/E even if the companies have different P/E we can’t say
which one is better based on this information. P/E should be used as a support along with the
fundamental business analysis of the companies. Once we decide that fundamentally both the
companies are at par we look for P/E.
There are two types of investors: One group argues that low P/E is better as it indicates that
the company is undervalued, however, the other group argues it is better to invest in
companies with higher growth potential even if their P/E is high. There is another group of
investors who look into PEG ratio which factors in EPS growth.
PEG Ratio
It is a stock's price-to-earnings ratio divided by the growth rate of its earnings for a specified
time period.
PEG = P/E ratio ÷ Annual EPS Growth
The price/earnings to growth (PEG) ratio is used to determine a stock's value while taking
the company's earnings growth into account, and is considered to provide a more complete
picture than the P/E ratio. While a high P/E ratio may make a stock look like a good buy,
factoring in the company's growth rate to get the stock's PEG ratio can tell a different story.
The lower the PEG ratio, the more the stock may be undervalued given its earnings
performance.
The accuracy of the PEG ratio depends on the inputs used. Using historical growth rates, for
example, may provide an inaccurate PEG ratio if future growth rates are expected to deviate
from historical growth rates. To distinguish between calculation methods using future growth
and historical growth, the terms forward PEG and trailing PEG are sometimes used.
46. Explain the concept of cash conversion cycle.
The cash conversion cycle is a cash flow calculation that attempts to measure the time it
takes a company to convert its investment in inventory and other resource inputs into cash. In
other words, the cash conversion cycle calculation measures how long cash is tied up in
inventory before the inventory is sold and cash is collected from customers.
It is an efficiency ratio aimed at assessing how effectively a company is managing its
working capital. A typical business purchases raw materials (mostly on credit), converts them
to finished products, sell those products (mostly on credit), recovers cash from customers and
reuses the cash to purchase raw materials for further production and so on.
The days for which cash is tied up in receivables is measured by days’ sales outstanding
(DSO) and the number of days it takes to sell inventories is measured by days’ inventories
outstanding (DIO). The sum of these two ratios is the company’s operating cycle. However,
since raw materials consumed in production of inventories is purchased on credit, and hence
paid after the relevant raw materials have been used in production, the actual days for which
cash is tied up in inventories equals days it takes to sell inventories minus days for which the
amount payable against those raw materials remained outstanding, i.e. days payable
outstanding (DPO).
Cash Conversion Cycle = DSO + DIO – DPO
It is an important ratio, particularly for companies that carry significant inventories and have
large receivables, because it highlights how effectively the company is managing its working
capital.
Cash conversion is most useful in conducting trend analysis for companies in the same
industry. Generally, short cash conversion cycle is better because it tells that the company’s
management is selling inventories and recovering cash from those sales as quickly as
possible while at the same time paying the suppliers as late as possible.
47. Explain what a negative cash conversion cycle could mean for a company.
A negative cash cycle is one in which you don’t pay for your inventory or materials until
after you’ve sold the final product associated with them. It means you’re using your working
capital as efficiently as possible and have available cash for other things. Not all companies
can achieve a negative cash cycle due to the nature of their products or consumers. For the
ones that can, good credit with their suppliers is a must. The longer a supplier allows you go
without payment, the easier achieving negative cash cycle will be. The only side of the
equation is collecting payment as soon as possible from your customers. A strict payment
policy helps you achieve that.
PROS
• Indirect source of financing from creditors and thus decrease in the requirement of
arranging short term loans and that will cut cost of capital and push the overall profitability
and gearing of the business.
• More prospects of making investments due to availability of free cash
• Not paying creditors until customers pay.
CONS
• Unsatisfied creditors
• Loss of revenue
• Loss of market share
• Deprive entity from growing in new markets as receivables period is short and payment
period is long. Customers won’t be happy as they do not have facility of reasonable credit
term and creditors won’t trust because of long payment time.
48. Which ratio gives an idea about the pricing power which a company commands?
Gross margin ratio is a profitability ratio that compares the gross margin of a business to the
net sales. This ratio measures how profitable a company sells its inventory or merchandise. In
other words, the gross profit ratio is essentially the percentage markup on merchandise from
its cost. This is the pure profit from the sale of inventory that can go to paying operating
expenses.
High ratios can typically be achieved by two ways. One way is to buy inventory very cheap.
If retailers can get a big purchase discount when they buy their inventory from the
manufacturer or wholesaler, their gross margin will be higher because their costs are down.
The second way retailers can achieve a high ratio is by marking their goods up higher. This
obviously has to be done competitively otherwise goods will be too expensive and customers
will shop elsewhere.
Thus, it can be said that if a producer has a high gross margin, it is probably because of his
ability to charge higher prices.
49. What is cycle counting?
Cycle counting refers to physically counting a portion of the inventory items on many days
throughout the year instead of counting all of the items on a single day near the end of the
year.
For example, cycle counting could mean counting one-twelfth of the inventory items each
month. Therefore, each month one-twelfth of the inventory records would be adjusted so that
they agree to the physical counts.
Another possibility would be to physically count the most important 15% of the inventory
items every month and to cycle count the remaining 85%. Perhaps one-twelfth of the
remaining 85% would be counted every month.
Cycle counting reduces the need for the costly process of shutting down the manufacturing
process in order to count inventory. Cycle counting can also result in more accurate interim
financial statements since inventory is a key part of a company's current assets and the
calculation of its cost of goods sold.
Shares, Stocks and Bonds
50. What are Stock Options?
Stock Options are the options to convert into common shares at a predetermined price. These
options are given to the employees of the company in order to attract them and make them
stay longer. The options are generally provided by the company to its upper management to
align management’s interests with that of its shareholders. Stock Options generally have a
venting period i.e. a waiting period before the employee can actually exercise his or her
option to convert into common shares. A Qualified option is a tax free option which means
that they are not subject to taxability after the conversion. An Unqualified option is a taxable
option which is taxed immediately after conversion and then again, when the employee sells
the stock.
51. What are the different types of Bonds?
A bond is a fixed income security which has a coupon payment attached to it which is paid
by the bond issuer annually or as per the conditions set at the time of issuance.
These are the types of bonds:

