Finance Guidebook Updated

8/10/2019 Finance Guidebook Updated

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The Finance Club

FINANCE GUIDEBOOK


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ContentsAccounting ............................................................................................................................................ 3

Financial Markets ................................................................................................................................ 18

Banking ................................................................................................................................................ 31

Economics ........................................................................................................................................... 33

Recent Developments ......................................................................................................................... 45

Historical Events .................................................................................................................................. 49

Careers in Finance ............................................................................................................................... 57


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Accountancy

What is Accounting?

Accounting is the guide-post for management. It points out the problems faced or likely to be faced by

the firm. A firm should know the financial implications of its operations. The financial score of the firm is

kept by the accounting system. Accounting is the medium through which business organizations

communicate their financial performance and financial position to the outside world. Accounting is the

process of identifying, measuring and communicating economic information to permit informed

judgements and decisions by users of the information. Accounting is defined as the systematic and

comprehensive recording of financial transactions pertaining to a business. Accounting also refers to the

process of summarizing, analyzing and reporting these transactions.

Who are the users of accounting information?

The accounting information is used by both internal and external stakeholders. The most predominant

group of external stakeholders includes the suppliers of capital which includes shareholders, lending

banks and financial institutions, bond holders and other lenders, etc. These stakeholders have financial

interest in the business and therefore are interested in knowing about the financial performance and

health of the organization. These groups have a direct stake in the financial health of the organization.

They use the accounting information to access the risk return profile of the company. The information

contained in the financial statements helps them to judge the return they expect from their investment

as well as the risk they are exposed to by investing and lending to the organization.

Tax authorities are also interested in the accounting information. As business units are liable to pay tax

on their taxable income, accounting information is used to ascertain the same.

What is meant by Accounting Cycle?

The accounting cycle involves:-

1. IDENTIFYING THE BUSINESS TRANSACTIONS: All business transactions carried out by the firm are

identified. Business activities are separated from the non-business activities.

2. CLASSIFYING THE BUSINESS TRANSACTION: The business activities are then classified according to

their nature and recording in the financial statements.

3. RECORDING THE BUSINESS TRANSACTION: The identified business transactions are recorded for

maintaining proper records of firms activities. Journals, ledgers and Trial Balance are used for

recording transactions.


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4. SUMMARIZING THE BUSINESS TRANSACTIONS: The business transactions are summarized on

periodical basis to interpret the firms profitability and performance. Profit and Loss account,

Balance Sheet, and Cash Flow statements are use for summarizing.

5. INTERPRETING THE BUSINESS TRANSACTIONS:The financial performance of the firm is interpreted to

arrive at the profitability position of the firm. Trend Analysis, Common Size, Ratio Analysis areused for the interpretation amongst others available.

What is the role of various agencies and government agencies?

The accounting practices are greatly influenced by the regulatory requirements prescribed. As the

financial statements are used by the external users, suitable provisions should be made in applicable acts

to ensure comparability of information.

COMPANIES ACT,1956: It governs the creation, continuation and winding up of companies and also the

relationships between the shareholders, the company, the public, and the government. The act also has

provisions regarding the books of accounts to be kept by companies, format of financial statements andauthentication of financial statements. Companies Bill 2012 has been passed by both the houses and is

awaiting Presidents assent. Once approved by the President, it will be called The Companies Act 2013.

MINISTRY OF CORPORATE AFFAIRS:It is primarily responsible for the administration of the companies act,

1956. In addition it also supervises three professional accounting bodies namely the Institute of Chartered

Accountant of India (ICAI), the Institute of Cost and Works Accountants of India (ICWAI) and the Institute

of Company Secretaries of India (ICSI).

RESERVE BANK OF INDIA:The Reserve bank of India is the central bank of India and was set up in 1935 to

regulate the business of banking in India. RBI also supervises the banking companies and issues circulars

relating to disclosures in the notes of accounts to the financial statements.

BANKING REGULATIONS ACT,1949: It states that every banking company incorporated in India is required

to prepare a Balance Sheet and a Profit and Loss account for each accounting period and these financial

statements of banking companies must be prepared in the format prescribed in the Third Schedule of

banking Regulations Act 1949.

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY: IRDA was established in 1999 to protect the

interests of holders of insurance policies, to regulate, to promote and ensure orderly growth of the

insurance industry in India. The financial statements of insurance companies must be prepared in the

format prescribed by IRDA regulations.

SECURITIES AND EXCHANGE BOARD OF INDIA:SEBI was established by an act of parliament in the year 1992

to protect the interests of investors in securities and to promote the development of, and to regulate,

the securities market. The act gives SEBI powers to specify the requirements of listing of securities.

INCOME TAX ACT,1961:Financial accounting and tax accounting are two distinct branches of accounting.

The taxable income is computed as per the provisions of Income Tax Act, 1961 whereas reported profits


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for financial accounting is determined based upon the applicable accounting standards and requirements

of the Companies Act, 1956.

CONFEDERATION OF ASIAN AND PACIFIC ACCOUNTANTS:The Confederation of Asian and Pacific Accountants

(CAPA) represent national professional accounting organisations in the Asia-Pacific region.

INTERNATIONAL FEDERATION OF ACCOUNTANTS:International Federation of Accountants (IFAC) is the global

organization for the accountancy profession.

What are the different types of accounts?

For the usage in Accounting, Accounts are classified into:

1. REAL ACCOUNTS:Real Accounts are accounts relating to assets owned by the enterprise. For Ex-

cash, machinery, etc.

2. PERSONAL ACCOUNTS:Personal Accounts are accounts relating to the persons, both natural and

legal, with whom the enterprise has business transactions. They represent the amount

receivables and payable by the enterprise. For Ex- Capital Account, Loan from Banks, etc.

3. NOMINAL ACCOUNTS: Nominal Accounts are accounts relating to income and expenses. For Ex-

sales, rent earned and paid, etc.

What do you mean by journal entry?

Journal entry is the beginning of the accounting cycle. Journal entries are the logging of business

transactions and their monetary value into the t-accounts of the accounting journal as either debits or

credits. Journal entries are usually backed up with a piece of paper; a receipt, a bill, an invoice, or some

other direct record of the transaction. Easy to record and to maintain traceability for each transaction

What is a Ledger?

Ledger is a book of accounts in which data from transactions recorded in journals are posted and thereby

classified and summarized. It is typically used by businesses that employ the double-entry bookkeeping

method - where each financial transaction is posted twice, as both a debit and a credit, and where each

account has two columns.

What is a Trial Balance?

Trial Balance is the aggregate of all debits and credit balances at the end of an accounting period. It shows

if the general ledger is in balance (total debits equal total credits) before making closing entries and serves

as a worksheet for making closing entries. It provides the basis for making draft financial statements.


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What do you mean by financial statement and explain types of financial statements and their

functions?

Financial statements can be referred to as representation of the financial status of a company in a

systematically documented form. These written reports help to quantify the financial strength,

performance and liquidity of a company.

There are three different types of financial statements. The different types of financial statements indicate

the different activities occurring in a particular business house.

Balance Sheet

Income statement

Cash flow statement

What is a Balance Sheet?

