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Questions and Answers
A company decides to invest surplus funds in government bonds with the intention of holding them for 10 years to generate income. Under which asset category would these bonds be classified?
A company decides to invest surplus funds in government bonds with the intention of holding them for 10 years to generate income. Under which asset category would these bonds be classified?
- Miscellaneous Expenditures and Losses
- Fixed Assets
- Current Assets, Loans, and Advances
- Investments (correct)
A manufacturing company has raw materials, finished goods, cash, and accounts receivable. Which asset category do these items collectively fall under?
A manufacturing company has raw materials, finished goods, cash, and accounts receivable. Which asset category do these items collectively fall under?
- Fixed Assets
- Investments
- Current Assets, Loans, and Advances (correct)
- Miscellaneous Expenditures and Losses
What does 'Gross Block' or 'Gross Fixed Asset' represent in the context of fixed assets?
What does 'Gross Block' or 'Gross Fixed Asset' represent in the context of fixed assets?
- The depreciated value of fixed assets.
- The total historical cost of all fixed assets acquired. (correct)
- The total of liabilities related to fixed assets.
- The cost of assets that are currently under construction.
A company is constructing a new factory. The funds used for this project, which is still in progress, would be classified as:
A company is constructing a new factory. The funds used for this project, which is still in progress, would be classified as:
Which of the following best describes 'Net Block'?
Which of the following best describes 'Net Block'?
A company receives electricity services in January but will pay for the services in February. Before payment, where would the unpaid amount be recorded?
A company receives electricity services in January but will pay for the services in February. Before payment, where would the unpaid amount be recorded?
A company anticipates a future expense, such as taxes, but the exact amount is not yet known, although it is likely to occur. How should this anticipated expense be accounted for in the balance sheet?
A company anticipates a future expense, such as taxes, but the exact amount is not yet known, although it is likely to occur. How should this anticipated expense be accounted for in the balance sheet?
What accounting concept is the balance sheet based on?
What accounting concept is the balance sheet based on?
A company retains a portion of its profits after dividends for various purposes. Which balance sheet section reflects these retained profits?
A company retains a portion of its profits after dividends for various purposes. Which balance sheet section reflects these retained profits?
What is a key distinction between equity shareholders and preference shareholders?
What is a key distinction between equity shareholders and preference shareholders?
Which of the following represents the correct order of capital types, from the total amount authorized to the amount actually received by the company?
Which of the following represents the correct order of capital types, from the total amount authorized to the amount actually received by the company?
What characteristic distinguishes a secured loan from an unsecured loan under Loan Funds?
What characteristic distinguishes a secured loan from an unsecured loan under Loan Funds?
A company decides to invest in new equipment. Which of the following accounting concepts does this decision primarily reflect?
A company decides to invest in new equipment. Which of the following accounting concepts does this decision primarily reflect?
If you invest a principal amount (P) at a simple annual interest rate (r), which formula correctly calculates the amount (S) received at the end of one year?
If you invest a principal amount (P) at a simple annual interest rate (r), which formula correctly calculates the amount (S) received at the end of one year?
What does 't' represent in the future value of money formula: $FV = PV (1+r)^t$?
What does 't' represent in the future value of money formula: $FV = PV (1+r)^t$?
A company is deciding whether to invest in Project X, which will return $5,000 in 3 years, or Project Y, which will return $5,000 in 5 years. Assuming the same discount rate for both projects, which project has a higher present value?
A company is deciding whether to invest in Project X, which will return $5,000 in 3 years, or Project Y, which will return $5,000 in 5 years. Assuming the same discount rate for both projects, which project has a higher present value?
What is the primary difference between discrete compounding and continuous compounding?
What is the primary difference between discrete compounding and continuous compounding?
Which of the following formulas represents the present value (PV) of a future sum (FV) to be received after a period 't' with a discount rate 'r' in the case of discrete discounting?
Which of the following formulas represents the present value (PV) of a future sum (FV) to be received after a period 't' with a discount rate 'r' in the case of discrete discounting?
An investor wants to determine the annual savings needed to reach a target amount of $10,000 in 5 years, earning a compound interest rate of 7%. Which time value of money concept is most relevant to this scenario?
An investor wants to determine the annual savings needed to reach a target amount of $10,000 in 5 years, earning a compound interest rate of 7%. Which time value of money concept is most relevant to this scenario?
What is the effect of increasing the interest rate (r) on the present value of a future cash flow, assuming all other variables remain constant?
What is the effect of increasing the interest rate (r) on the present value of a future cash flow, assuming all other variables remain constant?
In the context of time value of money, what does 'annuity' refer to?
In the context of time value of money, what does 'annuity' refer to?