● Corporate Bond, which is issued by the corporations.
● Supra-National Bond is issued by super-national entities like IMF and World
Bank.
● Sovereign National Bond is a bond issued by the government of the country.
52. What is a Stock Split and Stock Dividend?
A stock split is when a company splits its stock into 2 or more pieces. For example a 2 for 1
split. A company splits its stock for various reasons. One of the reasons is to make the stock
available for the investors who invest in the stock of the companies which are inexpensive.
The probability of growth for those stocks also increases. Stock Dividend is when the
company distributes additional shares in lieu of cash as dividends.
53. Who is a more senior creditor, a stockholder or a bondholder?
Bondholders are creditors of the company while stockholders are owners of the company.
Hence, the bondholders need to be paid a fixed amount of money as interest irrespective of
whether the company earns a profit or a loss. Shareholders, on the other hand, are paid
dividends which are not fixed except in case of preference shares, but even they are paid after
paying interest to bondholders. Therefore, in the context of repayment, bondholders are
senior to stockholders because their claims on the company are settled first and stockholders
are paid from the residual amount left after making payment to bondholders.
54. How would you choose to buy a particular stock?
Firstly, the investor should sit down and decide his objectives for investing. Is he looking for
short-term capital gains only, or is he looking to stay invested for a longer duration of time
and enjoy both capital gains and dividend returns? Based on his objectives thus chalked out,
the investor can adopt fundamental analysis vs. technical analysis or value investing vs.
growth investing.
Fundamental Analysis refers to the method of evaluating stocks based on the underlying
fundamentals of the company. A holistic view is obtained right from the macroeconomic
factors likely to affect the company and other industry conditions to the financial stability of
the company involved, its management practices, etc. and it is seen if all these factors
indicate whether the company is expected to perform well in the future or not. If the
company is expected to do well in the months coming by, the investor would choose to invest
(go long) in the stock.
Technical Analysis refers to the evaluation of the past trends observed in the stock price and
volumes traded of the company on the indices. Technical analysts use stock charts and other
patterns and trends to come up with suggestions as to how the stock is expected to perform in
the future and would base their investment decisions on their results. Generally, traders or
short-term investors indulge in technical analysis.
The other types of investment decisions are based on Value investing vs. Growth Investing.
Value investors invest in stocks that are mispriced in the market. They believe that if a stock
is under-priced, it is a good buying opportunity and if it is overpriced, the stock should be
sold. They try to reap their rewards by buying stocks that are not performing well because the
companies are going through tough times; they invest in such stocks and stick with them and
ride their prices upward till the companies recover from those difficulties. They go on to sell
them when their price objectives are reached. Growth investors do not value the stocks they
want to invest in. They look for companies performing excellently and which are expected to
continue performing well in the future. They invest on the premise that these outperforming
companies, over time, will outgrow their high-premium valuations. So, it is better to stay
invested in these companies even if short-term capital gains are minimal because the long-
term prospects appear bright.
55. What is treasury stock?
Treasury stock is a corporation's previously issued shares of stock which have been
repurchased from the stockholders and the corporation has not retired the repurchased shares.
The number of shares of treasury stock (or treasury shares) is the difference between the
number of shares issued and the number of shares outstanding. Since the treasury shares
result in fewer shares outstanding, there may be a slight increase in the corporation's earnings
per share.
Treasury Stock is also the title of a general ledger account that will typically have a debit
balance equal to the cost of the repurchased shares being held by the corporation. (Some
corporations use the par value method instead.) The cost of the treasury stock purchased with
cash will reduce the corporation's cash and the amount of its total stockholders' equity.
The shares of treasury stock will not receive dividends, will not have voting rights, and
cannot result in an income statement gain or loss. The shares of treasury stock can be sold,
retired, or could continue to be held as treasury stock.
56. What is the difference between Authorized capital, issued capital, subscribed
capital, called-up capital and paid-up capital? Please explain with numerical
example making it easier that how different types of capital are connected to each
other.
Authorized capital: The amount of capital with which a company is registered with the
registrar of companies (body responsible for registration of companies). It is the maximum
amount of capital which a company can raise through shares i.e. shared capital can be
maximum up to the authorized capital and not beyond. Due to this reason companies are
registered with such authorized capital which is well above their current needs of financing
so that if more is needed in future then it is easily possible. Authorized capital is also called
Registered capital or Nominal capital.
Subscribed capital: The amount of capital (out of authorized capital) for which company
has received applications from the general public who are interested in buying shares. If this
term is too technical to be understood, then subscription is simply an application in which
investors expresses his interest to buy shares in the company. Usually only that much shares
are subscribed which company intends to issue later. But sometimes, if company is in good
shape then more and more people will be interested in buying shares and in this case over-
subscription will be the result. But if company’s financial position is not sound or due to
other factors it may be possible that subscriptions are received for lesser then intended shares
in which case there will be under-subscription.
Issued capital: The amount of capital (out of subscribed capital) which has been issued by
the company to the subscribers and thus are now shareholders.
Called-up capital: In some jurisdictions, company is permitted to ask for only part of the
total issued capital i.e. company will require shareholders to pay only part of the amount of
the shares they hold and not to pay fully. The partial amount (out of issued capital) so asked
by the company from the shareholders out of the total value of shares is called-up capital.
Paid-up capital: The amount of capital (out of called-up capital) against which the company
has received the payments from the shareholders so far.
Example:
ABC Ltd was registered with registrar with a registered capital of Rs. 20,000,000 where each
share is of Rs. 10.
In response to the advertisements made by the company to buy shares in the company
applications have been received for 1,000,000 shares but company actually issued 700,000
shares where company has called for Rs. 8 per share.
All the calls have been met in full except three shareholders who still owe for their 6000
shares in total.
Solution:
Authorized capital = Rs. 20,000,000
Subscribed capital = 1,000,000 x Rs. 10 = Rs. 10,000,000 Issued capital = 700,000 x Rs.10 =
Rs. 7,000,000 Called-up capital = 700,000 x Rs. 8 = Rs. 5,600,000
Paid-up capital = 5,600,000 – (6000 x Rs. 8) = Rs. 5,552,000
57. What is a clean and dirty price of a bond?
Clean price is a price of a coupon bond not including the interest accrued. In other words,
clean price is the present value of the discounted future cash flows of a bond excluding the
interest payments. Dirty price of a bond includes accrued interest in the calculation of bond.
Dirty price of the bond is the present value of the discounted future cash flows of a bond
which include the interest payments made by the issuing entity.
Taxes
58. What are deferred taxes?
It is an asset on a company's balance sheet that may be used to reduce any subsequent
period's income tax expenses. Deferred tax assets can arise due to net loss carryovers, which
are only recorded as assets if it is deemed more likely than not that the asset will be used in
future fiscal periods. It must be determined that there is more than a 50% probability that the
company will have positive accounting income in the next fiscal period before the deferred
tax asset can be applied. If, for example, a company has a deferred tax asset of $25,000 on its
balance sheet, and then the company earns $75,000 in before-tax accounting income,
accounting tax expense will be applied to $50,000 ($75,000 - $25,000), instead of $75,000.
59. What can be an example of Deferred Tax Assets and Deferred Tax liabilities?
Deferred tax assets: An asset that may be used to reduce future time period income tax.
Deferred tax liabilities: This can arise due to tax relief provided in advance which needs to
be paid later on. This may be due to tax depreciation at an accelerated rate relative to
accounting depreciation.
60. What is the meaning of TDS? How is it charged?
Tax Deducted at Source (TDS) is a means of collecting income tax in India, governed under
the Indian Income Tax Act of 1961. It is managed by the Central Board for Direct Taxes
(CBDT) and is part of the Department of Revenue managed by Indian Revenue Service (IRS)
TDS is money deducted from worker income and transferred to the tax authority by the
employer. The National Securities Depository Ltd. (NSDL) modernized the settlement
system in the Indian Capital Market pioneering scriptless settlement. It is now in the process
of establishing a nationwide Tax Information Network (TIN) on behalf of the Income Tax
Department (ITD). This is designed to improve tax administration, simplify filing returns,
reduce compliance costs and bring greater transparency.
Under TDS, the Deductor is a person/company who captures the Tax at the income source.
The deductor is the employer in cases where the payments are salaries. The Deductee is the
person from whom the tax is deducted or accrued. TDS is of different types:
TDS on salary has to be deducted on salary paid to employee by employer if it crosses the tax
limit. And pay to the government on or before due date.
In case of TDS on contractors or profession or others, there is slab that min tax, surcharge,
plus education cess plus higher education cess, it is different and finance minister may
change or keep same or remove in every year budget. Secondly you can deduct the TDS on
bill amount while paying or if advance is paid
Others
61. What is the time value of money?
Time value of money tells us that receiving cash today is more valuable than receiving cash
