Answers in Detail About the QUIZ Taken in Business Update Class

7/29/2019 Answers in Detail About the QUIZ Taken in Business Update Class

1/5

Answers in detail about the QUIZ taken in Business Update Class:

CAD:

If an economy is running current account deficit, it is absorbing (absorption = domestic

consumption + investment + government spending) more than that it is producing. This can onlyhappen if some other economies are lending their savings to it (in the form of debt to or direct/

portfolio investment in the economy) or the economy is running down its foreign assets such as

official foreign currency reserve.

On the other hand, if an economy is running a current account surplus it is absorbing less than

that it is producing. This means it is saving. As the economy is open, this saving is beinginvested abroad and thus foreign assets are being created.

Normally, the current account is calculated by adding up the 4 components of current account:Goods, services, income and current transfers.

[4]

Goods

Being movable and physical in, goods are often traded by countries all over the world. When a

transaction of certain good's ownership from a local country to a foreign country takes place, thisis called an "export." The other way around, when a good's owner changes to a local inhabitant

from a foreigner, is defined to be an "import." In calculating current account, exports are marked

as credit (the inflow of money) and imports as debit. (the outflow of money.)

Services

When an intangible service (e.g. tourism) is used by a foreigner in a local land and the localresident receives the money from a foreigner, this is also counted as an export, thus a credit.

Income

A credit of income happens when an individual or a company of domestic nationality receives

money from a company or individual with foreign identity. A foreign company's investment

upon a domestic company or a local government is also considered as a credit.

Current Transfers

Current transfers take place when a certain foreign country simply provides currency to anothercountry with nothing received as a return. Typically, such transfers are done in the form of

donations, aids, or official assistance.

A formula for calculating current accounts

Thus, one can see that a certain country's current account can be calculated by the followingformula:
http://en.wikipedia.org/wiki/Current_account#cite_note-4http://en.wikipedia.org/wiki/Current_account#cite_note-4http://en.wikipedia.org/wiki/Current_account#cite_note-4http://en.wikipedia.org/wiki/Current_account#cite_note-4


2/5

When CA is the current account, X and M the export and import of goods and services

respectively, NY the net income from abroad, and NCT the net current transfers.

FDI:

Foreign direct investment (FDI) is a direct investment into production or business in a country by an

individual or company in another country, either by buying a company in the target country or by

expanding operations of an existing business in that country. Foreign direct investment is in contrast to

portfolio investment which is a passive investment in the securities of another country such as stocks

and bonds.

FDI is the sum ofequity capital, other long-term capital, and short-term capital as shown the balance of

payments. FDI usually involves participation in management, joint-venture, transfer of technology and

expertise. There are two types of FDI: inward and outward, resulting in a netFDI inflow(positive or

negative) and "stock of foreign direct investment", which is the cumulative number for a given period.

Direct investment excludes investment through purchase of shares.

CRR:

Cash Reserve Ratio (CRR)Cash Reserve Ratio (CRR) is the amount of funds that all Scheduled

Commercial Banks (SCB) excluding Regional Rural Banks (RRB) are required to maintain without any floor

or ceiling rate* with RBI with reference to their total net Demand and Time Liabilities (DTL) to ensure

the liquidity and solvency of Banks (Section 42 (1) of RBI Act 1934). The current CRR is 4.00%. * This

means that no interest is payable on CRR held with RBI.

SLR

Statutory Liquidity ratio:

Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form

of gold or govt. approved securities before providing credit to the customers. Here by approved

securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined

and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is

determined as percentage of total demand and time liabilities.

At present, the minimum limit of SLR that has been set by the Reserve Bank is23% AS ON AUGUST 2012

Objectives of SLR: The main objectives for maintaining the SLR ratio are the following:

to control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of Indiacan increase or decrease bank credit expansion.
http://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Equity_capitalhttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Joint-venturehttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttp://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Joint-venturehttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Equity_capitalhttp://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Portfolio_investment


3/5

to ensure the solvency of commercial banks.

to compel the commercial banks to invest in government securities like government bonds.

REPO RATE

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of

securities together with an agreement for the seller to buy back the securities at a later date. The

repurchase price should be greater than the original sale price, the difference effectively representing

interest, sometimes called the repo rate.