Which scenario would require using the present value of an annuity formula?
Which scenario would require using the present value of an annuity formula?
What is the relationship between the future value (FV) and present value (PV) of a sum of money, given a positive interest rate?
What is the relationship between the future value (FV) and present value (PV) of a sum of money, given a positive interest rate?
In an account form balance sheet, which of the following is a typical classification on the liabilities side?
In an account form balance sheet, which of the following is a typical classification on the liabilities side?
A company has total assets of $1,500,000 and total liabilities of $700,000. According to the basic accounting equation, what is the amount of the company's equity?
A company has total assets of $1,500,000 and total liabilities of $700,000. According to the basic accounting equation, what is the amount of the company's equity?
Which of the following best describes the purpose of a balance sheet?
Which of the following best describes the purpose of a balance sheet?
In the report form of the balance sheet, what is the correct order of presentation?
In the report form of the balance sheet, what is the correct order of presentation?
If a company's current assets are $500,000 and its current liabilities are $300,000, what is the net current assets amount that would be reported on the balance sheet?
If a company's current assets are $500,000 and its current liabilities are $300,000, what is the net current assets amount that would be reported on the balance sheet?
What is the key difference between 'secured loans' and 'unsecured loans' as presented on a balance sheet?
What is the key difference between 'secured loans' and 'unsecured loans' as presented on a balance sheet?
Which of the following accounts would most likely be categorized under 'Miscellaneous expenditure' on a balance sheet?
Which of the following accounts would most likely be categorized under 'Miscellaneous expenditure' on a balance sheet?
How do 'Reserves and Surplus' contribute to a company's financial health, as reflected in the balance sheet?
How do 'Reserves and Surplus' contribute to a company's financial health, as reflected in the balance sheet?
A company's balance sheet shows total assets of $800,000, current liabilities of $200,000, and long-term liabilities of $300,000. What is the company's debt-to-assets ratio?
A company's balance sheet shows total assets of $800,000, current liabilities of $200,000, and long-term liabilities of $300,000. What is the company's debt-to-assets ratio?
Why is it essential for stakeholders to analyze both the balance sheet and the profit and loss account (income statement) together?
Why is it essential for stakeholders to analyze both the balance sheet and the profit and loss account (income statement) together?
What distinguishes compound interest from simple interest?
What distinguishes compound interest from simple interest?
Under which condition should one assume interest is compounded rather than simple?
Under which condition should one assume interest is compounded rather than simple?
If you invest Rs 10,000 for 10 years at a 10% annual compound interest rate, approximately how much more will you have compared to investing at a 5% annual compound interest rate for the same period?
If you invest Rs 10,000 for 10 years at a 10% annual compound interest rate, approximately how much more will you have compared to investing at a 5% annual compound interest rate for the same period?
An investment states an annual interest rate of 10%, but compounds quarterly. How does this affect the actual return compared to a simple 10% annual return?
An investment states an annual interest rate of 10%, but compounds quarterly. How does this affect the actual return compared to a simple 10% annual return?
What is the key benefit of reinvesting income at the same rate of return?
What is the key benefit of reinvesting income at the same rate of return?
Which of the following best describes the relationship between Industry Analysis, Corporate Analysis, and Financial Analysis when evaluating a company?
Which of the following best describes the relationship between Industry Analysis, Corporate Analysis, and Financial Analysis when evaluating a company?
Why is an annual report considered the 'best source of information' regarding a company's financial health?
Why is an annual report considered the 'best source of information' regarding a company's financial health?
Using the compound interest formula $C = P (1+i)^n$, which component represents the total number of conversion periods?
Using the compound interest formula $C = P (1+i)^n$, which component represents the total number of conversion periods?
An investor is comparing two companies. Company A's interest is compounded monthly, and Company B's is compounded semi-annually. Assuming the stated annual interest rate is the same for both, which is more beneficial?
An investor is comparing two companies. Company A's interest is compounded monthly, and Company B's is compounded semi-annually. Assuming the stated annual interest rate is the same for both, which is more beneficial?
An investor has a choice between simple interest and compound interest for a 5-year investment. If both offer the same initial annual interest rate, what is the primary factor that will determine which yields a higher return?
An investor has a choice between simple interest and compound interest for a 5-year investment. If both offer the same initial annual interest rate, what is the primary factor that will determine which yields a higher return?
Consider two investments: Investment A offers a fixed simple interest rate, and Investment B offers a variable compound interest rate that is expected to average the same as Investment A over the investment period. What risk is more prominent in Investment B compared to Investment A?
