question bank on accounting for managers with answer

7/28/2019 Question Bank on Accounting for Managers With Answer

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Question Bank on Accounting for Manage with answer

.What is accounting?

the art of recording, classifying and summarizing in a significant manner and in

erms of money, transactions and events which are, in part at least of a financial

haracter and interpreting the results there of.

.What are financial items?

The financial items are:

Purchase

Sales

Dividend received

Gain or loss on financial investment

Interest received

Interest gain

Foreign exchange gain or loss etc.

.What is GAAP?

Generally Accepted Accounting Principle (GAAP): A set of conventions, rules, and

rocedures which defines accepted accounting practice, constitute Generally

Accepted Accounting Principles. It represents the fundamental positions that have

enerally agreed upon by accountants and encompasses permissible accounting

ractice.


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Accounting principle means rule of action or conduct, or basis of conduct or

ractices.

.What are the statutory and non-statutory financial statements?

A statutory financial statement is a financial statement of an insurance company

repared in accordance with statutory accounting standards.

A Non-statutory Audit is an audit not required by law, the following might have one:

Clubs, certain charities, Small companies, Sole trade/partnerships

.Explain the relationship between financial items and financial statements.

he financial items are recorded in book keeping in to separate accounts and the

nancial statement is prepared as per the accounts of financial item.

.

Who sets accounting rules in India? Are they different from the rules of other

ountries?

he Institute of Charted Accountant India (ICAI) sets accounting rules in India. And it

s deferent from the rules of other countries because, each countries, has its own set of

ules and regulations for accounting and financial reporting.

.How different is partnership from Joint Stock Company?

artnership:.partnehip is an association of individuals competent to enter into contracts, who agreeo carry on the business in common with a view to earn and share profits.

. Registration is not compulsory

.there is unlimited liability.

. All partner are mutual agents

.number of partner cannot exceed 10.


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oint stock Company:

.this Company is an artificial peon recognized by the law, with a distinctive name, a

ommon seal, a common capital and carrying limited liabilities.

. Registration is compulsory.

. There is limited liability.

. a member is not an agent of another member.

. In case of pvt the member is 50 & in case of public it is unlimited.

.What are the important features of a company form of organization?

The important features of a company form of organizations are:

1) Formation. A company is a corporate body. It enjoys a separate entity of its ownwhich is distinct from its member that constitutes it. It can be set up by following the

rocedure laid down for this purpose under the law. The formation of a company

asses through four stages (i) promotion (ii) incorporation (iii) subscription and (iv)ommencement.

2) Financing. A company limited by shares raises capital by issuing of a prospectus.n the prospectus, general public is invited to purchase the shares of the company. The

ompany, through wide publicity, is able to collect necessary capital.

3) Control. In theory and according to law, the ultimate control of the affair of the

ompany lies with the shareholder. The shareholder exercises their power of control in

he annual general meeting of the company. They review the progress and the prospects

f the company and give approval on important matte of the company.

4) Management. The shareholder, who are the owner of the company, cannot take

art in the management of its affair. They entrust the management to a Board of

Director elected by them. The Board administer the internal affair and the management

f the company. The shareholder are, thus, the risk bearer and the director are the risk

ake.

5) Duration. A company enjoys continuous existence. The existence of the companys not affected by the transfer, the death or insolvency of the member. The member may

ome and the member may go, its continuity is not affected until dissolved by a process

f law.


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6) Double taxation. The company is subject to double taxation. Fit, the tax is levied

n the profits of the company. Secondly, the shareholder pay tax on the dividends

eceived.

7) Irredeemable share capital. Share capital is the capital collected by subscription

o the shares of the company. The capital is non-refundable except in the case ofwinding up and reduction of capital.

8) Winding up. The continuous existence of a company can come to an end only

hrough winding up which is possible through a legal process. A liquidator is appointed

or this purpose that carries the company to its end under a strict legal procedure.

.Who are the use of accounting information?

The user of accounting information isShareholder

Security analyst

Banks

Rating agency

Manage

Employees

Supplier

CustomerGovernment

Regulator

Television

channel and News paper

0.What are the contents of the annual report of a joint stock company?

The contents of the annual report of a joint stock company are:

Accountingpolicies

Balance sheet

Cash flow statement

Contents: non-audited information
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Profit and loss account

Notes to the financial statements

Chair peons statement

Director' Report

Operating and financial review

Other features

Auditor report

1.What do you mean by perpetual succession of a company?

n company law, perpetual succession is the continuation of a corporation's or other

rganization's existence despite the death, bankruptcy, insanity, change in membershipr an exit from the business of any owner or member, or any transfer of stock, etc.

2.What is a foreign company?

A foreign company means a company incorporated outside Indiabut having a place of

usiness in India [Sec. 591 (1)]. Within 30 days of the establishment of the business in

ndia,

3.

roperty of a company is not the property of the shareholder. Comment

Shareholder are the proprietor of the company. The word shareholder means who

ave owned share of a particular company and gain certain rights and liabilities over

hat company. Generally the main goal of a shareholder is to gain profit because

veryone knows that man and woman in business are interested in one thing: money,

nd will do anything that has to be done to make money. But it is a traditional view,

hings are changed and company is the property of a shareholder is now an exploded

myth. The new concept according to the new socio economic thinking is that, company

s not property of shareholder; it is a social institution having duties and responsibilities

owards the community. I support that shareholder are the owner of the company, and

s an owner of the company there goal shouldnt be only profit maximization. Besideshis shareholder also should concentrate about their duties towards the society and
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ther interest groups. This essay starts with the discussion about the shareholder

wnership and their general goal.

4.

What are the interim financial reports?

A public financial report covering a period of less than one year. An interim statement

s used to convey the performance of a company before the end of the year. Unlike

nnual statements, interim statements do not have to be audited. Interim statements

ncrease communication between companies and the public, and provide investor with

p-to-date information between annual reporting periods.

5.Distinguish between a public limited company and a private limited company.

ublic companies - Ownership rights (Shares) are traded on the stock exchange.

Anyone can have part ownership of the company i.e. BT, Microsoft. Their accounts

eed to be audited and are of public information

rivate company - Ownership is usually just a few people. These are commonly

maller businesses. Their shares are not traded on the stock exchange. Their accounts

ont need to be audited, and their financial statements are private6.

Explain the concept of limited liability.

A type of liability that does not exceed the amount invested in a partnership or limited

ability company. The limited liability feature is one of the biggest advantages of

nvesting in publicly listed companies. While a shareholder can participate wholly in

he growth of a company, his or her liability is restricted to the amount of the

nvestment in the company, even if it subsequently goes bankrupt and racks up millionsr billions in liabilities.


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7.Write a brief note on the accounting policies.

is a set of rules, concepts, conventions and Procedures which have been accepted by

ccountants over a period of time for accounting practices.8.

What are accounting standards?

he following are the mandatory Accounting Standards (AS) as on July 1, 2012 as

sted on the site of The Institute of Chartered Accountants of India (ICAI) -

AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies and Events Occurring after the Balance Sheet Date

AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting

olicies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

AS 8 Accounting for Research and Development (AS-8 is no longer in force since it

was merged with AS-26)

AS 9 Revenue Recognition

AS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments
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AS 14 Accounting for Amalgamations

AS 15 Employee Benefits (revised 2005)

AS 16 Borrowing Costs

AS 17 Segment Reporting

AS 18 Related Party Disclosures

AS 19 Leases

AS 20 Earnings Per Share

AS 21 Consolidated Financial Statements

AS 22 Accounting for Taxes on Income.