Reverse Repo

A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's.

Repo and Reverse Repo in India

In India, RBI uses repo and reverse repo techniques to increase or decrease the liquidity in the market.

To increase liquidity, RBI buys government securities from banks under REPO; to decrease liquidity, RBI

sells the government securities to banks. The repo rate in India as of 18th Feb '13 was 7.75% and the

reverse repo rate which is 100 bps below the repo rate stood at 6.75%.

Inventory Turnover Ratio

In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a

time period such as a year. The equation for inventory turnover equals the Cost of goods sold divided by

the average inventory. Inventory turnover is also known as inventory turns, stockturn, stock turns,

turns, and stock turnover.

The formula for average inventory:

The average days to sell the inventory is calculated as follows:
http://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Equationhttp://en.wikipedia.org/wiki/Cost_of_goods_soldhttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Cost_of_goods_soldhttp://en.wikipedia.org/wiki/Equationhttp://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Security_%28finance%29


4/5

Application in Business

A low turnover rate may point to overstocking,obsolescence, or deficiencies in the product line

or marketing effort. However, in some instances a low rate may be appropriate, such as wherehigher inventory levels occur in anticipation of rapidly rising prices or expected market

shortages.

Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a

loss in business as the inventory is too low. This often can result in stock shortages.

ROI

Return on investment (ROI) is the concept of aninvestmentof some resource yielding a benefit to the

investor. A high ROI means the investment gains compare favorably to investment cost. As a

performance measure, ROI is used to evaluate the efficiency of an investment or to compare the

efficiency of a number of different investments. In purely economic terms, it is one way of considering

profits in relation to capital invested.

For a single-period review divide the return (net profit) by the resources that were committed(investment.)

return on investment (%) = (Net profit / Investment) 100%

or

return on investment = gain from investment/ cost of investment.

Current Ratio

The current ratio is a financial ratio that measures whether or not a firm has enough resources

to pay its debts over the next 12 months. It compares a firm's current assets to its current

liabilities. It is expressed as follows:

The current ratio is an indication of a firm's market liquidity and ability to meet creditor's

demands. Acceptable current ratios vary from industry to industry and are generally between

1.5 and 3 for healthy businesses. If a company's current ratio is in this range, then it generally

indicates good short-term financial strength. If current liabilities exceed current assets (the

current ratio is below 1), then the company may have problems meeting its short-term

obligations. If the current ratio is too high, then the company may not be efficiently using its
http://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Current_assethttp://en.wikipedia.org/wiki/Current_liabilitieshttp://en.wikipedia.org/wiki/Current_liabilitieshttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Current_liabilitieshttp://en.wikipedia.org/wiki/Current_liabilitieshttp://en.wikipedia.org/wiki/Current_assethttp://en.wikipedia.org/wiki/Financial_ratiohttp://en.wikipedia.org/wiki/Investment


5/5

current assets or its short-term financing facilities. This may also indicate problems in working

capital management.

FISCAL DEFICIT:

A deficit is the amount by which a sum falls short of some reference amount.

The Government budget balance, also commonly referred to as general government balance,

public budget balance, orpublic fiscal balance, is the overall result of a country's general

government budget over the course of anaccounting period, usually one year. It includes all

government levels (from national to local) and publicsocial securityfunds. The budget balanceis the difference between government revenues (e.g., tax) and spending. A positive balance is

called agovernment budget surplus, and a negative balance is called agovernment budget deficit.

The government budget balance is used to assess the fiscal health of a country. In India it is

called FISCAL DEFICIT.
http://en.wikipedia.org/wiki/Accounting_periodhttp://en.wikipedia.org/wiki/Accounting_periodhttp://en.wikipedia.org/wiki/Accounting_periodhttp://en.wikipedia.org/wiki/Social_securityhttp://en.wikipedia.org/wiki/Social_securityhttp://en.wikipedia.org/wiki/Social_securityhttp://en.wikipedia.org/wiki/Social_securityhttp://en.wikipedia.org/wiki/Accounting_period

Documents

Answers in Detail About the QUIZ Taken in Business Update Class