The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 1 Book-Keeping & Accountancy 1. What is General Ledger ? Ans:-General Ledger is a book containing all the accounts for recording transactions relating to a company's 1.Assets 2.Liabilities 3.Owners' equity 4.Revenue 5Expenses 6.Gains and losses. Which is known as “General Ledger” Difference between Journal & Ledger: Journal : The record of journal entries appearing in order by date. Some refer to the journal as the book of original entry, since the entries are first recorded in a journal. From the journal the entries will be posted to the designated accounts in the general ledger. With manual systems there are likely to be a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and the general journal. Ledger :A "book" containing accounts. For example, there is the general ledger that contains the balance sheet and income statement accounts. 2.What is BRS ? Ans:- BRS means Bank Reconcilation Statement Which shows the differentiation between Cash book and Pass book That statement is known as Bank Reconciliation Statement 3.What is Petty cash? Ans:-An accessible store of money kept by an organization for expenditure on small items. 4.What are the 3 basic rules in Accounting ? Ans:- Real Accounts :Debit what comes in :Credit what goes out Personal Accounts :Debit the receiver :Credit the giver Nominal Account :Debit all expenses and losses :Credit all incomes and gains 5.What is Journalizing? What are the five columns of a Journal? Journalizing:- Ans:- Entering of Financial Data which is known as Journalizing
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The Finance Interwive Questoins and Answer
Babasabpatilfreepptmba.com Page 1
Book-Keeping & Accountancy
1. What is General Ledger ?
Ans:-General Ledger is a book containing all the accounts for recording transactions relating to a
company's
1.Assets 2.Liabilities 3.Owners' equity 4.Revenue 5Expenses 6.Gains and losses. Which is known as
“General Ledger”
Difference between Journal & Ledger:
Journal : The record of journal entries appearing in order by date. Some refer to the journal as the book
of original entry, since the entries are first recorded in a journal. From the journal the entries will be
posted to the designated accounts in the general ledger. With manual systems there are likely to be a
sales journal, purchases journal, cash receipts journal, cash disbursements journal, and the general
journal.
Ledger :A "book" containing accounts. For example, there is the general ledger that contains the
balance sheet and income statement accounts.
2.What is BRS ?
Ans:- BRS means Bank Reconcilation Statement Which shows the differentiation between Cash book
and Pass book That statement is known as Bank Reconciliation Statement
3.What is Petty cash?
Ans:-An accessible store of money kept by an organization for expenditure on small items.
4.What are the 3 basic rules in Accounting ?
Ans:- Real Accounts :Debit what comes in
:Credit what goes out
Personal Accounts :Debit the receiver
:Credit the giver
Nominal Account :Debit all expenses and losses
:Credit all incomes and gains
5.What is Journalizing? What are the five columns of a Journal?
Journalizing:-
Ans:- Entering of Financial Data which is known as Journalizing
As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can operate
in the stock market. Deal can be done only through a registered broker of a recognised Stock Exchange or
through a SEBI- registered sub-broker
1What are Blue-Chip companies? A blue chip stock is the stock of a well-established company having
stable earnings and no extensive liabilities.
1How is SENSEX calculated?
Sensex is an index which shows whether the stocks have gone up or gone down and accordingly the
sensex is calculated.
1What is a Split and buy-back?
Split is book entry wherein the face value of the share is altered to create more number of shares
outstanding without calling for fresh capital or without altering the share capital account. For example if a
company announces a two-way split, it means that a share of the face value of Rs.10 is split into two
shares of face value Rs.five each and a person holding one share now holds two shares. Buy-back t is a
process by which a company can buy-back its shares from shareholders. A company may buy-back its
shares in various ways from existing shareholders on a proportionate basis through a tender offer.
What is an IPO? An IPO is an abbreviation for Initial Public Offer. When a company goes public for
the first time or issues a fresh stock of shares, it offers it to the public directly. This happens in the
primary market. The primary market is where a company makes its first contact with the public at large.
What is Arbitrage? Arbitrage is an act of buying assets (or securities) in one market and selling in
another at higher prices
What are the various kinds of financial ratios? There are many financial ratios. Some of the better
known include:Liquidity Ratios: Liquidity ratio measures the ability of a firm to meet its current
obligations. Liquidity ratios by establishing a relationship between cash and other current assets to current
obligations give measure of liquidity.
e.g. Current ratio [CR] = Current Assets/Current liabilities.