AS 23 Accounting for Investments in Associates in Consolidated Financial

tatements

AS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint Ventures

AS 28 Impairment of Assets

AS 29 Provisions, Contingent` Liabilities and Contingent Assets

AS 30 Financial Instruments: Recognition and Measurement and Limited Revisions

o AS 2, AS 11 revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29

AS 31, Financial Instruments: Presentation


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AS 32, Financial Instruments: Disclosures, and limited revision to Accounting

tandard (AS) 19, Leases

9.Distinguish between financial accounting and management accounting

FINANCIAL

ACCOUNTING

MANAGEMENT

ACCOUNTING

PRIMARY USE External( Investor,

governmentauthorities, creditor)

Internal(Manage of

business, employees)

PURPOSE OF INFORMATION Help investor,

creditor, and other

make investment,

credit, and other

decisions

Help manage plan

and control business

operations

TIMELINES Delayed or historical Current and future

oriented

RESTRICTIONS GAAP FASB AND

SEC

GAAP does not

apply, but

information should

be restricted to

strategic and

operational needs

NATURE OF INFORMATION Objective, auditable,

reliable, consistent

and precise

More subjective and

udgmental, valid,

relevant and accurateSCOPE Highly aggregated

information about the

overall organization

Disaggregated

information to

support local

decisions

BEHAVIOURAL IMPLICATIONS Concern about Concern about how


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adequacy of

disclosure

reports will affect

employees behavior

FEATURES Must be accurate and

timely Compulsory

under company law Isan end in itself

Usually approximate

but relevant and

flexible Except forfew companies, it is

not mandatory Is a

mean to the end

SEGMENTS

OF ORGANISATION

It is primarily

concerned with

reporting for the

company as a whole.

Segment reporting is

the primary

emphasis.

0.Distinguish between public sector companies and public limited companies.

A public limited company is a corporate entity that openly sells its shares on the stock

xchange and has share holder ranging from one to infinity (1-infinity).Its headed by

fficials who are elected every end of the financial year at the Annual General

Meeting. A Public Sector Undertaking is a corporation in the public sector in India,

where management control of the company rests with the Government; it can be

Central Government or the State Governments. Below given is a partial list of Public

ector Undertakings of the Government of India.

1.Explain the important features of public limited companies.

he features of public limited companies are

There is limited liability for the shareholder.

The business has separate legal entity. There is continuity even if any of the

hareholders die.

These businesses can raise large capital sum as there is no limit to the number of

hareholder.


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The shares of the business are freely transferable providing more liquidity to its

hareholder.

22.

Who manages a Joint Stock Company?

he company is managed on behalf of the shareholder by a Board of Director, electedt an Annual General Meeting. The shareholder also vote to accept or reject an Annual

Report and audited set of accounts. Individual shareholder can sometimes stand for

irectorships within the company, should a vacancy occur, but this is uncommon.

3.Write a brief note on the separation of management from the ownership of a

ompany.

eparation of ownership and management in cooperate governance involves placing the

management of the firm under the responsibility of professionals who are not its ownerOwner of a company may include shareholder, director, government entities, other

orporations and the initial founder. In corporate governance these owner are

ometimes different from those running the company to allow skilled manage to

onduct the complicated business of running a large company.

4.Who takes the profits of a Joint Stock Company?

hare holder take the profits of a Joint Stock Company.

5.Why companies prepare the financial statements?

he companies are preparing the financial statements because:

To find out the financial performance (profit or loss) during an accounting period.

To show financial position or health of a business.

To provide reliable information about the flow of cash during an accounting period.

To reveal the changes in fund.

To provide other information relevant to the needs of use.

6.What are the different statutory financial statements?

he different financial statements are:

Balance sheet

Profit & loss Account

Cash flow statement etc.


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7.Examine the relationship between balance sheet, income statement, and cash flow

tatement.

ncome

tatement

ash Flow

tatement

alance

heet

00,000 75,000 125,000

The income statement shows revenue of 500,000.

The cash flow statement shows the cash received from customer is 375,000.

The balance sheet shows under assets the difference, i.e. accounts receivables is

25,000.

The income statement = cash flow statement + balance sheet. In the example above:

00,000 = 375,000 + 125,000

8.Distinguish between cash from operations and profit.

he difference between EBITDA and OCF would then reflect how the entity finances

s net working capital in the short term. OCF is not a measure of free cash flow and the

ffect of investment activities would need to be considered to arrive at the free cash

ow of the entity.9.

Distinguish between PAT and dividend.

Earnings after Tax orProfit after Tax equals sales revenue after deducting all

xpenses, including taxes (unless some distinction about the treatment of extraordinary

xpenses is made). In the US, the term Net Income is commonly used. Income before

xtraordinary expenses represents the same but before adjusting for extraordinary

ems.

Dividend is the part of the PATarnings after Tax (or Net Profit after Tax) minus

ayable dividends becomes Retained Earnings.


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0.What is the relevance of audit report?

The auditor's report is a formal opinion, or disclaimer thereof, issued by either

n internal auditor or an independent external auditor as a result of an internal or

xternal audit or evaluation performed on a legal entity or subdivision thereof (calledn "audited"). The report is subsequently provided to a "user" (such as an individual, a

roup of peons, a company, a government, or even the general public, among other) as

n assurance service in order for the user to make decisions based on the results of the

udit.

1.Who appoints the auditor?

Member (share holder) are appoints the auditor at an annual general meeting,

2.What items are included in the notes to the financial statements?Balance sheet

Profit & loss Account

Cash flow statement etc.

3.Where do you find the description of a companys accounting policies?

inancial statement

4.

Explain the accounting equation.

shows the relationship between the economic resources of a business and the claims

gainst those resources. At any given time, the following relationship holds:

Economic resources = Claims

Economic resources are assets. The claims consist of creditor claims or liabilities,nd owner claims or equity. So the accounting equation now is: Assets= Liabilities +

Equity

5.What are the three major sources of finance?

Overdraft financing.

hareholder and director funds.

rade Credit.

actoring and invoicing discounting.


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Hire purchase and leasing.

Bank loans.

6.What is the relationship between the accounting equation and the balance sheet?

he balance sheet shows the position of assets, liabilities and equity.he accounting equation shows

Asset= liabilities + Equity

7.Define cash from operating activities.

An accounting item indicating the cash a company brings in from ongoing, regular

usiness activities. Cash flow from operating activities does not include long-term

apital or investment costs. It can be calculated as:

Cash Flow from Operating Activities = EBIT + DepreciationTaxes

8.What are the components of cash from financing activities?

Proceeds from borrowings (both short-term and long-term)

Cash received from owner usually on issuance of stock

Repayments of borrowings

Repayments to owner

9.What are the components of cash from investment activities?Cash payments to acquire or construct long-term fixed assets such as plant and

machinery, vehicles, equipment, etc.

Cash receipts from sale of PPE and intangible assets such as buildings, copyrights,

tc.

Cash payments to purchase bonds or shares of other companies (subsidiaries,

ssociates and joint ventures).

Cash receipts from sale of bonds and shares of other companies.Cash payments in the form of loans and advances and receipt related to payback of

uch loans and receivables, etc.


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0.Classify the following financial transactions/items into cash flows from financing,

nvestment, operating activities:Sold goods on credit. operating

Collection from customer operatingBad debt operating

Sale of shares for cash Financing

Interest received Investing

Interest paid Investing

Dividend received Investing

Dividend paid Financing

Purchased goods for cash operating

Depreciation Investing1.