in the future. The reason is that the cash received today can be invested immediately and will
begin growing in value. For instance, if a company receives $1,000 today and it is invested at
8% per year, the company will have $1,080 after 365 days.
A time value of money of 8% per year also tells us that receiving $1,080 one year from now
is comparable to receiving $1,000 today. With a time, value of money of 8% per year,
accountants will state that receiving $1,080 in one year has a present value of $1,000.
In accounting, a time value of money of 8% means that a company performing services today
in exchange for cash of $1,080 in one year has earned $1,000 of service revenues today. The
$80 difference will become interest income as the company waits 365 days for the money.
The time value of money is important in accounting because of the cost principle and the
revenue recognition principle. However, materiality and cost/benefit allow the accountants to
ignore the time value of money for its routine accounts receivable and accounts payable
having credit terms of 30 or 60 days.
62. How would you explain net present value to a non-finance major?
In very simple terms, the Net Present Value (NPV) tells you the value of all future cash flows
discounted back to today. Present Value is today’s value of an amount of money in the
future. The term ‘Net’ is used for calculating the total of all such future cash flows (both
inflows and outflows).
Before calculating the NPV, a target rate of return (also known as discount rate) is set which
is used to discount the future cash flows in order to arrive at the present value.
Example:
An initial investment on plant and machinery of INR 8,000 is expected to generate cash
inflows of INR 3,000, INR 4,000, INR 5,000 and INR 2,000 at the end of the 1st, 2nd, 3rd
and 4th years respectively. Calculate the Net Present Value of the investment if the discount
rate is 18%.
The INR 8,000 initial investment is a cash outflow in Year 0, so a negative sign will be
appended to it. All the other cash flows in subsequent years are cash inflows.
NPV = -8000 + 3000/1.18 + 4000/(1.18)^2 + 5000/(1.18)^3 + 2000/(1.18)^4
= INR 1,489.842
In general, projects with positive NPVs are selected, and those with negative NPVs are
rejected by companies.
63. What is Internal rate of return(IRR)?
Internal rate of return (IRR) is commonly used as an NPV alternative. Calculations of IRR
rely on the same formula as NPV does, except with slight adjustments. IRR calculations
assume a neutral NPV (a value of zero) and solve for the discount rate. The discount rate of
an investment when NPV is zero is the investment’s IRR, essentially representing the
projected rate of growth for that investment. Because IRR is necessarily annual — it refers to
projected returns on a yearly basis — it allows for the simplified comparison of a wide
variety of types and lengths of investments.
For example, IRR could be used to compare the anticipated profitability of a three-year
investment with that of a 10-year investment because it appears as an annualized figure. If
both have an IRR of 18%, then the investments are in certain respects comparable, in spite of
the difference in duration. Yet, the same is not true for net present value. Unlike IRR, NPV
exists as a single value applying the entirety of a projected investment period. If the
investment period is longer than one year, NPV will not account for the rate of earnings in a
way allowing for easy comparison. Returning to the previous example, the 10-year
investment could have a higher NPV than will the three-year investment, but this is not
necessarily helpful information, as the former is over three times as long as the latter, and
there is a substantial amount of investment opportunity in the seven years' difference between
the two investments.
64. What is DCF?
In accounting, DCF refers to discounted cash flows or to the discounted cash flow techniques
such as net present value or internal rate of return.
DCF is a preferred method for evaluating capital expenditures (and other investments)
because DCF recognizes the time value of money. In other words, it recognizes that receiving
$10,000 of cash today is more valuable than receiving $10,000 of cash in the future.
Similarly, $10,000 cash receipt in Year 10 is less valuable than a $10,000 cash receipt in
Year 7.
The recognition of the time value of money occurs by discounting the related future cash
flows back to the time when cash is invested. (The date that the cash is invested is often
referred to as the "present" or the very beginning of the investment's first year.)
The greater the time value of money, the greater will be the amount of the discount. The
smaller the time value of money, the smaller the amount of the discount. In turn, a larger
discount will mean a smaller present value. A smaller discount will result in a greater present
value.
DCF is also useful for calculating the approximate market value of bonds payable, a product
line, or entire companies.
65. What is hurdle rate?
Hurdle rate is the minimum rate that a company expects to earn when investing in a project.
Hence the hurdle rate is also referred to as the company's required rate of return or target rate.
In order for a project to be accepted, its internal rate of return must equal or exceed the
hurdle rate.
The hurdle rate is also used to discount a project's cash flows in the calculation of net present
value.
The minimum hurdle rate is usually the company's cost of capital (a blend of the cost of debt
and the cost of equity). However, the hurdle rate will be increased for projects with greater
risk and when the company has an abundance of investment opportunities.
66. What is an ordinary annuity?
In accounting, an ordinary annuity refers to a series of identical cash amounts with each
amount occurring at the end of equal time intervals.
An example of an ordinary annuity is the series of semi-annual interest payments that are part
of a bond payable. For instance, a 10-year bond with a maturity amount of $10 million and a
stated interest rate of 6% will require interest payments of $300,000 at the end of each of the
20 six-month time intervals.
Another example of an ordinary annuity is a mortgage loan having a fixed interest rate and a
series of equal monthly payments that will begin 30 days after the loan is granted. Thus a 15-
year mortgage loan will result in an ordinary annuity of 180 equal monthly payments with
the first payment due approximately 30 days after the loan is made.
An ordinary annuity is also known as an annuity in arrears.
67. What does the term arrears mean in accounting?
In accounting, arrears is used in at least two situations. One use involves the past, omitted
dividends on cumulative preferred stock. If a corporation fails to declare the preferred
dividend, those dividends are said to be in arrears. The dividends in arrears must be disclosed
in the notes (footnotes) to the financial statements. (Cumulative preferred stock requires that
any past, omitted dividends must be paid to the preferred stockholders before the common
stockholders will be paid any dividend.)
Another use of the word arrears occurs with annuities. If the recurring amount comes at the
end of each period, the annuity is described as an annuity in arrears or as an ordinary annuity.
A loan repayment schedule is usually an annuity in arrears. For example, you borrow
$10,000 on September 30 and your first monthly payment will be due on October 31, the
second payment will be due on November 30, and so on.
68. What is a difference between Futures Contract and Forwards Contract?
A futures contract is a standardized contract which means that the buyer or seller of the
contract can buy or sell in lot sizes which are already specified by the exchange and is traded
through exchanges. Future markets have clearing houses which manage the market and
therefore, there is no counterparty risk.
Forward contracts are private agreements between two parties to buy and sell an asset at a
specified price in the future. These contracts are OTC (over the counter) contracts i.e. no
exchange is required for trading. These contracts do not have a clearing house and therefore,
the buyer or the seller of the contract is exposed to the counterparty risk.
69. What is an outstanding deposit?
An outstanding deposit refers to a company's receipts (cash, checks from customers, etc.)
which have been recorded by the company, but the amount will appear on its bank statement
at a later date. An outstanding deposit is also known as a deposit in transit.
To illustrate an outstanding deposit, let's assume that on October 31 a company received cash
and checks from customers in the amount of $800. Clearly the company should report the
$800 as part of its cash as of October 31. However, the company did not deposit the $800
into its bank account until after October 31. Since the $800 is not on its bank statement as of
October 31, the $800 is described as an outstanding deposit or deposit in transit as of October
31.
The $800 outstanding deposit is pertinent to the company's bank reconciliation as of October
31. When the company reconciles the bank statement, the outstanding deposit is an addition
to the balance shown on the bank statement as of October 31. (There is no adjustment to the
balance per books since the $800 had been recorded as of October 31.)
70. What is an escrow payment?
An escrow payment is an amount deposited with another party and it is to be released only
for its specified purpose. The following is one example of an escrow payment. A borrower
and lender arrange for the borrower's monthly mortgage payment to include an amount equal
to one-twelfth of the property's annual real estate tax. Assuming the annual tax is $6,000 the
monthly mortgage payment will include an escrow payment of $500. When the lender
receives these monthly escrow payments of $500 each, the lender must hold them in escrow,
or hold the funds in an escrow account. When the annual real estate taxes come due, the
lender pays the real estate taxes by using the money in the borrower's escrow account.
71. What is FCFF and FCFE?
Free cash flow is a measure of cash that is available for discretionary purposes. It is the cash
flow available to the firm once it has covered its capital expenditures. It is a fundamental
measure often used for valuations.
FCFF: Free Cash Flow to the Firm is the cash available to all investors, both equity owners
and debt holders. It is calculated from Net Income as:
FCFF = NI + NCC + [Int. x (1 - tax rate)] - FCInv -WCInv
where:
NI – Net Income
NCC – Non-cash charges
Int – Interest expense
FCInv – Net capital expenditure
WCInv – Net changes in working capital
Interest expense, net of tax, is added back to net income. This is because FCFF is the cash
flow available to both shareholders and debt holders. Since interest is paid to debt holders, it
must be included in FCFE.
It can also be calculated from operating cash flow
FCFF = CFO + [Int. x (1 - tax rate)] – FCInv
FCFE: Free Cash Flow to Equity is the cash flow that would be available for distribution to
common shareholders. It is the value of just the equity claim of the business and is calculated
as:
FCFE = CFO – FCInv + Net Borrowing