Balance Sheet presents the financial position of an entity at a given date. It is comprised of the following

three elements:

ASSETS:Something a business owns or controls (e.g. cash, inventory, plant and machinery,

etc)

LIABILITIES:Something a business owes to someone (e.g. creditors, bank loans, etc)

EQUITY (CAPITAL):What the business owes to its owners. This represents the amount of capital

that remains in the business after its assets are used to pay off its outstanding liabilities. Equity

therefore represents the difference between the assets and liabilities.

What is meant by Income Statement?

Also known as the P&L statement or the Profit And Loss Statement, this statement ascertains the profit

and loss of any business. Income Statement is composed of the following two elements:

Income: What the business has earned over a period (e.g. sales revenue, dividend income,

etc)

Expense: The cost incurred by the business over a period (e.g. salaries and wages,

depreciation, rental charges, etc)

Net profit or loss is arrived by deducting expenses from income.

What is a Cash Flow Statement?

Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement in

cash flows is classified into the following segments:

Operating Activities: Represents the cash flow from primary activities of a business.

Investing Activities: Represents cash flow from the purchase and sale of assets other than

inventories (e.g. purchase of a factory plant)


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Financing Activities: Represents cash flow generated or spent on raising and repaying share

capital and debt together with the payments of interest and dividends.

Which are the twelve generally accepted accounting principles? Explain.

Separate Entity ConceptThe business entity concept provides that the accounting for a business or organization be kept separate

from the personal affairs of its owner, or from any other business or organization. The balance sheet of

the business must reflect the financial position of the business alone. Also, when transactions of the

business are recorded, any personal expenditures of the owner are charged to the owner and are not

allowed to affect the operating results of the business.

The Going Concern Concept

The going concern concept assumes that a business will continue to operate, unless it is known that such

is not the case. This concept has strong implication on the valuation of assets of the business. For example,

a supply of envelopes with the company's name printed on them would be valued at their cost. This would

not be the case if the company were going out of business. In that case, the envelopes would be difficult

to sell because the company's name is on them. When a company is going out of business, the values of

the assets usually suffer because they have to be sold under unfavourable circumstances. The values of

such assets often cannot be determined until they are actually sold.

The Principle of Conservatism

The principle of conservatism provides that accounting for a business should be fair and reasonable. It is

better to understate the financial position of the business rather than overstate. Probable gains should

be ignored but account for probable losses should be made.

The Objectivity PrincipleThe objectivity principle states that accounting will be recorded on the basis of objective evidence.

Objective evidence means that different people looking at the evidence will arrive at the same values for

the transaction. Simply put, this means that accounting entries will be based on fact and not on personal

opinion or feelings.

The source document for a transaction is almost always the best objective evidence available. The source

document shows the amount agreed to by the buyer and the seller, who are usually independent and

unrelated to each other.

Accounting Period Concept

This concept provides that accounting to take place over specific time periods known as fiscal periods. It

is usually of 12 months. These fiscal periods are of equal length, and are used when measuring the

financial progress of a business.

The Accrual Basis of accounting concept

Cash basis- transactions are recorded on receipt and payment of cash.


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Accrual basis- revenue is recorded when earned while expenses are recorded when incurred irrespective

of when received or paid.

Example - Think of the building of a large project such as a dam. It takes a construction company a number

of years to complete such a project. The company does not wait until the project is entirely completed

before it sends its bill. Periodically, it bills for the amount of work completed and receives payments asthe work progresses. Revenue is taken into the accounts on this periodic basis.

The Matching Principle

The matching principle states that each expense item related to revenue earned must be recorded in the

same accounting period as the revenue it helped to earn. If this is not done, the financial statements will

not measure the results of operations fairly.

The Cost Concept

The cost principle states that the accounting for purchases must be at their cost price. This is the figure

that appears on the source document for the transaction in almost all cases. The value recorded in the

accounts for an asset is not changed until later if the market value of the asset changes. It would take an

entirely new transaction based on new objective evidence to change the original value of an asset.

The Consistency Principle

The consistency principle requires accountants to apply the same methods and procedures from period

to period. When they change a method from one period to another they must explain the change clearly

on the financial statements. The consistency principle prevents people from changing methods for the

sole purpose of manipulating figures on the financial statements.

The Materiality Principle

The materiality principle states that all information that affects the full understanding of a company's

financial statements must be include with the financial statements provide but unnecessary details should

be avoided.

The Dual Concept

Every transaction affects at least two accounts in such a way that the below equation would always be

balanced.

Assets= Capital + Liabilities

Money Measurement Concept

It states that all the events and transactions should be converted and expressed in money terms are

subject matter of accounting. If business units earn revenue in different currencies then the financial

statements are prepared using a uniform currency called reporting currency.


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What do you mean by accounting standards? Name all the accounting standards.

Accounting standards translate general accounting principle to specific accounting principles to specific

accounting rules and are mandatory to be followed. While 32 Accounting Standards have been issued by

ICAI, the following 29 are mandatory:

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 Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

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

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 Statements

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

What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the

International Accounting Standards Board (IASB), which is an independent accounting standard-setting

body consisting of 14 members from nine countries and is based in London. IFRS are becoming the global

standard for the preparation of public company financial statements.


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What is meant by convergence with IFRS?

Convergence means that the Indian Accounting Standards (AS) and the International Financial Reporting

Standards (IFRS) would, over time, continue working together to develop high quality, compatible

accounting standards. As per the notification of the Ministry of Corporate Affairs, convergence of Indian

Accounting Standards (AS) with International Financial Reporting Standards (IFRS) will take place in

phases. The first phase commenced on 1st April 2011 and is expected to be over by 2014.

What is an asset in financial accounting?

Any item of economic value owned by an individual or corporation, especially that which could be

converted to cash. E.g.:land, buildings, furniture, patent, etc.

What are the different types of assets?

Assets can be classified into 2 types:

1. TANGIBLE ASSETS: Assets that have a physical substance such as currencies, buildings, real estate,

vehicles, inventories, equipment, and precious metals are called tangible assets. They can be

further classified into current assets and fixed assets.

2. INTANGIBLE ASSETS: They lack of physical substance and usually are very hard to evaluate which

includes patents, copyrights, franchises, goodwill, trademarks, trade names, etc.

What are current assets and different types of it?

Current assets are cash and other assets which can be converted to cash or consumed either in a year or

in the operating cycle (whichever is longer), without disturbing the normal operations of a business. There

are 5 major items which can be included into current assets:

1. CASH AND CASH EQUIVALENTS: This includes currency and other assets such as deposit accounts,

money orders, cheque, bank drafts which can be converted to cash immediately.

2. SHORT-TERM INVESTMENTS:They include securities bought and held for sale in the near future to

generate income on short-term price differences (trading securities).

3. ACCOUNT RECEIVABLES:They represent money owed by entities to the firm on the sale of products

or services on credit. They are shown in the balance sheet as an asset. To record a journal entry

for a sale on account, one must debit a receivable and credit a revenue account. When the

customer pays off their accounts, one debits cash and credits the receivable in the journal entry.

The ending balance on the trial balance sheet for accounts receivable is usually a debit.

4. INVENTORY:It is commonly used to describe the goods and materials that a business holds for theultimate purpose of resale (or repair).The inventory of a manufacturer should report the cost of

its raw materials, work-in-process, and finished goods. The cost of inventory should include all

costs necessary to acquire the items and to get them ready for sale.