Briefly explain the basic assumptions for preparing the financial statements.

According to the Framework of IAS/IF, the underlying assumptions for the preparation

f financial statements are:

Accrual basis the financial statements are prepared under the accrual basis. According

o accrual basis of accounting, the effects of transactions and other events are

ecognized when they occur and not when the cash is received or paid. In other wordshe transactions are recorded in the books of accounts when they occur and not when

he cash is received or paid. It is opposite to cash basis of accounting.

2.Examine the effect of inventory valuation on the profit and cash flows.

he different methods of inventory valuation will affect the cash flow, the actual or

ssumed association of inventory unit costs with goods sold or in stocknot goods

ow, the actual movement of goods. Therefore, gross profits will vary among theifferent methods.


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3.Examine the importance of the accrual concept.

The effects of transactions and events are recognized when they occur (and not when

ash is received or paid), and they are recorded in the financial statements

Accrual basis the financial statements are prepared under the accrual basis. According

o accrual basis of accounting, the effects of transactions and other events are

ecognized when they occur and not when the cash is received or paid. In other words,

he transactions are recorded in the books of accounts when they occur and not when

he cash is received or paid.

4.Explain the difference between accrual concept and matching concept.

Accrual Concept: It recognizes income when it is earned not when it is collectedMatching Concept: Revenues of a period are matched with expenses to ascertain

rofit or loss.

5.Why is the matching concept central to the determination of profit?

Matching concept central to the determination of profit because the revenues of a

eriod are matched with expenses to ascertain profit or loss.

6.Explain the importance of dual aspect concept in understanding the balance sheet.n this system, every business transaction is having a twofold effect of benefits giving

nd benefits receiving aspects. The recording is made on the basis of both these

spects. Double Entry is an accounting system that records the effects of transactions

nd other events in at least two accounts with equal debits and credits.

7.Distinguish between expenses and payments.

xpenses are expenses. Money can reduce & the word can use little bit amounts. We

hould not get any assets, liability.

ayments:- it means we can get some assets, liabilities against the payments. We can

oss revenue but the same cost or more asset we should get against payments.


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8.Distinguish between incomes and receipts.

Receipt is the money that you receive and you might have to return it on a later stage.

urther the receipt can be on sale of goods, or business receipts out of which the profit

hall be your income. If salaried, the salary is your income for the purpose of taxalculations.

All receipts need not be income. But all incomes will be receipts.

9.Name three receipts which are not incomes.

Receipt from customer against credit sale

Loan receipt

Receipt cash from share holder against issue of share capital

0.Name three payments which are not expenses.

Dividend payment

ayment of loan

ayment to

1.Name three financial items which are shown in the income statement but may not

esult in any cash outflow.

DepreciationBad debt

Outstanding expenses

2.Explain the impact of issue of shares at a discount on the accounting equation.

Asset= liabilities + Equity

When share issued +cash at asset site= +Equity

3.Examine the impact of buy-back of shares on the accounting equation.

he repurchase of outstanding shares (repurchase) by a company in order to reduce the

umber of shares on the market. Companies will buy back shares either to increase the

alue of shares still available (reducing supply), or to eliminate any threats by

hareholder who may be looking for a controlling stake.

The equity and cash at asset site will increases.


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4.What is capital employed and owners fund?

Capital employed is usually presented as total assets less current liabilities, or fixed

ssets plus working capital also called owner fund.

5.Explain the difference between stock dividend and cash dividend.

tock dividend- A dividend payment made in the form of additional shares, rather than

cash payout. Also known as a scrip dividend."ash dividend- Money paid to stockholder, normally out of the corporation's current

arnings or accumulated profits.

6.Explain the difference between bonus shares and rights shares.

Bonus share- An offer of free additional shares to existing shareholde. A company

may decide to distribute further shares as an alternative to increasing the dividend

ayout.

Right share- Right shares are the shares which are offered by the company to the

xisting shareholder. Simply stated the existing shareholder have a right to subscribe

or the shares which are offered by the company after initial allotment until somepecial right is reserved for any other peon by special resolution in this respect.

7.Explain different methods of presenting balance sheet.

Horizontal

Vertical

8.What is an account?A record of financial transactions for an asset or individual, such as at

bank, brokerage, credit card company or retail store.


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9.Briefly explain the debits and credit.

Debits-An accounting entry which results in either an increase in assets or

ecrease in liabilities.

Credit- An accounting entry which results in either an Decrease in assets orncrease in liabilities. or opposite of debit.

0.How is an account balanced?

he account on left side of this equation has a normal balance of debit. The accounts on

ght side of this equation have a normal balance of credit. The normal balance of all

ther accounts is derived from their relationship with these three accounts.

Normal balance of common accounts:

Asset: Debit

Liability: Credit

Owner's Equity: Credit

Revenue: Credit

Expense: Debit

Retained Earnings: Credit

Dividend: Debit1.

What is credit balance?

n a margin account, the amount of funds deposited in the customer's account following

he successful execution of a short sale order. The credit balance amount includes both

he proceeds of the short sale itself and the specified margin amount the customer is

equired to deposit under Regulation T.

2.

What is debit balance?

The debit balance is the amounts of funds the customer must put into his or her margin

ccount, following the successful execution of a security purchase order, in order to

roperly settle the transaction.


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3.What are real accounts?

Asset, liability, reserves, and capital accounts that appear on a balance sheet

he balances of real accounts are not cancelled out at the end of an accountingeriod but are carried over to the next period. Also called permanent accounts.

4.What are the nominal accounts?

Revenue or expense account that is a subdivision of the owner' equity account, and

which is closed to a zero balance at the end of each accounting period. It starts with a

ero balance at the beginning of a new accounting period, accumulates balances during

he period, and returns to zero at the yearend by means of closing entries

Nominal accounts are income statement accounts and are also called 'temporary

ccounts' in contrast to balance sheet (asset, liability, and owner' equity) accounts

which are called 'permanent accounts' or 'real accounts.

5.What is the relevance of trial balance?

A trial balance should show the debit and credit balances in all accounts and should

dd to zero.

Maintaining a trial balance allows you to immediately check the balances of all ofour accounts and can help you to find some error in your entries.

Trial balance will be "out of balance" (i.e. not add to zero) if you make one of the

ollowing error:

f you accidently forget to book one side of an entry;

f both sides of the entry are not booked at the same amount;

f you accidently book the part of the entry as debit when it should be credit or vice

ersa.

6.Explain the process of preparing trial balance.

After posting all transactions from an accounting period, accountants prepare a trial

alance to verify that the total of all accounts with debit balances equals the total of all

ccounts with credit balances. The trial balance lists every open general ledger account

y account number and provides separate debit and credit columns for entering account

alances.


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7.Classify the following items into real, personal, and nominal accounts:

Bad debt Nominal

Discount received Nominal

Interest paid Nominal

Dividend received Nominal

Share capital Nominal

Bonds Personal

Capital Personal

8.Classify the following items into balance sheet and income statement accounts:

Outstanding Salary Balance sheet, Income statement

Discount received Income statement

Interest received Income statement

Dividend received Income statement

Share capital Balance sheet

Bonds issued Balance sheet

Cash Balance sheet

Rent Income statement

Depreciation Income statement

9.What is positing?

he process of transferring entries from a journal of original entry to a ledger book.

0.Explain the difference between journalizing and posting.

When you journalize you are recording transactions in a journal.