Investment Banking Related Questions
1. Functions of an Investment Bank:
IPOs: Investment Banks facilitate public and Private Corporation’s Initial Public Offering
known as IPO (issuing securities in the primary market) by providing underwriting services.
Other services include acting as intermediaries in trading for clients and foreign exchange
management.
Investment management: Investment Bankers also provide advice to investors to purchase,

manage and trade various securities (shares, bonds, etc.) and other assets like real estate,
hedge fund, mutual funds etc. The investment management division of an investment bank is
divided into separate groups, namely, Private Wealth Management and Private Client
Services.
Boutiques: Small investment banking firms providing financial services are called boutiques.
These mainly specialize in trading bonds, advising for mergers and acquisitions, providing
technical analysis etc.
Mergers and Acquisitions: Another major function of the investment banking include
mergers and acquisitions and corporate finance which involve subscribing investors to a
security issuance, coordinating with bidders, or negotiating with a merger target.
Structuring of Derivatives: This has been a relatively recent division which involves highly
technical and numerate employees working on creating complex structured derivative
products which typically offer much greater margins and returns than underlying cash
securities.
Merchant banking: This is the private equity activity of investment banks. Goldman Sachs
Capital Partners and JPMorgan’s One Equity Partners are the current examples
Research: Research is another important function of an Investment bank which reviews
companies and writes reports about their prospects with “buy” or “sell” ratings. Though this
division does not generate direct revenues, the information gathered or produced by them is
used to guide investors and in some cases for Mergers and Acquisitions.
Risk management: It is a continuously ongoing activity which involves analyzing the