5. PRE-PAID EXPENSES:They arise as a result of business making payments for goods and services to

be received in the near future. While prepaid expenses are initially recorded as assets, their value


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is expensed over time as the benefit is received onto the income statement, because unlike

conventional expenses, the business will receive something of value in the near future.

What are fixed assets?

Fixed assets are tangible assets held by an entity for the production or supply of goods and services, for

rentals to others, or for administrative purposes. These assets are expected to be used for more than one

accounting period. They are generally not considered to be a liquid form of assets unlike current assets.

They include buildings, land, furniture and fixtures, machines and vehicles.

E.g.:If a company is in the business of selling cars, it must not account for cars held for resale as fixed

assets but instead as inventory assets. However, any vehicles other than those held for the purpose of

resale may be classified as fixed assets such as delivery trucks and employee cars.

What is a liability?

A liability is commonly defined as an obligation of an entity arising from past transactions or events. Theyare reported on a balance sheet and are usually divided into two categories:

1. CURRENT LIABILITIES:These liabilities are reasonably expected to be liquidated within a year. They

usually include payables such as wages, accounts, taxes, and accounts payable, unearned revenue

when adjusting entries, portions of long-term bonds to be paid this year, short-term obligations

(e.g. from purchase of equipment).

2. LONG-TERM LIABILITIES: These liabilities are reasonably expected not to be liquidated within a year.

They usually include issued long-term bonds, notes payables, long-term leases, pension

obligations, and long-term product warranties. The balance sheet is based upon the following

equation:

ASSETS =LIABILITIES +OWNER'S EQUITY

What is Owner's equity?

Owner's equity is an individual or company's net worth. This is calculated by taking the value of all assets

and subtracting the value of all liabilities. Owner's equity is used in determining an individual's or

company's creditworthiness, and can be used in determining the value of a business when its owner or

shareholders want to sell. It also includes the value of intangible assets and liabilities. It is sometimes

referred to as the book value of the company.

What is Shareholders Fund?

It represents the actual amount put in the business by the owners and the amount raised by issuance of

shares and earnings retained. Shareholders fund is generally divided into two parts- share capital and

reserves and surplus.

SHARE CAPITAL:It represents the amount raised by issuance of shares at the face value.


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RESERVE AND SURPLUS:It represents the part of profit that has been retained by the company after

paying out the dividends. It is also called as retained earnings.

E.g.: you have started a business by investing Rs. 100,000. After an year, the business have earned a profit

of Rs 50,000 out of which you decided to keep Rs. 10,000 to yourself and the remaining amount to be

reused in future of the business. In this case, Rs. 40,000 will be the retained earnings while Rs. 100,000will be the owners share in the business. After few years, you have decided to raise investments in your

business by issuing 10,000 shares at a face value of Rs 10. The amount of Rs. 100,000 raised will be the

share capital.

What are dividends?

It represents a part of the profit that is distributed to the shareholders. The final dividend is proposed by

the directors of the company. The dividends released attract a tax called as dividend distribution tax or

corporate distribution tax and is deducted from the profit made by the company.

Continuing with the above example, your business have earned a profit of Rs. 100,000 and you being the

Director of your business have decided to give out 10% dividend to your shareholders. The dividend

released has attracted the dividend distribution tax of 10% on the amount of dividend issued. As a result

an amount of Rs. 10,000 will be issued for the dividends and Rs 1,000 will be the dividend distribution tax

and the profit will be apportioned accordingly.

What is the distinction between debtor and creditor?

A DEBTORis a person or enterprise that owes money to another party. (The party to whom the money is

owed is often a supplier or bank that will be referred to as the creditor.)

CREDITORSare the entities which give some type of credit to a borrower or debtor. A creditor could acompany, person, organization, government, a bank, a corporation or a credit card issuer. They look at

financial information before giving out money (for a loan) to businesses.

E.g.: If Company X borrowed money from its bank, Company X is the debtor and the bank is the creditor.

If Supplier A sold merchandise to Retailer B, then Supplier A is the creditor and Retailer B is the debtor.

What are the different types of credits?

SECURED LOAN OR CREDIT:Loan will be given only if there is some kind of asset or property offered by

the borrower. This approach helps to reduce the risk to the entity or individual which is providing the

credit or loan, because there is always the choice of laying claim to the pledged asset during the time

that the borrower fails to pay the loan amount according to the loan agreement or contract.

UNSECURED LOAN OR CREDIT:Some creditors prefer to not entail the pledging of some kind of asset in

exchange for giving a credit or loan to the borrower. In this situation, the creditor has a lot of details

in order to indicate there is an adequate amount of confidence which the debtor would repay the full

amount of the debt in an appropriate manner.


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What are trade payables?

Liabilities owed to suppliers for purchases or services rendered. They are also referred as accounts payable

or as sundry creditors. For example, when any goods are purchased on credit from the vendor then that

amount is included under the head trade payables.

What is depreciation?

The process of appropriating the cost of a fixed asset over its useful life is called depreciation. The term

depreciation is associated with tangible assets such as plant machinery, furniture, building and vehicles.

E.g.:If a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years,

it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming

straight-line depreciation), which will be matched with the money that the equipment helps to make each

year.

What are the various methods of computing depreciation?

1. STRAIGHT LINE METHOD:This method depreciates cost evenly throughout the useful life of the fixed

asset.

Depreciation per annum = (Cost - Residual Value) / Useful Life

2. DECLINING BALANCE METHOD: This method charges depreciation at a higher rate in the earlier years

of an asset. The amount of depreciation reduces as the life of the asset progresses.

Depreciation per annum = (Net Book Value - Residual Value) x Rate%

Where, Net Book Value is the asset's net value at the start of an accounting period. It is calculated

by deducting the accumulated (total) depreciation from the cost of the fixed asset. Residual Valueis the estimated scrap value at the end of the useful life of the asset. As the residual value is

expected to be recovered at the end of an asset's useful life, there is no need to charge the portion

of cost, equaling the residual value. Rate of depreciation is defined according to the estimated

pattern of an asset's use over its life term.

3. SUM-OF-THE-YEARS'-DIGITS METHOD: This is one of the accelerated depreciation techniques which

are based on the assumption that assets are generally more productive when they are new and

their productivity decreases as they become old.

SYD Depreciation = (Depreciable Base Remaining Useful Life)/Sum of the Years' Digits

Where, depreciable base is the difference between cost and salvage value of the asset.


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What is amortization?

It is defined as the deduction of capital expenses over a specific period of time (usually over the asset's

life). More specifically, this method measures the consumption of the value of intangible assets, such as

a patent or a copyright.

E.g.:Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent

on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an

amortization expense.

What is Inventory?

It includes the raw materials, work-in-progress goods and finished goods that are ready or will be ready for sale

and are considered as assets to any business. The composition of inventories will depend upon the nature of

business of the organization. A manufacturing company will have all the above components, a trading company

will have only finished goods and a service company may not have any inventory at all. Inventory is always

valued at lower of cost or net realizable value. First-in-First-Out (FIFO), Last-in-Last-Out (LIFO), specific

identification method and average cost method are the methods used for evaluating the inventory. As per AS2 the cost of inventories should be assigned by using either FIFO or weighted average method.

What is a ratio? What are the different kinds of financial ratios?