A journal is a chronological record of transactions and is the fit place that transactions

re recorded. It is often referred to as a book of original entry. Each entry records the

ate, the accounts affected and their reference number, an explanation of the

ransaction, and the debit/credit effect on the accounts named. Information from the

ournal is later posted to each account.


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eriodically, usually at the end of the day, you transfer the debits and credits from the

ournal entries by posting to the affected accounts.

1.Distinguish between ledger and journal.

The journal and the ledger are the most important books of the double entry system of

ccounting. Following are the points of difference between these two types of books:

The journal is the book of fit entry (original entry); the ledger is the book of second

ntry. It is the goal where all the entries in the journal find their ultimate destination.

The journal is the book of chronological record; the ledger is the book for the

nalytical record.

The journal, as a book of source entry, ordinarily has greater weight as legal evidencehan the ledger.

The unit of classification of data within the journal is the transaction; the unit of

lassification of data within the ledger is the account.

The process of recording in the journal is called journalizing; the process of recording

n the ledger is called posting.

2.What is income?ncome is the consumption and savings opportunity gained by an entity within a

pecified timeframe, which is generally expressed in monetary terms. However, for

ouseholds and individuals, "income is the sum of all the wages, salaries, profits,

nterests payments, rents and other forms of earnings received. in a given period of

me.

3.How is income different from profit?

ncome = Money you make (with or without taking out expenses)

rofit = Money earned after subtraction of expenses.

4.When is income recognized in the income statement?

Bottom line" is the net income that is calculated after subtracting the expenses from

evenue. Since this forms the last line of the income statement, it is informally called


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bottom line." It is important to investor as it represents the profit for the year

ttributable to the shareholder.

5.What are expenses?

An expense is a cost that is "paid" or "remitted", usually in exchange for something of

alue. Something that seems to cost a great deal is "expensive". For a tenant, rent is an

xpense. For students or parents, tuition is an expense. Buying food, clothing, furniture

r automobile, paid salaries is often referred to as an expense.

6.What is an income statement?

A financial statement that measures a company's financial performance over a specific

ccounting period. Financial performance is assessed by giving a summary of how the

usiness incurred its revenues and expenses through both operating and non-operating

ctivities. It also shows the net profit or loss incurred over a specific accounting period,

ypically over a fiscal quarter or year.

7.Explain some of the important items of an income statement.

Net Sales (sales or revenue): These all refer to the value of a company's sales of goodsnd services to its customer. Even though a company's "bottom line" (its net income)

ets most of the attention from investor, the "top line" is where the revenue or income

rocess begins. Also, in the long run, profit margins on a companys existing productsend to eventually reach a maximum that is difficult on which to improve. Thus,

ompanies typically can grow no faster than their revenues.

Cost of Sales(cost of goods (or products) sold (COGS), and cost of services): For a

manufacturer, cost of sales is the expense incurred for raw materials, labor and

manufacturing overhead used in the production of its goods. While it may be statedeparately, depreciation expense belongs in the cost of sales. For wholesale and retaile,

he cost of sales is essentially the purchase cost of merchandise used for resale. For

ervice-related businesses, cost of sales represents the cost of services rendered or cost

f revenues.


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Gross Profit(Gross income or gross margin): A company's gross profit does more than

imply represent the difference between net sales and the cost of sales. Gross profit

rovides the resources to cover all of the company are other expenses. Obviously, the

reater and more stable a company's gross margin, the greater potential there is for

ositive bottom line (net income) results.elling, General and Administrative Expenses: Often referred to as SG&A, this

ccount comprises a company's operational expenses. Financial analysts generally

ssume that management exercises a great deal of control over this expense category.

he trend of SG&A expenses, as a percentage of sales, is watched closely to detect

igns, both positive and negative, of managerial efficiency.

Operating Income: Deducting SG&A from a company's gross profit produces

perating income. This figure represents a company's earnings from its normal

perations before any so-called non-operating income and/or costs such as interestxpense, taxes and special items. Income at the operating level, which is viewed as

more reliable, is often used by financial analysts rather than net income as a measure of

rofitability.

Interest Expense: This item reflects the costs of a company's borrowings.

ometimes companies record a net figure here for interest expense and interest

ncome from invested funds.

Pretax Income: Another carefully watched indicator of profitability, earnings

arnered before the income tax expense is an important step in the income statement.

Numerous and drive techniques are available to companies to avoid and/or minimize

axes that affect their reported income. Because these actions are not part of a

ompany's business operations, analysts may choose to use pretax income as a more

ccurate measure of corporate profitability.

ncome Taxes: As stated, the income tax amount has not actually been paid - it is an

stimate, or an account that has been created to cover what a company expects to pay.

pecial Items or Extraordinary Expenses: A variety of events can occasion charges

gainst income. They are commonly identified as restructuring charges, unusual or

onrecurring items and discontinued operations. These write-offs are supposed to bene-time events. Investor need to take these special items into account when making

nter-annual profit comparisons because they can distort evaluations.

Net Income (net profit or net earnings): This is the bottom line, which is the most

ommonly used indicator of a company's profitability. Of course, if expenses exceed

ncome, this account caption will read as a net loss. After the payment of preferred


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ividends, if any, net income becomes part of a company's equity position as retained

arnings. Supplemental data is also presented for net income on the basis of shares

utstanding (basic) and the potential convention of stock options, warrants etc

diluted).

Comprehensive Income: The concept of comprehensive income, which is relativelyew (1998), takes into consideration the effect of such items as foreign currency

ranslations adjustments, minimum pension liability adjustments and unrealized

ains/losses on certain investments in debt and equity. The investment community

ontinues to focus on the net income figure. The aforementioned adjustment items all

elate to volatile market and/or economic events that are out of the control of a

ompany's management. Their impact is real when they occur, but they tend to even

ut over an extended period of time.

Conclusion

When an investor understands the income and expense components of the income

tatement, he or she can appreciate what makes a company profitable., it experienced a

major increase in sales for the period reviewed and was also able to control the expense

ide of its business. That's a sign of very efficient management.

8.Distinguish between expense and asset?

An asset is something of value that is controlled by the businesses. You may haveurrent assets (items that will be available for up to 12 months) such as cash or office

upplies and you may have non-current assets (items that will be available for more

han 12months) such as a car. (PS on some non-current assets you will also have to take

nto consideration the depreciation of the asset)

An expense is outflows that are incurred when used to generate revenue, such as wages,

ent, advertising etc. these are all items that the business must pay for in order for them

o generate revenue. for example: if running a cafe, if the business operator don't pay

wages to their staff, then they will not have anyone to serve customer, which in turn

eads them to lose revenue.9.

What is depreciation?

A method of allocating the cost of a tangible asset over its useful life. Businesses

epreciate long-term assets for both tax and accounting purposes

A decrease in an asset's value caused by unfavorable market conditions.


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0.A).Why arent purchase of equipment shown in the income statement?

Because it is capital expenditure. according to dual aspect concept the P/L

ccount is not related to purchase of equipment, the balance of equipment account

ransferred to balance sheet.B) Why is credit sales shown in the income statement?

Because when we calculate profit (Profit= total sales-total expenses)

Total sales=cash sales + credit sales

C) Why is dividend not shown in the income statement?

Dividend is a part of income; dividend is distributed after calculating the income,

hats why dividend is not shown in the income statement.D)Why is depreciation on furniture an expense?