market and credit risk that traders are taking onto the balance sheet in conducting their daily
trades, and setting limits on the amount of capital that they are able to trade in order to
prevent ‘bad’ trades having a detrimental effect to a desk overall.
2. Briefly explain leveraged buyout?
A leveraged buyout (LBO) is when a company or investor buys another company using
mostly borrowed money, loans or even bonds to be able to make the purchase. the assets of
the company being acquired are usually used a collateral for those loans.
Sometimes the ratio of debt to equity in an LBO can be 90-10. Any debt percentage higher
than that can lead to bankruptcy.
3. Tell me something about Basel-II and Basel-III implementation in Indian Banks

Basel II?
The RBI announced the implementation of Basel II norms in India for internationally active
banks from March 2008 and for the domestic commercial banks from March 2009. Reserve
Bank of India had formed steering committees involving various bankers to finalise on
approaches to be used by Banks operating in India. Citi was member of one of the
committees.
Basel III:
Basel III Norms are the 3rd edition of the Banking regulations & guidelines designed by the
Basel Committee of Banking supervision established in 2010-11. These guidelines seek to
promote better risk management in banks to ensure their smooth functioning.
Salient features:
Capital Adequacy ratio (CAR) – According to Basel III, Banks need to maintain –
Minimum Tier 1 capital equivalent to 6% of Risk-Weighted assets (out of which Common

equity comprises 4.5%).
Along with that, they need to maintain 2 additional buffers to ensure capital adequacy:
1. A capital conservation buffer of 2.5% - It is mandatory and means that banks need to
maintain a capital buffer (Tier 1 + Tier 2 + Tier 3 Capital) equal to 2.5% of RWA.
2. A countercyclical buffer of 2.5% - It is discretionary. Banks can maintain up to a

maximum of 2.5 % during periods of credit growth while they can lessen it during
periods of downturn and bank losses.
Leverage Ratio – According to Basel III, banks need to maintain a minimum leverage ratio
of 3%. This ensures lesser risk.
Leverage ratio = Tier 1 Capital/Total consolidated assets
Liquidity Requirements –
1. Liquidity coverage Ratio – Banks need to maintain enough liquid assets to cover their
cash outflows for the next month.
2. Net Stable Funding Ratio – To ensure the available amount of stable funding to
exceed the required amount of stable funding over a one-year period of extended
stress.
4. What is your greatest concern about the Investment Banking Industry?
Investment banks are faced with the difficult task of identifying new ways to propel their
returns on equity back to something close to pre-crisis levels. In such an uncertain operating
environment, assessing risk, making the most of existing revenues, and capitalising on new
opportunities have never been more important.
Investment Banks will have to consider these factors in mind for future growth: -
1. Preparing for the new normal macroeconomic environment

2. Pinpointing the core challenges
3. Responding to regulations
4. Driving the client agenda
5. Preparing for the next Horizon by harnessing innovative technologies
5. Do you think investment banking and asset management sectors are strategic
growth markets in India?
The Indian financial markets have strengthened over the last decade, and the opportunity for
corporate and individual investors to gain from the financial markets is huge. A well-
developed financial market is characterized by the presence of strong intermediaries, in the
form of investment banks, brokers, AMCs (Mutual Funds), merchant bankers, etc.
Investment banking in India is witnessing a high growth today. Indian companies are going
global, collaborating with firms all over the world. These collaborations are increasingly
taking the form of M&A deals. M&A is the future for many Indian companies seeking newer
avenues for growth, therefore major investment banks have a presence in India is further
proof of the potential for investment banks in India.
6. What are the drivers for M&A?
Mergers and acquisitions (M&A) refers to the consolidation of companies or assets. M&A
can include a number of different transactions, such as mergers, acquisitions, consolidations,
tender offers, purchase of assets and management acquisitions.
Some of the reasons why companies merge with or acquire other companies include:
Synergy: The most used word in M&A is synergy, which is the idea that by combining
business activities, performance will increase and costs will decrease. Essentially, a business
will attempt to merge with another business that has complementary strengths and
weaknesses.
Diversification / Sharpening Business Focus: These two conflicting goals have been used
to describe thousands of M&A transactions. A company that merges to diversify may acquire
another company in a seemingly unrelated industry in order to reduce the impact of a
particular industry's performance on its profitability. Companies seeking to sharpen focus
often merge with companies that have deeper market penetration in a key area of operations.
Growth: Mergers can give the acquiring company an opportunity to grow market share
without having to really earn it by doing the work themselves - instead, they buy a
competitor's business for a price. Usually, these are called horizontal mergers. For example, a
beer company may choose to buy out a smaller competing brewery, enabling the smaller
company to make more beer and sell more to its brand-loyal customers.
Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of the
distributors, a business can eliminate a level of costs. If a company buys out one of its
suppliers, it is able to save on the margins that the supplier was previously adding to its costs;
this is known as a vertical merger. If a company buys out a distributor, it may be able to ship
its products at a lower cost.
Eliminate Competition: Many M&A deals allow the acquirer to eliminate future
competition and gain a larger market share in its product's market. The downside of this is
that a large premium is usually required to convince the target company's shareholders to
accept the offer. It is not uncommon for the acquiring company's shareholders to sell their
shares and push the price lower in response to the company paying too much for the target
company.
7. What are the synergies and its types?
Synergies are where the buyer gets more value than out of an acquisition than what the
financials would predict.There are basically two types of synergies –
● Revenue synergy: the combined company can cross-sell products to new

