Shares and Mutual Funds-6

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Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

Earning per share (EPS): It is a financial ratio that gives the information regarding earing available to each equity share. It is very important financial ratio for assessing the state of market price of share. The EPS statement is applicable to the enterprise whose equity shares are listed in stock exchange.

Types of EPS:

1.            Basic EPS ( with normal shares)

2.            Diluted EPS (with normal shares and convertible shares)

EPS Statement                    :          

Sales                                                       ****

Less: variable cost                                 ****

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

                                           Contribution      ****

Less: Fixed cost                                          ****

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

                                                EBIT             *****

Less: Interest                                              *****

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

                                               EBT           ****

Less:  Tax                                                 ****   

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

                                        Earnings           ****

 Less: preference dividend                    ****

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

Earnings available to equity

Share holders (A)                                      *****

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

EPS=A/ No of outstanding Shares

EBIT and Operating Income are same

The higher the EPS, the better is the performance of the company.

Cash Flow Statement: It is a statement which shows inflows (receipts) and outflows (payments) of cash and its equivalents in an enterprise during a specified period of time. According to the revised accounting standard 3, an enterprise prepares a cash flow statement and should present it for each period for which financial statements are presented.

Funds Flow Statement: Fund means the net working capital. Funds flow statement is a statement which lists first all the sources of funds and then all the applications of funds that have taken place in a business enterprise during the particular period of time for which the statement has been prepared. The statement finally shows the net increase or net decrease in the working capital that has taken place over the period of time.

Float: The difference between the available balance and the ledger balance is referred to as the float.

Collection Float: The amount of cheque deposited by the firm in the bank but not cleared.

Payment Float: The amount of cheques issued by the firm but not paid for by the bank.

Operating Cycle: The operating cycle of a firm begins with the acquisition of raw material and ends with the collection of receivables.

Financial Accounting multiple choice questions

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FINANCIAL ACCOUNTING QUESTION PAPER

1.    Accounting principles are generally based on :

1. Subjectivity                                                       2. Convenience in recording

3. Practicability                                                     4. All of the above

2.    Generally the Accounting is :

1. Accountancy                                                     2. Business language

3. Business                                                            4. None of these

3.    Which is the responsibility of Accounting ?

1. Classification                                                     2. Summarizing

3. Recording                                                         4. All of the above

4.    The system of recording transactions based on dual concept is called ?

1. Double accounting system                               2. Single entry system

3. Double entry system                                         4. None of these

5.    Accounting is a ?

1. Science                                                             2. Art

3. Both 1 & 2                                                         4. None of these

6.    According to money measurement concept the following will be recorded in the books of accounts :

1. Value of the building                                         2. Quality control in the business

3. Health of the Employees of the company        4. All of the above

7.    According to the – concept the proprietor is treated as a creditor to the extent of his capital :

1. Cost                                                                   2. Money measurement

3. Entity                                                                 4. Dual Aspect

8.    Cost concept envisages the recording of the following in the books of Accounts ?

1.    Knowledge and will acquired by business executive

2.    Change effected because of some political events

3.    An asset an its cost

4.    None of these

     

9.    Purpose of Accounting is to provide financial information to :

1. Board of directors                                             2. Tax Authorities

3. Investors                                                           4. Share holders

5. All of the above

10.  According to the money measurement concept, the following will be recorded in the books of accounts ?

1.    Extra profits made due introduction of a budgetary control system

2.    Quality control in the business

3.    Commission payable to a salesman

4.    All of the above

11.  Bank Account is a :

1. Nominal Account                                              2. Real Account

3. Personal Account                                             4. None of these

12.  According to going concern concept a business is viewed as having :

1. A limited life                                                      2. An indefinite life

3. A very long life                                                  4. None of these

13.  The convention of conservatism will have the effect of :

1. Overstatement of assets                                  2. Understatement of liabilities

3. understatement of assets

4. Understatement of provisions for bad and doubtful debts

14.  Stock-in-trade does not include :

1. Raw material                                                     2. Items held as fixed assets

3. Finished goods                                                  4. Goods in the process of manufacture

15.  The term fixed assets include :

1. Stock of finished goods                                    2. Bank balance

3. Goodwill                                                            4. Loose tools

16.  The term current assets does not include :

1. stock-in-trade                                                    2. Cash

3. debtors                                                              4. Building

17.  Current liabilities do not include :

1. Unclaimed dividend                                          2. Creditors

3. Capital                                                               4. Bank overdraft

18.  Heavy initial advertisement expense on introducing a new product in the market should be classified as :

1. Capital expenditure                                           2. Deferred revenue expenditure

3. Revenue expenditure                                       4. None of these

19.  A chartered Accountant who renders accounting new product in the market should be classified as :

1. Government Accountant                                  2. Private Accountant

3. Public Accountant                                             4. Internal Accountant

20.  Market value of investments is shown as a foot note to balance sheet according to:

1. consistency concept                                         2. Disclosures concept