Depreciation moves the cost of an asset to Depreciation Expense during the asset'sseful life. The accounts involved in recording depreciation are Depreciation Expense

nd Accumulated Depreciation. As you can see, cash is not involved. In other words,

epreciation reduces net income on the income statement, but it does not reduce the

Cash account on the balance sheet.

E)Why is interest due but not paid shown as an expense?

According to Accrual concept It recognizes income when it is earned not when it is

ollected. In case of expenses vice vea.

1.Explain the impact of depreciation on the financial statements.

In income statement shown as a expenses,

In balance sheet depreciation deducted from fixed asset and shown net figure of fixed

sset.

In cash flow statement depreciation adding to the net cash flow as a non cash

xpenses.

2.What are the different methods of charging depreciation?

Commonly used depreciation methods:

The straight line method

Accelerated methods:

Written -down-value method


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Sum-of-the-yea-digit method

The production unit method

3.Examine the impact of provision for bad and doubtful debts on the incometatements.

he provision for doubtful debts is identical to the allowance for doubtful accounts.

he provision is the estimated amount of bad debt that will arise from accounts

eceivable that have not yet been collected. The provision is used under accrual basis

ccounting, so that an expense is recognized for probable bad debts as soon as invoices

re issued to customer, rather than waiting several months to find out exactly which

nvoices turned out to be bad debts. Thus, the net impact of the provision is to

ccelerate the recognition of bad debts.You typically estimate the amount of bad debt based on historical experience, andharge this amount to expense with a debit to the bad debt expense account (which

ppear in the income statement) and a credit in the provision for doubtful debts

ccount (which appear in the balance sheet). You should make this entry in the same

eriod when you bill the customer, so that revenues are matched with all applicable

xpenses (as per the matching principle).

4.Explain the process of determining EPS.The process of determining EPS is

particular Amount

Revenue xxxx

Less- Direct Expanses xxxx

Gross profit xxxx

less Indirect expenses xxxx

EBIT xxxx

less Interest xxxx

EBT xxxx

less Tax xxxx

EAT xxxx

EAT/no of equity share= EPS xxxx


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5.What is relevance of diluted EPS?

A performance metric used to gauge the quality of a company's earnings per share

EPS) if all convertible securities were exercised. Convertible securities refer to all

utstanding convertible preferred shares, convertible debentures, stock optionsprimarily employee based) and warrants. Unless the company has no additional

otential shares outstanding (a relatively rare circumstance) the diluted EPS will

lways be lower than the simple EPS.6.

What is weighted average number of share?his element represents the weighted average total number of shares issued throughout

he period including the fit (beginning balance outstanding) and last (ending balance

utstanding) day of the period before considering any reductions (for instance, shareseld in treasury) to arrive at the weighted average number of shares outstanding.

Weighted average relates to the portion of time within a reporting period that common

hares have been issued and outstanding to the total time in that period. Such concept is

sed in determining the weighted average number of shares outstanding for purposes of

alculating earnings per share (basic).

7.What is appropriation of profit?A debit in a nominal account for ascertaining profits like the Trading and Profit and Loss accountwhich represents a transfer of credit balance from to some other nominal account (holding profitsept aside) is said to be an appropriation of profits. Such accounts to which credit balances (profits)

re transferred to are generally named reserve, provision or fund.8.

What is the composition of borrowing cost?

Borrowing cost may include:

interest expense calculated by the effective interest method under IAS 39,finance charges in respect of finance leases recognized in accordance with IAS 17

eases, and

Exchange differences arising from foreign currency borrowings to the extent that they

re regarded as an adjustment to interest costs.


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9.Examine the impact of borrowing cost on the financial statement.

Borrowing costs that are directly attributable to the acquisition, construction or

roduction of a qualifying asset form part of the cost of that asset and, therefore, shoulde capitalized. Other borrowing costs are recognized as an expense.

0.What is the difference between revenue and profit?

Revenue is the money coming in (from sales or whatever), profit is what is left after all

xpenses have been paid.

1.Explain the relationship between income statement and accounting equation.

he income statement is the financial statement that reports a company's revenues and

xpenses and the resulting net income. While the balance sheet is concerned with one

oint in time, the income statement covers a time interval or period of time. The

ncome statement will explain part of the change in the owner's or stockholder' equity

uring the time interval between two balance sheets.

2.What are cash equivalents?

ash equivalents are one of the three main asset classes, along with stocks and bonds. These

ecurities have a low-risk, low-return profile. Cash equivalents include U.S. government Treasuryills, bank certificates of deposit, banker' acceptances, corporate commercial paper and other money

market instruments.

3.Distinguish between cash and profit.

Profit is the surplus after total costs have been deducted from total revenue, whereas

ash is money at bank or in hand, readily available for use.

Profits are calculated in the trading, profit and loss account whereas cash is shown in

he cash flow forecast or cash flow statement.


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4.Classify the cash flows.

A list of cash flows is more meaningful to investor and creditor if they can determine

he type of transaction that gave rise to each cash flow. Toward this end, the statement

f cash flows classifies all transactions affecting cash into one of three categories:1) Operating activities,

2) Investing activities, and

3) Financing activities.

5.What is cash from operating activities (CFO)?

he inflows and outflows of cash that result from activities reported in the income

tatement are classified as cash flows from operating activitiesinflows and outflows of

ash related to transactions entering into the determination of net operation income.

. Inther words, this classification of cash flows includes the elements of net income

eported on a cash basis rather than an accrual basis.

Cash inflows include cash received from:

Customer from the sale of goods or services

hese amounts may differ from sales and investment income reported in the income

tatement. For example, sales revenue measured on the accrual basis reflects revenuearned during the period, not necessarily the cash actually collected. Revenue will not

qual cash collected from customer if receivables from customer or unearned revenue

hanged during the period.

Cash outflows include cash paid for:

Cash paid to supplier

Cash paid to employees

Income tax paid

Extraordinary items


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Basis rather than an accrual basis. Likewise, these amounts may differ from the

orresponding accrual expenses reported in the income statement. Expenses are

eported when incurred, not necessarily when cash is actually paid for those expenses.

Also, some revenues and expenses, like depreciation expense, don't affect cash at all

nd aren't included as cash outflows from operating activities.

The difference between the inflows and outflows is called net cash flows from

perating activities. This is equivalent to net income if the income statement had beenrepared on cash.

6.What is the treatment of dividend and interest received and paid?

he dividend and interest received and paid is going under nominal account as per

ominal account principle dividend & interest paid show in income statement as

xpense and it show at cash flow statement in financing activity as cash out flow. In

ase of received it vice versa.

7.Distinguish between cash from operating activities and operating profit.

Cash from operating is cash basis accounting and operating profit is accrual basis of

ccounting

You make sales on credit, but haven't collected cash yet. Net Income goes up, but A/R

oes up instead of cash.8.

Examine the relationship between profit and cash from operating

ctivities.Net income is the profit after all expenses have been accounted for - based on GAAP

Cash from operating activities is the cash increase from just the operating activities of

he business. It does not include buying and selling assets (investing activities) or

orrowing / paying back debt or money received from issuing stock (financing

ctivities). Net income is nice but cash pays the bills. Most companies use the indirectmethod of preparing the cash flow statement where you start with net income and then

dd / subtract differences between GAAP and cash.


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9.Why is cash generated during the year generally not equal to profit for the year?

Cash" transactions where the transaction and the transfer of cash occur at different

mes. Non -cash transactions where actual "cash" is not exchanged

Many businesses do their bookkeeping and accounting on an "accrual" basis. Someusinesses are required to use accrual methods for tax or other reasons

It is because of this accrual method that cash flows and net profits become separately

mportant.