Ratios express one item in relation to other and draw inference of this expression. Ratios are very

important as they help to analyze the financial statements of a company or a firm.

Ratios are of following types:

1. Profitability Ratios

2. Growth Ratios.3. Dividend policy ratios

4. Short-term liquidity ratio

5. Capital structure ratio

6. Asset utilization ratio

7. Return ratio

8. Market Ratio

9. Price to book value ratio

What is profitability ratio? What are the different kinds of profitability ratios?

A class of financial metrics that are used to assess a business's ability to generate earnings as compared

to its expenses and other relevant costs incurred during a specific period of time.

Following are the different profitability ratios:

Gross Profit Ratio = Sales Cost of Goods SoldSales


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Cash Operating Margin = EBITDASales

Operating Margin = EBITSales

Net Profit Ratio = PATSales

Operating Expenses Ratio = Operating ExpensesSales

Earnings per Share = PAT Dividend on Preference Shares if anyNo. of Equity Shares

What is growth ratio? What are the different kinds of growth ratios?

Growth ratio indicates the growth of the company based on its historical performance.

Following are the different growth ratios:

COMPOUND ANNUAL GROWTH RATIO (CAGR)indicates average annual growth achieved by an enterprise

during a given period of time.

= 1 + Where

A = current value

P = base value

g = CAGR

n = difference between current year and base year.

YEAR ON YEAR GROWTH RATIO (Y-O-Y)gives the long term average growth of key financial variables.

Year on Year growth = Current Year Sales Previous Year SalesPrevious Year Sales

What is dividend policy ratio? What are the different kinds of dividend policy ratios?

Dividend policy ratios measure how much a company pays out in dividends relative to its earnings and

market value of its shares. These ratios provide insights into the dividend policy of a company.

Dividend Rate = Total DividendNo.of Shares

Dividend Payout Ratio = Dividends + Dividend Distribution TaxPAT


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Dividend Yield = Dividend per ShareCurrent Market Price

What is Short-term Liquidity ratio? What are the different kinds of Short-term Liquidity

ratios?

Short-term liquidity ratios indicate the adequacy of the companys current assets to meet its current

obligations.

Current Ratio= Current AssetsCurrent Liabilities

Quick Ratio = Current Assets InventoriesCurrent Liabilities

What is Capital Structure ratio? What are the different kinds of Capital Structure ratios?

Capital Structure ratios indicate the proportion of borrowed funds and share holders fund in total capital

employed.

Debt Equity Ratio = Long term DebtsShareholders Fund

Fixed Assets to Long term Debt = Fixed AssetsLong term Debts

Interest Coverage Ratio = EBITInterest

Debt Service Coverage Ratio = EBIT + Depreciation + Other Non Cash ExpensesInterest+ Loan Installment1Tax Rate

What is Asset Utilization ratio? What are the different kinds of Asset Utilization ratios?

The asset utilization ratio measures management's ability to make the best use of its assets to generate

revenue. This is particularly meaningful in a manufacturing, where fewer capital assets are used to

produce products.

Total Assets Turnover Ratio = Sales

Total Assets

Fixed Assets Turnover Ratio = SalesFixed Assets

Current Assets Turnover Ratio = SalesCurrent Assets

Inventory Turnover Ratio = Cost of Goods SoldAverage Inventories


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Average Holding Period = 365Inventory Turnover Ratio

Debtors Turnover Ratio = SalesAverage Debtors

Days of Sales Outstanding = 365Debtors Turnover Ratio

Average Payment Period= 365CreditorsPurchases

Length of Cash Conversion Cycle = Average Holding Period + Days of Sales Outstanding + Average Payment Period

What is Return ratio? What are the different kinds of Return ratios?

Return ratios indicate the returns earned by a company with respect to its assets, equity, capital employed

etc.

Return of Assets ROA = EBIT1Tax RateTotal Assets

Return on Capital Employed ROCE = EBIT1Tax RateCapital Employed

Return on Equity ROE = PATShareholdersFunds

DuPont AnalysisReturn on Equity ROE = PATSales

SalesTotal Assets

Total AssetsShareholdersFunds

What is Price-to-Book Value ratio? What are the different kinds of Price-to-Book Value ratios?

Price to Book Value Ratio = Current Market PriceBook Value per Share

Price Earnings (PE)Ratio =Current Market Price

Earnings per Share

Price Earnings to Growth Ratio = Price Earnings RatioGrowth Rate


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Financial Markets

What is a Share?

Total equity capital of a company is divided into equal units of small denominations, each called a share.Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the

company. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000

units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 12 said to have

20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have

voting rights.

Shares can be broadly divided into two categories - equity and preference shares.

EQUITY SHARESgive their holders the power to share the earnings/profits in the company as well as a

vote in the AGMs of the company. Such a shareholder has to share the profits and also bear the losses

incurred by the company. PREFERENCE SHARESearn their holders only dividends, which are fixed, giving no voting rights.

What is a Debt Instrument?

Debt instrument represents a contract whereby one party lends money to another on pre-determined

terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to

the lender.

In the Indian securities markets, the term bond is used for debt instruments issued by the Central and

State governments and public sector organizations and the term debenture is used for instruments

issued by private corporate sector.

What is a Derivative?

A derivative is a product whose value is derived from the value of one or more underlying variables or

assets in a contractual manner. The underlying asset can be equity, Forex, commodity or any other asset.

For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change

in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven

by the spot price of wheat which is the "underlying".

Some commonly used FINANCIAL DERIVATIVESare:

FORWARDS:A forward contract is a customized contract between two entities, where settlement takes

place at a specific date in the future at todays predetermined price.

E.g.:On 1st June, X enters into an agreement to buy 50 bales of cotton for 1stDecember at Rs.1000

per bale from Y, a cotton dealer. It is a case of a forward contract where X has to pay Rs.50000 on 1st

December to Y and Y has to supply 50 bales of cotton.

FUTURES:A futures contract is an agreement between two parties to buy or sell the underlying asset

at a future date at today's future price. Futures contracts differ from forward contracts in the sense


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that they are standardized and exchange traded. To facilitate liquidity in the futures contracts, the

exchange specifies certain standard quantity and quality of the underlying instrument that can be

delivered, and a standard time for such a settlement.

OPTIONS: An Option is a contract which gives the right, but not an obligation, to buy or sell the

underlying at a stated date and at a stated price. While a buyer of an option pays the premium and

buys the right to exercise his option, the writer of an option is the one who receives the option

premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.

Options are of two types - CALLand PUToptions:

CALLSgive the buyer the right but not the obligation to buy a given quantity of the underlying

asset, at a given price on or before a given future dates.

Putsgive the buyer the right, but not the obligation to sell a given quantity of underlying asset

at a given price on or before a given future date.

Presently, at NSE, futures and options are traded on the Nifty, CNX IT, BANK Nifty and 116 single

stocks.

WARRANTS: Options generally have lives of up to one year. The majority of options traded on

exchanges have maximum maturity of nine months. Longer dated options are called Warrants and

are generally traded over-the-counter.

Define Commodity Derivatives market.

Commodity derivatives market trade contracts for which the underlying asset is commodity. It can be an

agricultural commodity like wheat, soybeans, rapeseed, cotton, etc. or precious metals like gold, silver,

etc.