customers or up-sell new products to existing customers. Because of the deal it
could be possible to expand in new geographies.
● Cost synergies: the combined company could amalgamate buildings and

administrative staff and can lay off redundant employees. It could also be in a
position to close down redundant stores or locations.
8. Talk about a few of the recent M&As
The year 2018 has started on a positive note, with a flurry of initial public offerings (IPOs) in
March and M&As surpassing the corresponding 2017 January-February numbers. An
interesting point to note is that domestic deals make up more than 75% of the total.
Amazon Pay India to acquire app aggregator Tapzo in digital payments push
Amazon Pay India, Amazon India’s payments arm, has acquired Bengaluru-based app
aggregator Tapzo to ramp up its digital payments business in the country . Amazon Pay India
picked up Tapzo in a cash-and-stock deal valuing the company at $30-40 million, according
to people aware of the development. Tapzo allows users to access over 35 apps, including
Flipkart, Amazon, Uber and Ola. As part of the deal with Amazon, Singla and his team at
Tapzo will join the online retailer.
Sequoia-backed Tapzo has so far raised over $20 million from Sequoia Capital and American
Express Co., among others
Walmart-Flipkart deal
The $16 billion Walmart-Flipkart deal marks a milestone in the world's largest e-commerce
deal ever. The Bentonville, Arkansas-based global retail behemoth signed a definitive
agreement to become the largest shareholder in Flipkart Group. The latest deal puts Walmart
directly on the map of India's growing e-commerce market - estimated to be around over
$200 billion by 2026 - against the likes of the US e-Com player Amazon. Here are top key
takeaways from the deal.
1. MAJORITY STAKE: Walmart will pay $16 billion for an initial stake of 77 per cent in
Flipkart, valuing the e-tailer close to $20 billion. The remainder of the business will be held
by some of Flipkart's existing shareholders, including Flipkart co-founder Binny Bansal,
Tencent Holdings Limited, Tiger Global Management LLC and Microsoft Corp. Walmart's
investment includes $2 billion of new equity funding, which will help Flipkart accelerate
growth in the future.
2. MORE INVESTORS TO JOIN IN: Walmart and Flipkart are also in discussions with
additional potential investors who may join the round, which could result in Walmart's
investment stake moving lower after the transaction is complete. Even so, the company
would retain clear majority ownership. Tencent and Tiger Global will continue on the
Flipkart board, joined by new members from Walmart.
3. AIM TO BECOME PUBLICLY-LISTED: The new Walmart-owned entity's immediate

focus will be on serving customers and growing the business. The company will also aim to
transition into a publicly-listed, majority-owned subsidiary in the future.
4. E-COM TO GROW FOUR TIMES: Walmart expects India's e-commerce market to

grow at four times the rate of overall retail, and with well-known platforms such as Myntra,
Jabong and PhonePe, Flipkart is uniquely positioned to leverage its integrated ecosystem,
said Walmart.
5. BIG 'MAKE IN INDIA' PUSH: Walmart said it supports small business and 'Make in
India' through direct procurement as well as increased opportunities for exports through
global sourcing and e-commerce. The company aims to partner with kirana owners and
members to help modernise retail practices and adopt digital payment technologies.
6. LOCAL OUTSOURCING, BETTER LOGISTICS: The company says it would support

farmers and develop supply chains through local sourcing and improved market access. It
primary focus would also be on reduced food waste by improving waste management
practices and investing in supply chains, especially cold storage.
7. MAJOR PLAYER IN INDIAN MARKET: The Flipkart investment transforms

Walmart's position in a country with more than 1.3 billion people, strong GDP growth, a
growing middle class and significant runway for smartphone, internet and e-commerce
penetration, said the company.
PVR set to acquire SPI cinemas in a cash-cum-stock deal valued at over Rs 850 crore
After years of on-again-off-again negotiations, Ajay Bijli-led India’s leading multiplex chain
PVR Ltd has finally reached an agreement with South India’s largest premium cinema
exhibitor SPI Cinemas to acquire the company at an enterprises valuation of over Rs 850
crore.
Under the terms of the proposed acquisition, PVR would acquire 71.7% stake in SPI
Cinemas from existing shareholders for a total consideration of Rs 633 crore, and will issue
1.6 million new equity shares of PVR, constituting approximately 3.3% of the diluted paid up
equity share capital of the company for the remaining stake. At current share price of Rs
1,317 per share, PVR will issue new shares worth over 210 crore
9. What is in a pitch book?
Pitch book depends on the kind of deal the company is pitching for but the common structure
would include:
● Bank credentials to prove their expertise in completing similar deals before.