Net profits are Total revenue minus Total expenses

ften calculated by taking Gross profits and subtracting overheads and interest

xpenses. Net profits are a measure of a business's long-term financial health.

A similar relative measure (to Net Profits) is EBITDA

Earnings before Interest, Taxes, Depreciation, and Amortization".Cash flows are cash receipts less cash payments.

Cash flows are a measure of a business's short-term financial health.

A business can go bankrupt in the short-run if "negative" cash flows go on for too

ong a period of time; likewise they will likely go bankrupt in the long-run when net

rofits are too low over a long period of time.

00.Briefly explain the provisions of the Accounting Standard (AS)-3

Accounting Standard (AS) 3,Cash Flow Statements (revised 1997), issued by the Council of the Institute of

Chartered Accountants of India, comes into effect in respect of accounting periods

ommencing on or after 1-4-1997. This Standard speeders Accounting Standard (AS)

, Changes in Financial Position, issued in June 1981.This Standard is mandatory inature2 in respect of accounting periods commencing on or after 1-4-2004 for the

nterprises which fall in any one or more of the following categories, at any time

uring the accounting period:

Objective of Accounting Standard 3 - Cash Flow Statements - AS 3

nformation about the cash flows of an enterprise is useful in providing use of financial

tatements with a basis to assess the ability of the enterprise to generate cash and cash

quivalents and the needs of the enterprise to utilize those cash flows. The economic

ecisions that are taken by use require an evaluation of the ability of an enterprise to


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enerate cash and cash equivalents and the timing and certainty of their generation. The

tatement deals with the provision of information about the historical changes in cash

nd cash equivalents of an enterprise by means of a cash flow statement which

lassifies cash flows during the period from operating, investing and financing

ctivities.

Classification Of Cash Flows

According to Accounting standard -3 (Revised) the cash flow statement should report

ash flows during the period classified by operating, investing, and financing activities

hus cash flows are classified in to three main categories:

.Cash flow from operating activities.

.

Cash flow from investing activities..Cash flow from financing activities.

.Cash flow from operating activities:Operating activities are the principal revenue-producing activities of the enterprise

nd other activities that are not investing or financing activities.

The amount of cash flow arising from operating activities is a key indicator of the

xtent to which the operations of the enterprise have generated sufficient cash flow tomaintain the operating capability of the enterprise, pay dividends, repay loans, and

make new investments without resource to external source of financing. Information

bout the specific components of historical operating cash flows is useful, in

onjunction with other information, in forecasting future operating cash flows.

Cash flow from operating activities are primarily derived from the principal

evenue-producing activities of the enterprise. Therefore they generally result from the

ransactions and other events that enter into the determination of net profit or loss.

Examples of cash flow from operating activities are:

a. Cash receipts from the sale of goods and the rendering of service;

b.Cash receipts from royalties, fees, commissions, and other revenue


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c.Cash payments to and on behalf of employees ;

d.

e.Cash payments to and on behalf of employees ;

f.

Cash receipts and cash payments of an insurance enterprise for premiums andclaims, annuities and other policy benefits;

g.Cash payments or refunds of income taxes unless they can be specifically

identified with financing and investing activities ;

h.Cash receipts and payments relating to future contracts, forward contracts, option

contracts, and swap contracts when the contracts are held for dealing or trading

purposes.

ome transactions, such as the sale of an item of plant, may give rise to a gain or loss

which is included in the determination of net profit or loss however the cash flow

elating to such transactions are cash flows from investing activities.

.Cash flow from investing activities.

nvesting activities are the acquisition and disposal of long-term assets and other

nvestments not included in cash equivalents. The separate disclosure of cash flows

rising from investing activities is important because the cash flows represent the

xtent to which expenditures have been made for resources intended to generate future

ncome and cash flows.Examples of cash flow arising from investing activities are:.Cash payment to acquire fixed assets (including intangibles). These payments include

hose relating to capitalized research and development cost and sale constructed fixed

ssets.

.Cash receipt from disposal of fixed assets (including intangibles).

. Cash payments to acquire shares, warrants or debt instruments of other enterprises

nd interest in joint venture (other than payments for those instruments considered to

e cash equivalent and those held for dealing or trading purpose).

.

Cash received from disposal of shares, warrants or debt instruments of othernterprises and interest in joint venture (other than received for those instruments

onsidered to be cash equivalent and those held for dealing or trading purpose).

.Cash advances nd loans made to third parties (other than advances and loans made by

financial enterprise).


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Cash received from the payment of advances and loans made to third parties (other

han advanced and loans of financial enterprise).

.Cash payments for future contracts, forward contracts options and swap contracts

xcept when the contracts are dealing or trading purpose, or the payments are classified

s financing activities..Cash received for future contracts, forward contracts options and swap contracts

xcept when the contracts are dealing or trading purpose, or the received are classified

s financing activities.

.Cash flow from financing activities.inancing activities are activities that result in changes in the size and composition of

he owners capital (including preference share capital in the case of a company) andorrowing of the enterprise.

he separate disclosure of cash flows arising from financing activities is importantecause it is useful in predicting claims on future cash flows by provider of fund (both

apital and borrowings) to the enterprise.

Examples of cash flow arising from financing activities are:

.Cash proceeds from issuing shares or other similar instruments.

.Cash proceeds from issuing debentures, loans, bonds, and other short or long termorrowings.

.

Cash payments of amounts borrowed such as redemption of debentures, bonds,reference shares.

101.Examine the impact of the changes in the working capital on the cash

from operating activities.

Working capital is calculated as current assets minus current liabilities on the balance

sheet. Just as the name suggests, working capital is the money that the business needs

o "work." Therefore, any cash used in or provided by working capital is included inhe "cash flows from operating activities" section.

Any change in the balances of each line item of working capital from one period to

another will affect a firm's cash flows. For example, if a company's accounts

receivable increase at the end of the year, this means that the firm collected less money


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from its customer than it recorded in sales during the same year on its income

statement. This is a negative event for cash flow and may contribute to the "Net

changes in current assets and current liabilities" on the firm's cash flow statement to be

negative. On the flip side, if accounts payable were also to increase, it means a firm is

able to pay its supplier more slowly, which is a positive for cash flow. Were all aboutshortcuts to make financial statement analysis easier, so here's a little secret that's allyou really need to remember regarding changes in working capital:

If balance of an asset increases, cash flow from operations will decrease.

If balance of an asset decreases, cash flow from operations will increase.

If balance of a liability increases, cash flow from operations will increase.

If balance of a liability decreases, cash flow from operations will decrease.

Current assets may include things like inventories and accounts receivable, whilecurrent liabilities would include short-term debt and accounts payable.

102.When will the cash from investing activities (CFI) be negative?

Negative cash flow from investing activities means that a company has spent more

money on fixed assets than it has received from the sale of fixed assets in a given

financial period. It's usually a sign of a company growing/investing in itself with a

few to growing cash flow from operating activities,103.

Explain with example the impact of depreciation on the cash from operating

activities.Depreciation is accounting's way to record wear and tear on a company's property,

plant, and equipment (P&E). Even though it's an expense on the income statement

depreciation is not a cash charge, so it's added back to net income.