What is the difference between Commodity and Financial Derivatives

The basic concept of a derivative contract remains the same whether the underlying happens to be a

commodity or a financial asset. However there are some features which are very peculiar to commodity

derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in

the case of physical settlement, financial assets are not bulky and do not need special facility for storage.

Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates

the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as

financial underlying is concerned. However in the case of commodities, the quality of the asset underlying

a contract can vary at times.

What is a Mutual Fund?

A Mutual Fund is a corporate body registered with SEBI that pools money from individuals/corporate

investors and invests the same in a variety of different financial instruments or securities such as equity

shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial

intermediaries in the investment business that collect funds from the public and invest on behalf of the

investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which


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the mutual fund has invested the money leads to an appreciation in the value of the units held by

investors.

The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund

scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. The schemes

offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equityand bonds. Investors are also given the option of getting dividends, which are declared periodically by the

mutual fund, or to participate only in the capital appreciation of the scheme.

What is an Exchange Traded Fund?

An ETF represents a basket of stocks that reflect an index such as the Nifty. An ETF trades just like any

other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at

the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and

demand. By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock.

Because, ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one

share. Another advantage is that the expense ratios of most ETFs are lower than that of the average

mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on

any regular trade.

What is an Index?

An Index shows how a specified portfolio of share prices is 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 upwards or downwards.

NIFTY INDEX

S&P CNX Nifty (Nifty), is a scientifically developed, 50 stock index, reflecting accurately the market

movement of the Indian markets. It comprises of some of the largest and most liquid stocks traded

on the NSE. It is maintained by India Index Services & Products Ltd. (IISL), which is a joint venture

between NSE and CRISIL. The index has been co-branded by Standard & Poors (S&P). Nifty is the

barometer of the Indian markets.

SENSEX INDEX

S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply

the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established

and financially sound companies listed on BSE Ltd.

What is a Depository?

A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government

securities, units etc.) in electronic form.

There are two depositories in India which provide dematerialization of securities. The National Securities

Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).


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The benefits of participation in a depository are:

Immediate transfer of securities

No stamp duty on transfer of securities

Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.

Reduction in paperwork involved in transfer of securities

Reduction in transaction cost

What is Dematerialization?

Dematerialization 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 investors account with his

Depository Participant (DP).

Define Securities.

Securities includes instruments such as shares, bonds, stocks or other marketable securities of similar

nature in or of any incorporate company or body corporate, government securities, derivatives ofsecurities, units of collective investment scheme, interest and rights in securities, security receipt or any

other instruments so declared by the Central Government.

What is the function of Securities Market?

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase

and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporate and

entrepreneurs to raise resources for their companies and business ventures through public issues.

Transfer of resources from those having idle resources (investors) to others who have a need for them

(corporate) is most efficiently achieved through the securities market. Stated formally, securities markets

provide channels for reallocation of savings to investments and entrepreneurship.

Savings are linked to investments by a variety of intermediaries, through a range of financial products,

called Securities.

Which are the securities one can invest in?

Shares

Government Securities

Derivative products

Units of Mutual Funds

Who regulates the Securities Market?

The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA),

Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of

India (SEBI).


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Why do companies need to issue shares to the public?

Most companies are usually started privately by their promoter(s). However, the promoters capital and

the borrowings from banks and financial institutions may not be sufficient for setting up or running the

business over a long term. So companies invite the public to contribute towards the equity and issue

shares to individual investors. The way to invite share capital from the public is through a Public Issue.

Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once

this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid

down by SEBI.

What are the different kinds of issues?

Primarily, issues can be classified as a Public, Rights or Preferential issues (also known as private

placements). While public and rights issues involve a detailed procedure, private placements or

preferential issues are relatively simpler. The classification of issues is illustrated below:

INITIAL PUBLIC OFFERING (IPO)

IPO is when an unlisted company makes either a fresh issue of securities or an offer for sale of itsexisting securities or both for the first time to the public. This paves way for listing and trading of

the issuers securities.

AFOLLOW ON PUBLIC OFFERING (FPO)

FPO 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.

RIGHTS ISSUE

It is issued when a listed company which proposes to issue fresh securities to its existing

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. This route is best suited for companies who would

like to raise capital without diluting stake of its existing shareholders.

PREFERENTIAL ISSUE

Refers to the issue of shares or convertible securities by listed companies to a select group of

persons. This is a faster way for a company to raise equity capital.

What is meant by Market Capitalization?

The market value of a quoted company, which is calculated by multiplying its current share price (market

price) by the number of shares in an issue, is called as market capitalization. E.g. Company A has 120

million shares in issue. The current market price is Rs. 100. The market capitalization of company A is Rs.

12000 million.

How are companies classified on the basis of Market Capitalization?

BSEs classifies companies according to their Market Capitalization by using the 80-15-5 method. Heres

how this method works:

1. Arrange all the companies in descending order of their Market Capitalization.


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going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations

if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called

a "bull" and is said to have a "bullish outlook".

Define Bear Market.

A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets

make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks

are falling using a technique called short selling. Another strategy is to wait on the side-lines until you feel

that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is

pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish

outlook".

Define Short Selling.

Selling short is the sale of a stock that you don't own. More specifically, a short sale is the sale of a security

that isn't owned by the seller, but that is promised to be delivered. Short sellers assume that they will beable to buy the stock at a lower amount than the price at which they sold short. Selling short is the

opposite of going long. That is, short sellers make money if the stock goes down in price.

This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to

avoid short sales.

What is a Stock Exchange?

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and

Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact

in securities. These days, the trading platforms provided by exchanges are electronic and there is no need

for buyers and sellers to meet at a physical location to trade.

Who is a Broker?

A broker is an individual or party (brokerage firm) that arranges transactions between a buyer and

a seller for a commission when the deal is executed. A stockbroker is a regulated professional individual,

usually associated with a brokerage firm or broker dealer, who buys and sells stocks and other

securities for both retail and institutional clients, through a stock exchange or over the counter, in return

for a fee or commission. Stockbrokers are known by numerous professional designations, depending on

the license they hold, the type of securities they sell, or the services they provide.

What is a Portfolio?

A Portfolio is a combination of different investment assets mixed and matched for the purpose of

achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset

you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and even real estate


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etc. However, for most investors a portfolio has come to signify an investment in financial instruments

like shares, debentures, fixed deposits, mutual fund units.

A good investment portfolio is a mix of a wide range of asset class. Different securities perform differently

at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a

decline of any one security. When your stocks go down, you may still have the stability of the bonds inyour portfolio.

What is meant by Dividends declared by a Company?

Returns received by investors in equities come in two forms

a. Growth in the value (market price) of the share

b. Dividends

Dividend is distribution of part of a company's earnings to shareholders, usually twice a year in the form

of a final dividend and an interim dividend. Dividend is therefore a source of income for the shareholder.

Normally, the dividend is expressed on a 'per share' basis, for instanceRs. 3 per share. This makes it easy

to see how much of the company's profits are being paid out, and how much are being retained by the

company to plough back into the business. So a company that has earnings per share in the year of Rs. 6

and pays out Rs. 3 per share as a dividend is passing half of its profits on to shareholders and retaining the

other half. Directors of a company have discretion as to how much of a dividend to declare or whether

they should pay any dividend at all.