● Summary of company’s options
● Appropriate financial models and valuation
● Potential acquisition targets or potential buyers
● Summary and key recommendations
10. Tell me a company you admire/follow and pitch me a stock
You need to structure your answer keeping in mind the following:

● Give the name of the stock you have been following and the reason
● Quickly summarize what the company’s business
● Provide a quick overview of the financials to indicate its size and how
profitable it is. Also if you can provide with specific details on Revenue,
EBITDA multiples, or its P/E multiple
● Provide reasons as to how the stock or their business is more attractive than its
rivals
● You should speak about the trend the stock has had
● You could also talk about the future outlook for the company
11. When buying a company why do private equity firms use leverage?
The private equity firm reduces the amount of equity to the deal by using significant amounts
of leverage (debt) to help finance the purchase price. By doing this, it will increase the
private equity firm’s rate of return substantially when exiting the investment.
12. Define risk-adjusted rate of returns
When looking at an investment you cannot simply look at the return that is projected. If the
profit from investment A is greater than the profit from investment B you may immediately
want to go with investment A. But investment A might have a greater chance of a total loss
than investment B so even though the profit may be larger, it is a lot riskier and therefore not
necessarily a better investment.
The adjusted rate of return is when you not only look at the return that an investment may
give you, but you also measure the risk of that investment. The adjusted rate of return is
usually denoted as a number or rating.
13. What are the benefits of a company getting listed on an exchange?
It is an important step for a company to achieve liquidity

● There are certain investors who would want to invest only in exchange-listed
issuers
● It helps the company establish a recognized value for their stock which in turn
could also help it use stock for acquisitions rather than cash
Banking Questions
1. What does debit memo mean on a bank statement?
A debit memo on a bank statement refers to a deduction from the bank account's balance.
In other words, a debit memo has the same effect as a check written on the bank account.
A bank debit memo could be a charge for interest owed to the bank, a loan payment, a fee
owed for the printing of checks, a fee for the handling of a check that was returned because
of insufficient funds, a transfer of funds from the bank account to another account at the
bank, and so on.
The charge, decrease, or reduction is likely called a debit memo because the checking
account balance is a liability on the bank's books. This is the case because the bank has
your money as one of its assets and it has your account balance as one of its liabilities.
When the bank decreases your account balance, it is reducing its liability. Liabilities are
reduced with a debit entry. That also explains why the bank credits your account when
your account balance is increased.
2. What is a rubber check?
A rubber check is a check that is not paid (or honored) by the bank on which it is drawn. The
reason the check is not paid is the maker's account had insufficient funds or not sufficient
funds (NSF). Instead of the check being paid, it will be returned (or bounced back) through
the banking system. Because the check was bounced back by the bank, the check is described
as a rubber check.
A rubber check also causes bank fees for the maker of the check and for the depositor of the
check. These fees need to be recorded in the general ledger accounts. If the fees are
overlooked initially, they will be adjusting items to the balance per books in the bank
reconciliation.
If a rubber check is not redeposited by the payee, the payee must also reduce its general
ledger cash account for the amount of the check (and also debit another general ledger
account).
3. What is a certificate of deposit?
A certificate of deposit, also referred to as a CD, is a time deposit at a bank, credit union, or
other financial institution. However, the certificate of deposit cannot be withdrawn until an
agreed upon date known as its maturity date. If a withdrawal becomes a necessity, the
financial institution will assess a penalty—usually the loss of interest.
A depositor will earn more interest on a certificate of deposit than the amount earned on a
savings account or money market account. The length of a certificate of deposit could be one
month, three months, six months, one year, 17 months, three years, etc. Generally the longer
the time until maturity, the higher the interest rate.
A CD that matures in less than one year will be reported by the bank as a current liability,
and will be reported as a short-term investment by the depositor (provided the amount is not
restricted by the depositor).
4. What is a restrictive endorsement?
A restrictive endorsement or restricted endorsement places a limitation on the use of a check

or other negotiable financial instrument. The most common restrictive endorsement is the
phrase For Deposit Only written along with the payee's signature on the back of a check.
Other wording for a similar restrictive endorsement might be Pay to the Order of Sample
Bank for deposit to account #xxxx followed by the payee's signature. Many companies
endorse checks by using a rubber stamp containing this restriction.
Using a restrictive endorsement is one of many actions that a company can take in order to
improve the internal control of its assets.
5. What is a blank endorsement?
In the case of a check payable to John Smith (the payee), a blank endorsement would be the
signature of John Smith on the back side of the check without any other words above or
below his signature.
A blank endorsement is considered to be risky because the endorser is not restricting the
check (or other negotiable instrument). The blank endorsement indicates that whoever is in
possession of the endorsed check is considered to be the owner. To avoid such a risk,
businesses and individuals should use restrictive endorsements on the checks they receive.
6. What is a rubber check?
A rubber check is a check that is not paid (or honored) by the bank on which it is drawn. The
reason the check is not paid is the maker's account had insufficient funds or not sufficient
funds (NSF). Instead of the check being paid, it will be returned (or bounced back) through
the banking system. Because the check was bounced back by the bank, the check is described
as a rubber check.
A rubber check also causes bank fees for the maker of the check and for the depositor of the
check. These fees need to be recorded in the general ledger accounts. If the fees are
overlooked initially, they will be adjusting items to the balance per books in the bank
reconciliation.
If a rubber check is not redeposited by the payee, the payee must also reduce its general
ledger cash account for the amount of the check (and also debit another general ledger
account).
7. What do you know about Micro-Finance?
Microfinance is a general term to describe financial services to low-income individuals or to

those who do not have access to typical banking services. Microfinance is also the idea that
low-income individuals are capable of lifting themselves out of poverty if given access to
financial services. While some studies indicate that microfinance can play a role in the battle
against poverty, it is also recognized that is not always the appropriate method, and that it
should never be seen as the only tool for ending poverty.
It is the supply of loans, savings, and other basic financial services to the poor. As these
financial services usually involve small amounts of money - small loans, small savings, etc. -
the term "microfinance" helps to differentiate these services from those which formal banks
provide.
Microfinance impact and outcomes
According to CGAP (the Consultative Group to Assist the Poor), "Comprehensive impact
studies have demonstrated that: Microfinance helps very poor households meet basic needs
and protect against risks; The use of financial services by low-income households is
associated with improvements in household economic welfare and enterprise stability or
growth; By supporting women's economic participation, microfinance helps to empower
women, thus promoting gender-equity and improving household well-being; For almost all
significant impacts, the magnitude of impact is positively related to the length of time that
clients have been in the program."
8. What are the procedures involved in the audit process?
There are mainly two broad categories of audit:

First Party/Internal Audit: is conducted by the organization itself to ensure that the
processes are carried out in a smooth manner.
External Audit: which is again of two types:

● Second Party: is conducted by the other party which is involved with the organization
by a contract e.g. supplier.
● Third party: is conducted by a party which is not involved with the firm in any other
kind of dealing and which cannot have any hidden benefit from the results of the
audit
External auditors are independent audit professionals who audit the financial statements of a
company, legal entity or organization. They express their opinion on the financial statements
of the organization, ensure that there are no misstatements and verify their correctness.
Their primary responsibilities are:

• Identify items that have a reasonable possibility of causing the financial statements
to be misstated
• Design and execute tests to determine whether such misstatements have occurred
• Test the effectiveness of internal control over financial reporting.
The audit planning is done in the following manner:

• Obtaining an understanding of the entity, its environment and its internal control
system
• Assessing the risk of material misstatement in the financial statements
• Designing audit procedures commensurate with the assessed level of risk.
Firstly, efforts have to be directed for understanding the operating environment of the entity
to be audited. Then the items are identified where there is a substantial risk of misstatement.
Lastly, the audit procedures are designed keeping in mind the assessed level of risk. Auditors
consider two key factors in planning and executing audits: materiality and audit risk.
Materiality: Materiality is used to evaluate audit findings and determine whether any
uncorrected errors render financial statements materially inaccurate. Both quantitative and
qualitative measures are used to judge materiality.
Audit Risk: Audit risk is the risk that the auditor may unknowingly fail to modify his
opinion on financial statements that are materially misstated.
The different types of internal audit are:
Financial Audit: The purpose is express opinion on financial condition based on analysis,
comparisons and test of accuracy. Its scope is on the financial records. The expected results
from this audit are opinions on the accuracy and reliability of the financial statements.
Operational Audit: The purpose is to analyse and improve methods of operations and
performance. Its scope is limited to the operational activities of a unit or department. The
expected results from this audit are recommendations to management for the improvement of
operations.
Department Review: A current period analysis of administrative functions, to evaluate the

adequacy of controls, safeguarding of assets, efficient use of resources, compliance with
related laws, regulations and University policy and integrity of financial information.
Management Audit: The purpose is to review and evaluate business and management issues
to enhance profitability. Its scope is on the business support activities of a unit or the entire
organization. The expected results from this audit are to give opinion on strategic issues and
recommendations or solutions.
Compliance Audit: The purpose is to express opinion as to adherence to internal policies

and regulatory rules and requirements and applicable laws. The expected results from this
audit make immediate rectification and compliance thereafter.
IS/IT Audit: The purpose is to audit on the computer systems and the provision and
management of information. Its scope is on the technical reviews on computer systems and
their peripherals. The expected result from this audit is to give recommendations on
computerization and information systems related.
Investigation Audit: The purpose is to audit in delve into the irregularities such as
misappropriation of bank’s assets or reported fraud or allegations. Its scope is in the area
specified to determine modus operandi. The expected results from this audit give conclusion
to findings with recommendations to prevent recurrence.
Integrated Audit: This is a combination of an operational audit, department review, and IS

audit application controls review. This type of review allows for a very comprehensive
examination of a functional operation within the organization.

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Monetrix FAQ Compendium MDI Gurgaon

FREQUENTLY ASKED QUESTIONS

1. What is the difference between financial accounting and management accounting?

2. What is the difference between Accounts and Finance?

Accounting: Accountant’s (sometimes called: Controller) primary function is to develop and

4. Where is a contract with a customer reported on the balance sheet?

6. What causes a change in the equity section of a balance sheet?

7. Explain three sources of short-term Finance used by a company

● Bank Overdraft is a type of short-term credit which is offered to an individual or a

8. What is the difference between a nominal account and a real account?

9. What is goodwill? How does it affect net income?

10. How do you generate internal goodwill?

11. What are the limitations of the balance sheet?

12. What is the impact of a share buyback on the financial statements?

On the income statement:

On the balance sheet:

On the Cash Flow Statement:

13. How do drawings affect the financial statements?

14. What is a reconciliation statement?

A reconciliation statement is a document that begins with a company's own record of an

Reconciliation statements are commonly constructed in the following situations:

Accounts receivable - The receivables reconciliation is usually constructed on an informal

Accounts payable - The payables reconciliation is also usually constructed on an informal

c) Can a company showing negative cash flows be in great financial health?

16. What is Interest on Capital?

17. What is Minority Interest?

A minority interest, which is also referred to as non-controlling interest (NCI), is ownership

18. What is Working Capital?

Working Capital = Current Assets - Current Liabilities

● A ratio between 1.2 and 2.0 is generally sufficient.

Working Capital Ratio = Current Assets/Current Liabilities

19. What does negative working capital mean?

Some of the components of Reserves and Surplus are:

● Capital redemption reserve which represents utilised reserve for redemption of

● General Reserve which represent undistributed profit reported in the Statement of

21. Why might a company choose debt over equity financing?

22. What is a fictitious asset?

23. What is Contingent Liability?

Contingent liability is a potential liability/obligation that may be incurred depending on

24. Is a security deposit for a rental agreement recorded in a liability account?

25. What is a lease?

A lease is usually a written agreement between an owner of property (land, building,

26. What is capital budgeting?

29. What is a sunk cost?

31. How do you write off a bad account?

32. What is the allowance method?

The allowance method is used to calculate the amounts to be reported on a corporation's

33. What is the direct write-off method?

34. Why do we charge depreciation?

The depreciation reported on a U.S. corporation's external financial statements is computed

35. What does Accumulated Depreciation tell us?

36. Why is depreciation not charged on land?

The journal entries will be at three different times

38. Should inventories be reported at their cost or at their selling prices?

A write-down in a company's inventory is recorded by reducing the amount reported as

In a periodic system the account Inventory will:

In a perpetual system, the account Inventory will:

42. Why does a company debit Purchases instead of Inventory?

Ratios Related Questions

43. What is EPS and how is it calculated?

Different types of EPS

no convertible securities outstanding like convertible bonds or convertible

● Dilutive EPS: It has a dilutive characteristic attached to it. When a company