Consider two investments: Investment A offers a fixed simple interest rate, and Investment B offers a variable compound interest rate that is expected to average the same as Investment A over the investment period. What risk is more prominent in Investment B compared to Investment A?
What is the primary distinction between a company's Balance Sheet and its Profit and Loss (Income) statement?
What is the primary distinction between a company's Balance Sheet and its Profit and Loss (Income) statement?
How does the length of the investment period typically affect the difference between simple and compound interest returns, assuming all other factors are constant?
How does the length of the investment period typically affect the difference between simple and compound interest returns, assuming all other factors are constant?
An analyst notices that a company's annual report shows a significant increase in liabilities. Which area of analysis would immediately be most relevant to understand the implications of this change?
An analyst notices that a company's annual report shows a significant increase in liabilities. Which area of analysis would immediately be most relevant to understand the implications of this change?
A company's annual report indicates a high Earnings Per Share (EPS) but also reveals that a significant portion of revenue comes from a single, unstable market. Which of the following statements is most accurate?
A company's annual report indicates a high Earnings Per Share (EPS) but also reveals that a significant portion of revenue comes from a single, unstable market. Which of the following statements is most accurate?
According to the Companies Act, 1956, what are the acceptable formats for a company's balance sheet?
According to the Companies Act, 1956, what are the acceptable formats for a company's balance sheet?
Flashcards
Simple Interest
Simple Interest
Interest calculated only on the principal amount.
Compound Interest
Compound Interest
Interest calculated on the principal and accumulated interest.
Amount (Compound Interest)
Amount (Compound Interest)
Principal plus all the interest earned.
Compounding
Compounding
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Time Value of Money
Time Value of Money
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Principal
Principal
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Interest Rate
Interest Rate
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Time (in interest calculations)
Time (in interest calculations)
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Effective Annual Return
Effective Annual Return
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Industry Analysis
Industry Analysis
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Corporate Analysis
Corporate Analysis
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Financial Analysis
Financial Analysis
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Annual Report
Annual Report
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Balance Sheet
Balance Sheet
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Profit and Loss (P&L) Account
Profit and Loss (P&L) Account
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Shareholders’ Fund
Shareholders’ Fund
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Equity Shareholders
Equity Shareholders
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Preference Share
Preference Share
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Authorized Capital
Authorized Capital
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Secured Loans
Secured Loans
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Future Value
Future Value
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Future Value (Simple Interest)
Future Value (Simple Interest)
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Future Value Formula (1 year)
Future Value Formula (1 year)
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Future Value: Discrete Compounding
Future Value: Discrete Compounding
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Present Value
Present Value
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Present Value Formula
Present Value Formula
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Annuity
Annuity
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Future Value of an Annuity
Future Value of an Annuity
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Present Value of an Annuity
Present Value of an Annuity
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FV = PVert
FV = PVert
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Profit and Loss Account (Income Statement)
Profit and Loss Account (Income Statement)
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Account Form Balance Sheet
Account Form Balance Sheet
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Report Form Balance Sheet
Report Form Balance Sheet
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Loan Funds
Loan Funds
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Fixed Assets
Fixed Assets
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Current Assets
Current Assets
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Current Liabilities
Current Liabilities
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Provisions
Provisions
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Investments (Company)
Investments (Company)
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Miscellaneous Expenditures and Losses
Miscellaneous Expenditures and Losses
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Gross Block (Fixed Assets)
Gross Block (Fixed Assets)
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Depreciation
Depreciation
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Net Block (Fixed Assets)
Net Block (Fixed Assets)
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Study Notes
Simple Interest
- Is the interest paid only on the principal amount borrowed.
- There is no interest paid on the interest accrued during the term of the loan.
- Three components calculate: Principal, Interest Rate, and Time.
- I = Prt , where I = interest, P = principal, r = interest rate (per year), t = time (in years or fraction of a year).
Compound Interest
- Compound includes interest calculated on interest.
- The interest accrued on a principal amount is added back to the principal sum.
- That sum is then treated as new principal for the next calculation period.
- The interest rate should always be quoted annually.
- Compound interest may involve multiple calculations per year, each with a new principal amount.
- Conversion period refers to how often interest is calculated over the term of the loan or investment.
- C = P (1+i)^n, where C = amount, P = principal, i = interest rate per conversion period, n = total number of conversion periods.
- Compounding refers to the re-investment of income at the same rate of return to constantly grow the principal amount, year after year.
The Time Value of Money
- A rupee now is worth more than a rupee in the future.
- An amount invested today has more value than the same amount invested at a later date because it can utilize the power of compounding.
- It is better to have money now because you are poised to increase the future value of your money by investing and gaining interest over a period of time.