What is a Stock Split?

A stock split is a corporate action which splits the existing shares of a particular face value into smaller

denominations so that the number of shares increase, however, the market capitalization or the value of

shares held by the investors post-split remains the same as that before the split.

E.g.:If a company has issued 1,00,00,000 shares with a face value of Rs.10 and the current market price

being Rs. 100, a 2-for-1 stock split would reduce the face value of the shares to 5 and increase the number

of the companys outstanding shares to 2,00,00,000, (1,00,00,000*(10/5)). Consequently, the share price

would also halve to Rs. 50 so that the market capitalization or the value shares held by an investor remains

unchanged. It is the same thing as exchanging a Rs. 100 note for two Rs. 50 notes; the value remains the

same.

Why do companies announce Stock Split?

Though there are no theoretical reasons in financial literature to indicate the need for a stock split,

generally, there are mainly two important reasons. As the price of a security gets higher and higher, some

investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable.

Splitting the stock brings the share price down to a more "attractive" level. In our earlier example to buy

1 share of company ABC you need Rs. 40 pre-split, but after the stock split the same number of shares can

be bought for Rs.10, making it attractive for more investors to buy the share. This leads us to the second


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reason. Splitting a stock may lead to increase in the stock's liquidity, since more investors are able to afford

the share and the total outstanding shares of the company have also increased in the market.

What is meant by Buy Back of Shares?

A buyback can be seen as a method for company to invest in itself by buying shares from other investors

in the market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by the

company with the purpose to improve the liquidity in its shares and enhance the shareholders wealth.

Under the SEBI (Buy Back of Securities) Regulation, 1998, a company is permitted to buy back its share

from:

a. Existing shareholders on a proportionate basis through the offer document.

b. Open market through stock exchanges using book building process.

c. Shareholders holding odd lot shares.

What is meant by Investment?

The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keepingthe savings idle you may like to use savings in order to get return on it in the future. This is called

Investment.

What are various Short-term financial options available for investment?

Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may

be considered as short-term financial investment options:

SAVINGS BANK ACCOUNT is often the first banking product people use, which offers low interest

(4%-5% p.a.), making them only marginally better than fixed deposits.

MONEY

MARKET OR

LIQUID

FUNDS

are a specialized form of mutual funds that invest in extremelyshort-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual

funds, money market funds are primarily oriented towards protecting your capital and then, aim

to maximize returns. Money market funds usually yield better returns than savings accounts, but

lower than bank fixed deposits.

FIXED DEPOSITS WITH BANKSare also referred to as term deposits and minimum investment period

for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and

may be considered for 6-12 months investment period as normally interest on less than 6 months

bank FDs is likely to be lower than money market fund returns.

What are various Long-term financial options available for investment?

POST OFFICE MONTHLY INCOME SCHEME is a low risk saving instrument, which can be availed

through any post office. It provides an interest rate of around 8% per annum, which is paid

monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in

multiples of 1,000/-.

PUBLIC PROVIDENT FUNDSare long term savings instrument with a maturity of 15 years and interest

payable at 8% per annum compounded annually. A PPF account can be opened through a


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nationalized bank at any time during the year and is open all through the year for depositing

money. Tax benefits can be availed for the amount invested and interest accrued is tax-free.

COMPANY FIXED DEPOSITS are short-term (six months) to medium-term (three to five years)

borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi-

annually or annually. They can also be cumulative fixed deposits where the entire principal along

with the interest is paid at the end of the loan period. The rate of interest varies between 6-9%

per annum for company FDs. The interest received is after deduction of taxes.

BONDS are fixed income (debt) instrument issued for a period of more than one year with the

purpose of raising capital. The central or state government, corporations and similar institutions

sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest

on a specified date, called the Maturity Date.

MUTUAL FUNDSare funds operated by an investment company which raises money from the public

and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of

objectives. It is a substitute for those who are unable to invest directly in equities or debt because

of resource, time or knowledge constraints. Benefits include professional money management,

buying in small amounts and diversification. Mutual fund units are issued and redeemed by the

FUND MANAGEMENT COMPANYbased on the fund's NET ASSET VALUE (NAV), which is determined

at the end of each trading session. NAV is calculated as the value of all the shares held by the

fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term

investment vehicle though there some categories of mutual funds, such as money market mutual

funds which are short term instruments.

What is meant by Trading?

Trading means performing a transaction that involves the buying and selling of a security. It involves

multiple parties participating in the voluntary negotiation and then the exchange of one's goods andservices for desired goods and services that someone else possesses.

What are the various factors considered while investing in a company?

Invest in companies which have:

BUSINESS CONTINUITY

First, look at continuity of business. Take the instance of a company in the electronics sector. The

Indian government-owned ECTV closed down operations when it failed to take advantage of other

business opportunities. It was once the largest seller of television sets in the country. Another

example in this industry was Videocon VCR, which was set up as a stand-alone manufacturer ofVCRs. The company failed to be alert to technological advancements, which sounded the death

knell for the outdated VCR and obviously for the company too!

ADEQUATE CAPACITY

Second, look at capacity. How big is beautiful? Size brings in economies of scale all rightcost is

spread over a larger output, bringing down the overall cost. But bigger isn't necessarily better in

this case. Companies can grow out of control. Arvind Mills built 10% of the global denim capacity,


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creating an oversupply situation. When these capacities went on stream, prices of denim dropped

and the infrastructure costs just killed the company. Arvind Mills couldn't go close to achieving

full capacity in its manufacturing, which it needed to do to be viable.

SURVIVAL ABILITY

Competition kills and this is one major cause of failure. Hindustan Unilever has over the years

taken the competition to its rivals and expanded its portfolio. When growth from its bread and

butter business of detergents and soap was plateauing, the company found new outlets to grow.

In the last three decades, this survival skill transformed the company into an FMCG conglomerate

with powerful cash flows. The survival factors here are more to do with the ability of the

management to see future trends in their business.

APPROPRIATE INFRASTRUCTURE

The infrastructure should complement the market where it sells its product or where it procures

its raw material. You can't have a cement plant in Karnataka and try to service the Delhi market.

It would be far more expensive just to transport goods that far, thus spiraling costs.

NEW CAPACITY CREATIONS:

Most capacities in any business come in at the peak of the business cycle. This generally leads to

a drop in selling prices as new capacities mean more supply. And a demand drop would hurt the

players in that field.

COST MANAGEMENT

The company should have a suitable cost structure for the business. Lower costs enable the

company to survive in a down phase well. In an upward business cycle, good cost management

implies higher profitability.

PRODUCTS WITH STAMINA

Look out for opportunistic businesses. There have been small niche players who have tried to

identify and milk insubstantial opportunities. For instance, a small company, India Food

Fermentations, tried to market the concept of dosas as fast food through a vending machine, Dosa

King. This company went bankrupt.

What are the different types of Investors in the market?

AGGRESSIVE:They adopt a method of portfolio management and asset allocation that attempts to

achieve maximum return. An aggressive investment strategy attempts to grow an investment at

an above-average rate compared to its industry or the overall market, but usually take on

additional risk. They place a higher percentage of their assets in equities rather than in safer debt

securities.