3. materiality concept                                           4. Going concern concepts

 

21.  Secret reserves may result by :

1. overvaluation of stock                                      2. Creating general reserve

3. providing excessive depreciation                     4. Under valuation of liabilities

22.  A reserve is a charge against ?

1. Trading Account                                               2. Profit and loss appropriation account

3. Profit and loss account                                     4. None of these

23.  What sort of reserve is a provision ?

1. General reserve                                                2. Capital reserve

3. Specific reserve                                               4. None of these

24.  According to the money measurement concept which of the following will be recorded in the books of account ?

1. Quality control in the business              2. Commission payable to salesman

3. Extra profit made owing to a new system        4. All of the above 

ANSWERS 

1.3       2.1       3.3       4.3       5.3       6.1       7.3       8.3       9.5       10.3     11.3     12.2

13.2     14.2     15.3     16.4     17.4     18.2     19.3     20.2     21.3     22.2     23.3     24.2

Ratio Analysis-2

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4. Profitability Ratios: Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment.

ü    Return on Capital Employed or Return on Investment (ROI): This ratio reveals the earning capacity of the capital employed in the business.

                                                =PBIT /Capital Employed

ü    Return on Proprietors Fund / Earning Ratio:  Earn on Net Worth

                                                =Net Profit (After tax)/Proprietors Fund

ü    Return on Ordinary shareholders Equity or Return on Equity Capital: It expresses the return earned by the equity shareholders on their investment.

=Net Profit after tax and Dividend / Proprietors fund or Paid up equity Capital

ü    Price Earning Ratio: It expresses the relationship between marketprice of share on a company and the earnings per share of that company.

                     =MPS (Market Price per Share) / EPS

ü    Earning Price Ratio/ Earning Yield:

                                                = EPS / MPS

ü    EPS= Net Profit (After tax and Interest) / No. Of Outstanding Shares.

ü    Dividend Yield ratio: It expresses the relationship between dividend earned per share to earnings per share.

 =    Dividend per share (DPS) / Market value per share

ü    Dividend pay-out ratio: It is the ratio of dividend per share to earning per share.

= DPS / EPS

                                   

DPS: It is the amount of the dividend payable to the holder of one equity share. =Dividend paid to ordinary shareholders / No. of    ordinary shares

                                                C.G.S=Sales- G.P

                                                G.P= Sales – C.G.S

                                                G.P.Ratio =G.P/Net sales*100

Net Sales= Gross Sales – Return inward- Cash discount allowed

Net profit ratio=Net Profit/ Net Sales*100

Operating Profit ratio=O.P/Net Sales*100

Interest Coverage Ratio= Net Profit (Before Tax & Interest) / Fixed Interest Classes

            Return on Investment (ROI): It reveals the earning capacity of the capital employed in the business. It is calculated as,

                                          EBIT/Capital employed.

The return on capital employed should be more than the cost of capital employed.

Capital employed =Equity Capital + Preference sharecapital + Reserves + Longterm loans and Debentures - Fictitious Assets – Non Operating Assets

                        

Ratio Analysis

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           A ratio analysis is a mathematical expression. It is the quantitative relation between two. It is the technique of interpretation of financial statements with the help of meaningful ratios. Ratios may be used for comparison in any of the following ways.

ü  Comparison of a firm its own performance in the past.

ü  Comparison of a firm with the another firm in the industry

ü  Comparison of a firm with the industry as a whole

TYPES OF RATIOS

ü  Liquidity ratio

ü  Activity ratio

ü  Leverage ratio

ü  profitability ratio

1. Liquidity ratio: These are ratios which measure the short term financial position of a firm.

                          i. Current ratio: It is also called as working capital ratio. The current ratio measures the ability of the firm to meet its currnt liabilities-current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities.  i.e

                                                    Current assets

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

                                                  Current liabilities

Ideal ratio is 2:1

           

            ii. Quick or Acid test Ratio: It tells about the firm’s liquidity position. It is a fairly stringent measure of liquidity.                            

                                                =Quick assets/Current Liabilities                         

                                                Ideal ratio is 1:1

                        Quick Assets =Current Assets – Stock - Prepaid Expenses 

             iii. Absolute Liquid Ratio:

                                                 A.L.A/C.L

                                    AL assets=Cash + Bank + Marketable Securities.

2. Activity Ratios or Current Assets management or Efficiency Ratios:

These ratios measure the efficiency or effectiveness of the firm in managing its resources or assets

ü    Stock or Inventory Turnover Ratio: It indicates the number of times the stock has turned over into sales in a year. A stock turn over ratio of ‘8’ is considered ideal. A high stock turn over ratio indicates that the stocks are fast moving and get converted into sales quickly.

= Cost of goods Sold/ Avg. Inventory

ü    Debtors Turnover Ratio: It expresses the relationship between debtors and sales.