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Example

Use the following information to calculate net cash flow from operating activities

using indirect method:

Net Income 7,000Depreciation Expense 1,000

Increase in Accounts Receivable 4,400

Increase in Prepaid Rent 7,000

Decrease in Prepaid Insurance 1,300

Increase in Accounts Payable 14,000

Increase in Wages Payable 1,000

Decrease in Income Tax Payable 700

Gain on Sale of Equipment 1,800

Solution:

Cash Flows from Operating Activities:

Net Income 7,000

Depreciation Expense 1,000

Gain on Sale of Equipment 1,800Increase in Accounts Receivable 4,400

Increase in Prepaid Rent 7,000Decrease in Prepaid Insurance 1,300

Increase in Accounts Payable 14,000

Increase in Wages Payable 1,000

Decrease in Income Tax Payable 700Net Cash Flow from Operating Activities 10,400

104.Examine the implications of having positive CFF, negative CFI, and negative

CFO.

The investing activities refer to the company's investment in other companies and

goods, or to investments made in the company by other. When a company

records negativecashflow, it may be because the company is struggling, or it may

be because the company had a number of expenses that upped outflow.


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Reviewing this statement can help owner and manage discover problems related to

the companysnegativecashflow. High operating expenses are one reason acompany may have negativecashflow.

105.Can a company have positive profit and huge negative CFO?

Yes it is possible.

Here's an example: Near the end of the year you signed a big client. To meet their

needs, you have to rapidly increase production. You buy a new production machine

with cash; you increase your raw materials inventory, paid for in cash. And just

before the end of the year, you ship out your fit large order to this new client on 30

day terms, increasing your profits...and receivables (not cash). And the result is

negative cash flow from operation and positive profit.106.

A company having profit will always have positive cash from operating

activities (CFO). Comment.

Cash flow from operating activities is a section of the cash flow statement that

provides information regarding the cash-generating abilities of a company's core

activities.

How It Works/Example:

Cash flow from operating activities is generally calculated according to the

following formula:

Cash Flow from Operating Activities = Net income + Noncash Expenses +

Changes in Working Capital

The noncash expenses are usually

The depreciation and/oramortization expenses listed on the firms income.

A statement of cash flows typically breaks out a company's cash sources and uses

for the period into three categories: cash flows from operations, cash flows

from investing activities, and cash flows from financing activities. Cash flows from
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operations primarily measure the cash-generating abilities of the company's core

operations rather than from its ability to raise capital or purchase assets.

Because working capital is a component ofcash flow from operations, investo

should be aware that companies can influence cash flow from operating activitiesby lengthening the time they take to pay the bills (thus preserving their cash),

shortening the time it takes to collect whats owed to them (thus accelerating thereceipt of cash), and putting off buying inventory (again thus preserving cash). It is

also important to note that companies also have some leeway about what items are

or are not considered capital expenditures, and the investor should be aware of this

when comparing the cash flow of different companies.

107.Changes in working capital will no effect on CFO. Comment.Operating cash flow doesn't mean EBITDA (earnings before interest taxes

depreciation and amortization). While EBITDA is sometimes called "cash flow", it

is really earnings before the effects of financing and capital investment decisions. It

does not capture the changes in working capital (inventories, receivables, etc.). The

real operating cash flow is the number derived in the statement of cash flows.

108.Buy back of shares will increase the cash from financing activities (CFF).Cash flow that a company acquires from a financing round instead of from

operations. That is, cash flow from financing activities is the net amount that a

company receives from issuing stock and bonds.

Generally speaking, shareholder prefer to see positive cash flow from financing

activities, but a negative amount could mean that a company is buying back its own

stock, which drives up the share price. It is calculated thus:

Cash flow from financing activities = Cash from stock and bonds - debt service on

bonds - dividends paid to stockholder - Stock buybacks - called debt.109.

Dividend paid and dividend received will affect the cash from financing

activities (CFF). Comment.

An entity may classify dividends paid as a financing cash flow because they are a

cost of obtaining financial resources. Alternatively, the entity may classify
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dividends paid as a component of cash flows from operating activities because they

are paid out of operating cash flows.

110.The impact of the following transaction of CFO:

Paid salaries operating outflowPurchased goods on credit

Interest received investing inflow

Interest paid investing outflowProfit on the sale of fixed assets investing inflow

Issued capital at a premium Financing inflow

Collections from old debtor. Operating inflow

Buy back of shares Financing Inflow111.

What is stock split?

A corporate action in which a company's existing shares are divided into multiple

shares. Although the number of shares outstanding increases by a specific multiple,

the total dollar value of the shares remains the same compared to pre-split amounts,

because no real value has been added as a result of the split.

112.How is stock split different from the issue of bonus issue?Simply put- A bonus is a free additional share. A stock split is the same share split

into two.

Usually companies accumulate its earnings in reserve funds instead of paying it to

share-holder in form of dividend. This accumulated reserve fund is then converted

into share-capital and allotted to share-holder as bonus shares in proportion to their

existing holding. So, Share-capital of the company increases with a

concomitant decrease in its Reserve profits. Share-holder get bonus shares in

compensation of dividend.But when a share is split, say, from 10 denominations to Re 1 denomination, there

would neither be an increase in the share capital nor a concomitant decrease in the

reserves of the company. This is because while in a bonus issue a peon having one

share of 10 face value would get another share of the same face value should the


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company go for a 1:1 bonus what would happen in a stock split is his one 10 share

would now be converted into ten Re 1 shares.

113.Explain the impact if bonus issue on the financial statements of a company.

When the additional shares are allotted to the existing shareholder without receiving

any additional payment from them, it is known as issue of bonus shares. Bonus

shares are allotted by capitalizing the reserves and surplus. Issue of bonus shares

results in the conversion of the company's profits into share capital. Therefore it is

termed as capitalization of company's profits. Since such shares are issued to the

equity shareholder in proportion to their holdings of equity share capital of the

company, a shareholder continues to retain his / her proportionate ownership of the

company. Issue of bonus shares does not affect the total capital structure of the

company. It is simply a capitalization of that portion of shareholder' equity which is

represented by reserves and surpluses. it also does not affect the total earnings of

the shareholder. Issue of Bonus Shares is more or less a financial gimmick without

any real impact on the wealth of the shareholder. Still firms issue bonus shares andshareholder look forward to issue of bonus shares.

114.When are the shares said to be issued at a premium?

A company issues its shares at a premium when the price at which it sells the sharesis higher than their par value. This is quite common, since the par value is typically

set at a minimal value, such as 0.01 per share. The amount of the premium is the

difference between the par value and the selling price.

115.How share premium is be used?

According to Companies Act 1985 s.130 and companies ordinance 1984 (Nepal)

s.84

1) If a company issues shares at a premium, whether for cash or otherwise, a sumequal to the aggregate amount or value of the premiums on those shares shall be

transferred to an account called "the share premium account".


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(2) The share premium account may be applied by the company in paying up

unissued shares to be allotted to member as fully paid bonus shares, or in writing

off-

(a) The company's preliminary expenses; or

(b) The expenses of, or the commission paid or discount allowed on, any issue of

shares or debentures of the company, or

(c) In providing for the premium payable on redemption of debentures of the

company.

(3) Subject to this, the provisions of this Act relating to the reduction of a

company's share capital apply as if the share premium account were part of its paid

up share capital.

116.What are the right shares?

Rights shares are issued u/s 81 of the Companies Act, 1956 when the company

decides to increase its subscribed capital. The scheme has the following

characteristics:

(a) Such share shall be offered to its equity shareholder in proportion to their hold-

ing.

(b) The offer shall be made by a notice of not less than 15 days within which the

offer is to be accepted. Otherwise it is deemed as declined.

(c) The equity shareholder to whom the offer is made shall be given a right to

renounce the offer in full or in part in favor of any other peon and the notice shall

contain a statement to this effect.