MODERATELY AGGRESSIVE: These investors seek longer term investment gains through a mix ofequity investments. While many of the investments are the same, the overall portfolio contains

some more conservative investments, creating a portfolio that builds wealth with less annual

swings in the portfolio's performance. An investor with a time frame of between 6-10+ years is

most appropriate for this type of portfolio and the average level of return that an investor can

expect to receive is between 10-11% annually. This annual investment return represents the stock

market's long term average growth over the past several decades.


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MODERATELY CONSERVATIVE:They are much less willing to accept variations in their portfolio's

balance. Individuals that are going to need their money within 3-6 years are most suitable for this

investment strategy, or those looking for a regular income stream. A moderately conservative

portfolio is often more weighted to individual bonds or bond mutual funds, and can expect to

earn between 6-8% in annual growth. Moderately Conservative investors also typically receive

income from dividends on a quarterly or annual basis from their investments.

CONSERVATIVE:Typically those investors with either a short term goal (less than 3 years), or those

who are in retirement seeking a regular income stream. These portfolios tilt away from equity

investments into more preservation investments, like individual bonds, bond funds, municipal

bonds and annuities. These assets are not intended to provide great growth within the portfolio,

but are designed to provide income and preserve the principal balance over the investor's

estimated lifespan.

What is the difference between a Shareholder and Stakeholder?

Shareholders are stakeholders in a corporation, but stakeholders are not always shareholders. Ashareholder owns part of a company through stock ownership, while a stakeholder is interested in the

performance of a company for reasons other than just stock appreciation.

Stakeholders could be:

employees who, without the company, would not have jobs

bondholders who would like a solid performance from the company and, therefore, a reduced

risk of default

customers who may rely on the company to provide a particular good or service

suppliers who may rely on the company to provide a consistent revenue stream

Banking


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What is a Bank and what are its functions?

The term bankis used generically to refer to any financial institution that is licensed to accept deposits

that are repayable on demand, and lends money.

A bank makes money via Net Interest Income

Net Interest Income (NII) = Interest Earned on Loans Interest Paid on Deposits

What are the different services offered by a bank to a corporate?

LOANS:Banks provide short and long-term funds to businesses.

CASH DEPOSITS:Corporate deposit surplus funds in a bank.

FOREIGN EXCHANGE TRANSACTIONS:Banks act as authorized dealers to facilitate foreign exchange

transactions.

ADVISORY SERVICES: Banks provide financial advisory services such as valuations, issue

management, mergers & acquisitions, etc. to corporate.

TRADE SERVICES:Banks play the role of the trusted intermediary between parties involved in tradeand facilitate trade and commerce.

What are the different Types of Bank Accounts?

SAVINGS ACCOUNTS

These accounts are meant for individuals. It pays interest. The interest is calculated on the daily

balance in the account. The interest is credited to the accounts on a monthly or quarterly basis.

There is some restriction on the number of times a customer may withdraw or deposit funds.

CURRENT ACCOUNTS

They are held mainly by businesses. These are accounts primarily meant for transacting, and

hence have no restrictions on the number of transactions. Banks do not pay any interest on

current accounts.

TERM/TIME/FIXED DEPOSITS

These are deposits with a fixed maturity, hence also called Fixed Deposits (FDs). The customer

cannot add to, or withdraw from, this deposit till maturityi.e. transactions are not allowed on

an FD. FDs earn higher interest than savings deposits, and banks are free to fix the interest rates.

RECURRING DEPOSITS

These are a fixed deposit variant. The only difference being that, the customer has the flexibility

to deposit the amount in installments. No withdrawals are allowed. One can however, avail a loanagainst the deposit.

PUBLIC PROVIDENT FUND ACCOUNTS

These are accounts meant for retirement savings. In India, they are fully tax exemptyou pay no

tax on the principal or interest earned.


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What are the different categories of banks?

SCHEDULED BANKS:Banks which have deposits>INR 200 crores are Scheduled Banks E.g.: SBI, ICICI

NON-SCHEDULED BANKS: Banks which have deposits50%)ownership. E.g.: SBI, Bank of India

PRIVATE BANKS:Banks which are owned by private Indian entities such as corporate or individuals.

E.g.: ICICI, Axis Bank

FOREIGN BANKS: Banks owned by Multinational/non-Indian entities. E.g.: HSBC, Deutsche bank,

JPMC

URBAN CO-OPERATIVE BANK: These banks are formed by a group of members and their main focus

is to mobilize savings from low income and middle income groups to ensure credit availability to

its members.

What are NBFCs?

Non-Banking Finance Companies (NBFCs) are financial institutions that provide services, similar to banks,

but they do not hold a banking license. The main difference is that NBFCs cannot accept deposits

repayable on demand. All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the

Bank had given a specific authorization are allowed to accept/hold public deposits. Motilal Oswal, Tata

Capital, Reliance Capital are some of the NBFCs in India.

Some of their services include:

1) Providing loans and credit facilities

2) Leasing and Hire purchase

3) Lending

4) Investment services (Asset Management, underwriting)

Economics


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What is GDP?

GDP is the total value of products & Services produced within the territorial boundary of a country. It is

calculated using the formula provided below:

GDP = Private Consumption + Investment + Government Spending + Net exports

Where,

Net Exports = ExportsImports

Private Consumption here refers to the household consumption expenditure which will fall

under one of the three categoriesdurable goods, non-durable goods and services.

Investment here refers to business investment in buying new equipment like purchase of

software, buying of machinery, etc. and does not include exchange of assets. This should not be

confused with financial investment in purchase of financial products.

Government Spending is the expenditure of government on final goods and services. It is

inclusive of salaries of public servants and purchase of military equipment but excludes socialsecurity and unemployment benefits.

APPLICATION:To see the strength of a countrys local economy. GDP is considered to be an indicator of

standard of living of a country. Countries with higher GDP are considered to have better standard of

living.

What is GNP?

Total value of Goods and Services produced by all nationals of a country (whether within or outside the

country).

GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net paymentoutflow to foreign assets)

Net income receipt is arrived at by summing the income from overseas investment and subtracting from

the sum the income earned by foreign nationals and companies domestically. Let us consider an example

for further clarification. Suppose the GDP and GNP of India are to be calculated, now if an Indian company

has a plant in China then the profit made by that plant will not be included in GDP but will be included in

GNP. Similarly if a Chinese firm has a plant in India then the plants income will be accounted for in GDP

but will be subtracted from GNP value. To summarize the basis of production allocation is geographical

location and ownership for GDP and GNP respectively.

APPLICATION:To see how the nationals of a country are doing economically.

What is PPP?

Purchasing power parity is based on the assumption that in absence of duties, transaction costs and other

curbs, identical goods should have the same price in different countries when expressed in same currency.

In other words, how much money would be needed to purchase same amount of goods and services in


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two different markets. This allows for calculating PPP exchange rates that can be used to convert gross

national income of countries in terms of a single currency, usually the US dollar, to facilitate meaningful

comparisons after adjusting for prices.

For example, suppose that Japan has a higher GDP per capita, ($18) than the US ($16). That means that

Japanese on average make $2 more than normal Americans. However, they are not necessarily richer.Suppose that one gallon of orange juice costs $6 in Japan and only $2 in the US. The Japanese can only

buy 3 gallons while the Americans can buy 8 gallons. Therefore, in terms of orange juice, the Americans

are richer

Now apply this to daily life. The orange juice represents the previously mentioned "basket of goods" which

represents the cost of living in a country. Therefore, even if a country has a higher GDP per capita

(individual income), that country's people may still live poorer if the cost of living is more expensive

What is Inflation?