=Credit Sales /Average Debtors

ü    Creditors Turnover Ratio: It expresses the relationship between creditors and purchases.

=Credit Purchases /Average Creditors

ü    Fixed Assets Turnover Ratio: A high fixed asset turn over ratio indicates better utilization of the firm fixed assets. A ratio of around 5 is considered ideal.

= Net Sales / Fixed Assets

ü    Working Capital Turnover Ratio: A high working capital turn over ratio indicates efficiency utilization of the firm’s funds.

=CGS/Working Capital

=W.C=C.A – C.L.

3. Leverage Ratio: These ratios are mainly calculated to know the long term solvency position of the company.

ü    Debt Equity Ratio: The debt-equity ratio shows the relative contributions of creditors and owners.

                                    = outsiders fund/Share holders fund

Ideal ratios 2:1

ü    Proprietary ratio or Equity ratio: It expresses the relationship between networth and total assets. A high proprietary ratio is indicativeof strong financial position of the business.

                                    =Share holders funds/Total Assets

                                   

                                 = (Equity Capital +Preference capital +Reserves – Fictitious assets) / Total Assets

ü    Fixed Assets to net worth Ratio: This ratio indicates the mode of financing the fixed assets. The ideal ratio is 0.67

                                    =Fixed Assets (After Depreciation.)/Shareholder Fund

Shares and Mutual Funds-5

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Mutual Fund: A mutual fund is a pool of money, collected from investors, and invested according to certain investment objectives.

Asset Management Company (AMC): A company set up under Indian company’s act, 1956 primarily for performing as the investment manager of mutual funds. It makes investment decisions and manages mutual funds in accordance with the scheme objectives, deed of trust and provisions of the investment management agreement.

Back-End Load: A kind of sales charge incurred when investors redeem or sell shares of a fund.

Front-End Load: A kind of sales charge that is paid before any amount gets invested into the mutual fund.

Off Shore Funds: The funds setup abroad to channalise foreign investment in the domestic capital markets.

Under Writer: The organization that acts as the distributor of mutual funds share to broker or dealers and investors.

Registrar: The institution that maintains a registry of shareholders of a fund and their share ownership. Normally the registrar also distributes dividends and provides periodic statements to shareholders.

Trustee: A person or a group of persons having an overall supervisory authority over the fund managers.

Bid (or Redemption) Price: In newspaper listings, the pre-share price that a fund will pay its shareholders when they sell back shares of a fund, usually the same as the net asset value of the fund.

Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

Shares and Mutual Funds-4

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Debentures: Companies raise substantial amount of longterm funds through the issue of debentures. The amount to be raised by way of loan from the public is divided into small units called debentures. Debenture may be defined as written instrument acknowledging a debt issued under the seal of company containing provisions regarding the payment of interest, repayment of principal sum, and charge on the assets of the company etc…

Large Cap / Big Cap:   Companies having a large market capitalization

For example, In US companies with market capitalization between $10 billion and $20 billion, and in the Indian context companies market capitalization of above Rs. 1000 crore are considered large caps.

Mid Cap: Companies having a mid sized market capitalization, for example, In US companies with market capitalization between $2 billion and $10 billion, and in the Indian context companies market capitalization between Rs. 500 crore to Rs. 1000 crore are considered mid caps.

Small Cap: Refers to stocks with a relatively small market capitalization, i.e. lessthan $2 billion in US or lessthan Rs.500 crore in India.

Holding Company: A holding company is one which controls one or more companies either by holding shares in that company or companies are having power to appoint the directors of those company

                                                   The company controlled by holding company is known as the Subsidary Company.

Consolidated Balance Sheet: It is the b/s of the holding company and its subsidiary company taken together.

Partnership act 1932: Partnership means an association between two or more persons who agree to carry the business and to share profits and losses arising from it. 20 members in ordinary trade and 10 in banking business

IPO: First time when a company announces its shares to the public is called as an IPO. (Intial Public Offer)

A Further public offering (FPO): It is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

Rights Issue (RI): It is when a listed company which proposes to issue fresh securities to its shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue.

Preferential Issue: It is an issue of shares or of convertible securities by listed companies to a select group of persons under sec.81 of the Indian companies act, 1956 which is neither a rights issue nor a public issue.This is a faster way for a company to raise equity capital.

Index: An index shows how specified portfolios of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upward or downwards.

Dematerialisation: It is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his depository participant.

Bull and Bear Market: Bull market is where the prices go up and Bear market where the prices come down.

Exchange Rate: It is a rate at which the currencies are bought and sold.

FOREX: The Foreign Exchange Market is the place where currencies are traded. The overall FOREX markets is the largest, most liquid market in the world with an average traded value that exceeds $ 1.9 trillion per day and includes all of the currencies in the world.It is open 24 hours a day, five days a week.