(d)After the expiry of the notice period or on receipt of intimation declining the

offer, whichever is earlier, the Board of Director may dispose of such shares in themanner most beneficial to the company.


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117.What the bonus shares?

A bonus share is a free share of stock given to current shareholder in a company,

based upon the number of shares that the shareholder already owns. While the issueof bonus shares increases the total number of shares issued and owned, it does not

change the value of the company. Although the total number of issued

shares increases, the ratio of number of shares held by each shareholder remains

constant.

118.What is the difference between public issue and private issue of shares?

When an issue isnt made to just a select group of people however is available to

the general public as well as any other investor at large, its a public issueHowever, if the issue is enabled to a select group of people, its known as private

placement. According to Companies Act, 1956, an share issue becomes public

when it results in allotment of 50 peons or even more. Share issue becomes

privately when an allotment is made to lower than 50 peons.

119.What is capital redemption reserve?

Capital Redemption Revere is an reserve created when a company buys it owns

shares which reduces its share capital. This reserve is not distributable toshareholder and can be used to pay bonus shared issued.

120.What is buyback of shares?

The repurchase of outstanding shares (repurchase) by a company in order to reduce

the number of shares on the market. Companies will buy back shares either to

increase the value of shares still available (reducing supply), or to eliminate any

threats by shareholder who may be looking for a controlling stake.

121.Examine the impact of buy-back of shares on the financial statements.The impact of buy-back of shares

If Market Price per Share is greater than Book Value per Share, Book Value per

Share will decrease.


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If Market Price per Share is less than Book Value per Share, Book Value per Share

will increase.

This happens because the shares are repurchased at or above the market value, so

when the market price is more than the book value, more money is spent to buy

shares having less value which erodes the book value for remaining shares.122.

What is book-building?Book building refer to the process of generating, capturing, and recording investor

demand for shares during an Initial Public Offering (IPO), or other securities during

their issuance process, in order to support efficient discovery. Usually

the issuer appoints a major investment bank to act as a major securities

underwriter or book runner. The book is the off-market collation of investor

demand by the book runner and is confidential to the book runner, issuer,and underwriter. Where shares are acquired, or transferred via a book build, the

transfer occur off-market, and the transfer is not guaranteed by an exchangesclearing house. Where an underwriter has been appointed, the underwriter bea the

risk of non-payment by an acquirer or non-delivery by the seller.

123.How is dividend declared?

Dividends are payments made by a corporation to its shareholder member. It is the

portion of corporate profits paid out to stockholder.[1]

When a corporation earnsa profit or surplus, that money can be put to two uses: it can either be re-invested in

the business (called retained earnings), or it can be distributed to shareholder. There

are two ways to distribute cash to shareholder: share repurchases or

dividends. Many corporations retain a portion of their earnings and pay the

remainder as a dividend.

A dividend is allocated as a fixed amount per share. Therefore, a shareholder

receives a dividend in proportion to their shareholding. For the joint stock company,

paying dividends is not an expense; rather, it is the division of after tax profitsamong shareholder. Retained earnings (profits that have not been distributed as

dividends) are shown in the shareholder equity section in the company's balance

sheet - the same as its issued share capital. Public companies usually pay dividends

on a fixed schedule, but may declare a dividend at any time, sometimes called

a special dividend to distinguish it from the fixed schedule dividends.
http://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Dividend#cite_note-1http://en.wikipedia.org/wiki/Dividend#cite_note-1


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Cooperatives, on the other hand, allocate dividends according to membe' activity, so

their dividends are often considered to be a pre-tax expense.

Dividends are usually paid in the form of cash, store credits (common among

retail consume' cooperatives) and shares in the company (either newly created

shares or existing shares bought in the market.) Further, many public companies

offer dividend reinvestment plans, which automatically use the cash dividend to

purchase additional shares for the shareholder.

124.How is cash dividend different from stock dividend?

A cash dividend is a payment made by a company out of its earnings to investor in

the form of cash (check or electronic transfer). This transfer economic value from

the company to the shareholder instead of the company using the money for

operations. However, this does cause the company's share price to drop my roughly

the same amount as the dividend. For example, if a company issues a cash dividend

equal to 5% of the stock price, shareholder will see a resulting loss of 5% in the

price of their shares. This is a result of the economic value transfer. Another

consequence of cash dividends is that receive of cash dividends must pay tax on the

value of the distribution, lowering its final value. Cash dividends are beneficial,

however, in that they provide shareholder with regular income on their investment

along with exposure to capital appreciation.

A stock dividend, on the other hand, is an increase in the amount of shares of acompany with the new shares being given to shareholder. For example, if a

company was to issue a 5% stock dividend, it would increase the amount of shares

by 5% (1 share for every 20 owned). If there are 1 million shares in a company, this

would translate into an additional 50,000 shares. If you owned 100 shares in the

company, you'd receive five additional shares.

125.How is the preference shares redeemed?

According to Section 100 of the Companies Act, 1956 : If a company collects themoney through redeemable preference shares, this money must be returned on its

maturity whether company is liquidated or not. Section 80 of the Companies Act,

1956 lays down some provisions relating to redeemable preference shares:

The shares to be redeemed must be fully paid-up.


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Capital reserves from forfeiture of shares and share premium account are not

available for payment of redeemable preference share holder.

Its payment will be out of the net profit of the company or amount received

on issue of new shares. Company cannot sale amount of asset for redemption

of redeemable preference shares.

126.Examine difference between preference shares and equity shares?

Equity Share Holder gets Equity Shares of the Company while Preference

Share Holder get Preference Shares.

Equity Shares are shares whose profit sharing depends on the PROFIT making

of the Company.

If the company makes huge profits, there dividend sharing will be high else itwill be low.

Whereas for Preference Share Holder, Dividend is a fixed income to them.

They get dividend at a fixed rate, irrespective of the Profit Making of the

Company.

Dividends to Equity Share holder is optional and at company's discretion.

For preference share holder, it is a right to get cumulative or non cumulative

dividends from the company.

Equity Shareholder are called Residual Owner of the company. After all theobligations of the company are over, the Equity Share Holder get their share.

Preference Share Holder get paid their dividends ahead of Equity

Shareholders.

127.What is preferential allotment of shares?

A private placement of shares or of convertible securities by a listed company is

generally known by name of preferential allotment. A listed company going for

preferential allotment has to comply with the requirements contained. According toSEBI (DIP) Guidelines, in addition to the requirements specified in the Companies

Act. In short, preferential issue means allotment of equity to some selected people

by a company which has its share already listed.


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128.Explain the impact of the issue of bonus shares on the book value per share.The impact of the bonus shares on the book value per share.

Reserves/Retained Earnings of the company reduce.

Paid up equity share capital increases. Total Net worth remains unchanged.

No. of outstanding shares of the company increases.

Shareholder proportional ownership remains unchanged.

EPS (Earnings per share), MPS (Market price of share), BVPS (Book value

per share) decreases.

129.Examine the difference between buy-back and payment of dividend.

Simply put, the company uses existing cash for both purposes; the difference is thatdividends go directly into your pocket, which you have to pay taxes on, while the

share buyback goes to purchasing shares on the open market, which are then retired

after purchase. This action reduces the number of shares outstanding, so profits are

then divided amongst fewer shares.

130.What are convertible debentures?

Convertible debentures, which are convertible bonds or bonds that can beconverted into equity shares of the issuing company after a predetermined period of

tim

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