Inflation means that the general level of prices is going up i.e. more money is needed to get the sameamount of a good or service, or the same amount of money will get a lower amount of a good or service.

Let us take an example suppose one week earlier you went to have breakfast in a nearby restaurant and

you have taken a 50 rupee note with you. If the price a piece of sandwich was Rs. 10 price then with you

could buy 5 sandwich pieces. Now over the week the prices of bread and vegetables have gone up on

account of inflation and as a result the restaurant has increased the price of a piece of sandwich to Rs.12.5.

Now you can only buy 4 sandwich pieces with the same 50 rupee note today. Now you may be thinking

as to how one can measure inflation. The answer to your question is inflation rate, the measure of rise in

price level of goods and services. It indicates the rate of rise in price level of goods and services.

What are the causes of inflation?

When the total money in an economy (the money supply) increases too rapidly, the quality of the

money (the currency value) often decreases.

Demand-Pull inflation

The Demand-Pull inflation theory can be said simply as "too much money chasing too few goods." In

other words, if the will of buying goods is growing faster than amount of goods that have been made,

then prices will go up. This most likely happens in economies that are growing fast.

Cost-Push inflation

The Cost-Push inflation theory says that when the cost of making goods (which are paid by the company)

go up, they have to make prices higher to still make profit out of selling that very product. The higher costs

of making goods can include things like workers' wages, taxes to be paid to the government or bigger

costs of getting raw materials from other countries.


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What is Deflation?

A general decline in prices, often caused by a reduction in the supply of money or credit is called deflation.

Deflation can be caused also by a decrease in government, personal or investment spending. The opposite

of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand

in the economy, which can lead to an economic depression. Central banks attempt to stop severe

deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.

The decline in prices of assets is often known as Asset Deflation.

What is Stagflation?

When inflation is accompanied by an increase in unemployment rate then the situation is called

stagflation. The term stagflation is combination of two terms stagnation and inflation.

Therefore it is a situation in which there is almost no growth in production (total amount

of goods and services produced), there is high inflation, and unemployment is higher than normal. This

situation usually begins with things beginning to cost more while fewer of the things are being made.

Because fewer things are being made, fewer people are needed to make them. This causes unemployment

to increase.

What is Hyperinflation?

In economics, hyperinflation is inflation that is "out of control," when prices increase very fast

as money loses its value. One example of hyperinflation is in Germany in the 1920s. In 1922, the largest

banknote was 50,000 Mark. These banknotes were so worthless that people would burn them in fires to

keep them warm. The notes would burn longer than the amount of wood you could buy with them. In

Zimbabwe, the inflation rate was 231,150,888.87 % in July 2008.

What are the effects of inflation?

The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden

costs to some and benefits to others from this decrease in the purchasing power of money. For example,

with inflation, those segments in society which own physical assets, such as property, stock etc., benefit

from the price/value of their holdings going up, while those who seek to acquire them will need to pay

more for them. However in general high or unpredictable inflation rates are regarded as harmful to an

overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or

plan long-term. Uncertainty about the future purchasing power of money discourages investment and

saving.And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher

income tax rates unless the tax brackets are indexed to inflation. Where fixedexchange ratesare imposed,

higher inflation in one economy than another will cause the first economy's exports to become more

expensive and affect thebalance of trade.

But yes, moderate inflation is good for developing economies like ours.
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Some of the effects are explained below:

Inflation cycle

High inflation can prompt employees to demand rapid wage increases, rising wages in turn can help fuel

inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary

expectations, which will be higher when inflation is high. This can cause awage spiral.In a sense, inflationbegets further inflationary expectations, which beget further inflation.

Hoarding

People buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the

losses expected from the declining purchasing power of money, creating shortages of the hoarded goods.

Social Unrest and Revolts

Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food

inflation is considered as one of the main reasons that caused the 20102011 Tunisian revolution and

the 2011 Egyptian revolution,

Allocative Efficiency

But when prices are constantly changing due to inflation, price changes due to genuine relativeprice

signals are difficult to distinguish from price changes due to general inflation, so agents are slow to

respond to them. The result is a loss ofallocative efficiency.

Cost involved in changing

With high inflation, firms must change their prices often in order to keep up with economy-wide changes.

But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus,

or implicitly, as with the extra time and effort neededto change prices constantly.

What are WPI, CPI and PPI?

Inflation in an economy can be measured based on 3 indexes.

WPI Wholesale price index

Wholesale Price Index (WPI) is a price index which represents the wholesale prices of a basket of goods

over time. In simple words, WPI is an indicator of price changes in the wholesale market. WPI measures

the changes in the prices charged by manufacturers and wholesalers. WPI measure the changes in

commodity prices at a selected stages before goods reaches to the retail level.

For example in India about 435 items were used for calculating the WPI in base year 1993-94 while theadvanced base year 2004-05 and which has now been changed to 2010-2011; uses 676 items

1. Primary Articles: consist of food grains, fruits and vegetables, milk, eggs, meats and fishes,

condiments and spices, fibers, oil seeds and minerals. Their weight age is 22.02 %.

2. Fuel, Power, and Light & Lubricants: consist of coal and petroleum related products, lubricants,

electricity etc. Their weight age is 14.23%.
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3. Manufactured Products: consist of dairy products, atta, biscuits, edible oils, liquors, cloth,

toothpaste, batteries, automobiles etc. Their weight age is 63.75%.

Shortcomings

Not globally comparable as countries either have a producer price index or a consumer price

index, that is used by central bank. Only has goods, and excludes services (contributes 56% to Indias GDP), a huge part of the

economy, which directly affect prices of all other things

These rates do not reflect the prices consumers pay for goods

CPI Consumer price index

Consumer Price Index (CPI) is a price index which represents the average price of a basket of goods over

time. In simple words, CPI is based on changes in prices at the retail level. CPI measures the average prices

of goods and services that we, the consumers, have paid for. Education, apparel, foods and beverages,

communication, transportation, recreation, housing, and medical care are the 8 groups for which the CPI

is set

India currently has four indices that measure changes in prices of goods and services paid by the final

consumer

1. CPI Industrial Workers;

2. CPI Urban Non-Manual Employees;

3. CPI Agricultural laborers;

4. CPI Rural labor.

Shortcomings

The all-India CPI, which has been divided between urban and rural areas, gives the most accuratepicture of prices but has very limited history as it was started in January last year

PPI focuses on prices of goods and services that are received by the producer. This is different

from the retail prices, which include shipping costs, taxes and other levies

Why 3 different indexes?

1. WPI Does not include service industry which contributes 56% to the GDP

2. CPI Helps to measure the price of goods and services at a retail level/last stage

3. PPI It completes the loop by also measuring the prices of goods and services at the first stage

Who proposed PPI in India?

Former Reserve Bank governor D Subbarao has said India needs a new gauge of inflation the producer

price index. According to Subbarao, the most widely watched measure of inflation in India, the wholesale

price index (WPI), does not include services, which forms a big part of economic activity (contributes 56%

to Indias GD

Documents

Finance Guidebook Updated