- S = P (r+ 1), where S = amount received at the end of period, P = principal amount and r = interest rate (per year)
How is time value of money computed?
- May be computed for: Future value of a single cash flow, Future value of an annuity, Present value of a single cash flow and Present value of an annuity.
Future Value of a Single Cash Flow
- FV = PV (1+r) compounding at discrete intervals
- FV = PV * e^(rt) continuous compounding
- 'e' is a mathematical function called 'exponential' the value of exponential (e) = 2.7183
Future Value of an Annuity
- An annuity is a stream of equal annual cash flows.
- FVA = CF*(1+r)^(t-1) + CF*(1+r)^(t-2) + ... + CF*(1+r)^1 + CF
- FVA Future Value of an Annuity
- CF Cash Flow
Present Value of a Single Cash Flow
- PV = FV / (1+r)^t Discrete discounting
- PV = FV * e−rt Continuous discounting
Present Value of an Annuity
- PVA = FV [{(1+r)^t − 1 } / {r* (1+r)^t}]
Effective Annual Return
- Effective annual return accounts for intra-year compounding, unlike the stated annual return, eg stated annual return (interest) of an investment is 10%, but the effective annual return mentioned is something more, 10.38%.
Systematic Analysis of a Company
- Industry Analysis: See how the industry to which the company belongs is doing.
- Corporate Analysis: How has the company been doing over the past few years?
- Financial Analysis: Check if the share is a good buy at the current price, financial parameters reviewed are EPS (Earnings Per Share) and P/E ratio, arriving at the estimated future price.
Annual Report
- Formal financial statement issued yearly by a corporate.
- It shows assets, liabilities, revenues, expenses and earnings.
Key Features in an Annual Report
- Director's Report and Chairman's statement
- Management Discussion and Analysis (MD&A)
- Auditors' Report (including Annexure to the Auditors Report)
- Profit and Loss Account
- Balance Sheet
- Notes to accounts attached to the Balance Sheet
Balance Sheet
- This shows the financial position of the company at a particular point in time.
Profit and Loss Account (Income Statement)
- Shows the financial performance of the company/firm over a period of time.
Balance Sheet Sources of Funds
- Shareholders' Fund (Net Worth): fund from the company’s owners.
- Loan Fund: fund borrowed from outsiders.
- Share Capital: is what shareholder contribute when a company starts
Defining Shareholder Terms
- Equity Capital: share capital does not have fixed rate of dividend.
- Preference Capital: preference capital represents contribution of preference shareholders and has fixed rate of dividend.
- Reserves and Surplus: retained profits accumulated over the years, which are shareholders' property. Equity Shareholders: have right to dividend, as declared, and a right to vote in the Annual General Meeting for passing any resolution.
- Preference Share: enjoys preferential right as to: (a) payment of dividend at a fixed rate during the life time of the Company; and (b) the return of capital on winding up of the Company.
- Authorized Capital: is the maximum capital that a company is authorized to raise.
- Issued Capital: is that part of the authorized capital which is offered by the company for being subscribed
- Subscribed Capital: is that part of the issued capital which is subscribed (accepted) by the public.
- Called Up Capital: is a part of subscribed capital which has been called up by the company for payment.
- Paid Up Capital: refers to that part of the called up capital which has been actually paid by the shareholders.
Secured Loans
- Borrowings against the security and safeguards creditors in the event of any default.
Unsecured loans
- Are other short term borrowings without a specific security.
Application of Funds
- Fixed Assets: acquired for long-terms and are used for business operation, but not meant for resale.
- Investments: the financial securities created by investing surplus funds into any non-business related avenues for getting income either for long-term or short-term.
- Current Assets, Loans, and Advances: consists of cash and other resources which can be converted into cash during the business operation.
- Miscellaneous Expenditures and Losses: The miscellaneous expenditures represent certain outlays such as preliminary expenses and pre-operative expenses not written off.
Fixed Asset Subheadings
- Gross Block or "Gross Fixed Asset': the total value of acquiring all fixed assets (even though at different points of time)
- Depreciation: refers to the reduction in value as the worth of an asset falls due to usage
- Net Block: the worth of the fixed assets after providing for depreciation
- Capital-Work in Progress: capital/funds used for a new plant under erection
Current Liabilities and Provisions
- These reduce the burden of day-today expenditure on current assets by deferring some of the payments.
- Net Current Assets or Net Working Capital': Current assets less the current liabilities.
Reviewing a Profit and Loss Account
- Whether there is an overall improvement of sales as well as profits (operating, gross and net) over the similar period (half-yearly or annual) previous year.
- Check 'other income' sources.
- Check for the increase of all expenditure items such as material consumption, and manpower.
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