A high CR ratio (>2.5) indicates that a company can meets its short term liabilities.Leverage Ratios:
Leverage ratio indicates the proportion of debt and equity in financing the firm's assets. They indicate the
funds provided by owners and lenders. e.g -----Debt-equity ratio (D-E ratio) total long term debt/net
worth. A high D-E ratio indicates that the company's credit profile is bad. Activity Ratios: Activity ratios
are employed to evaluate the efficiency with which firms manage and run their assets. They are also
called turnover ratios. e.g-- Sales Turnover ratio = sales/total assets .A Sales Turnover ratio indicates how
much business a company generates for every additional rupee invested. Profitability Ratios: These ratios
indicate the level of profitability of the business with relation to the inputs or capital employed. Some
better-known profit ratios include operating profit margin (OPM). Operating profit margin is a measure of
the company's efficiency, either in isolation or in comparison to its peers.
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What is EPS, P/E, BV and MV/BV?
Earning Per Share (EPS): EPS represents the portion of a company's profit allocated to each
outstanding share of common stock. Net income (reported or estimated) for a period of time is divided by
the total number of shares outstanding during that period. It is one of the measures of the profitability of
common shareholder's investments. It is given by profit after tax (PAT) divided by number of common
shares outstanding.
Price Earning Multiple (P/E): Price earning multiple is ratio between market value per share and
earning per share.
Book Value (BV): (of a common share) The company's Net worth (which is paid-up capital + reserves &
surplus) divided by number of shares outstanding.
Market value to book value ratio (MV/BV ratio): It is the ratio between the market price of a security
and Book Value of the security.
What is technical analysis?
Technical analysis is the study of historic price movements of securities and trading volumes.Technical
analysts believe that prices of the securities are determined largely by forces of demand and supply. Share
prices move in patterns which are easily identifiable. Crucial insights into these patterns can be obtained
by keeping track of price charts, leading to predictions that a stock price may move up or down. The
belief is that by knowing the past, future prices can predicted.
What is equity? Funds brought into a business by its shareholders is called equity. It is a
measure of a stake of a person or group of persons starting a business
What is a Stock Exchange? A common platform where buyers and sellers come together to
transact in stocks and shares. It may be a physical entity where brokers trade on a physical
trading floor via an "open outcry" system or a virtual environment.
What is electronic trading? Electronic trading eliminates the need for physical trading floors.
Brokers can trade from their offices, using fully automated screen-based processes. Their
workstations are connected to a Stock Exchange's central computer via satellite using Very
Small Aperture Terminus (VSATs). The orders placed by brokers reach the Exchange's central
computer and are matched electronically.
What Does Reverse Stock Split Mean?
A reduction in the number of a corporation's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.
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Preference Shares usually, non-voting capital stock that pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of assets.
Debenture A bond issued by a corporation which is secured by the general credit or promise to pay of the issuer. It is not backed by collateral such as tangible assets. Example: 1. A certificate or voucher acknowledging a debt.
2. An unsecured bond issued by a civil or governmental corporation or agency and
backed only by the credit standing of the issuer.
Derivatives:
Financial instruments, such as futures and options, which derive their value from underlying securities
including bonds, bills, currencies, and equities. Equity derivatives are financial derivative products
whose value is dependent on the value of an underlying share or group of shares.
Underlying Security
The security that must be delivered when another security is exercised. For example, if a call option is
exercised, then the underlying stock is delivered to the call owner. Warrants, rights, options, and
convertible securities all have underlying securities. For futures options, futures are the underlying
security.
Futures Investment contracts which specify the quantity and price of a commodity to be purchased or sold at a later date. On contract date, the buyer must take physical possession or make delivery of the commodity, which can only be avoided by closing out the contract(s) before that date. Futures can be used for speculation or hedging.
Option A contract that gives the owner the right, if exercised, to buy or sell a security or basket of securities (index) at a specific price within a specific time limit. Usually, they are traded as securities themselves, with buyers and sellers trying to profit from price changes. They are generally available for 1 to 9 months, with some longer term options (called LEAPS) also available for selected securities. Stock option contracts are generally for the right to buy or sell 100 shares of the underlying stock (100 is the multiplier). Trading in options should only be undertaken by sophisticated investors.
Call Option A call option gives the owner the right, but not the obligation, to buy the underlying stock at a given price (the strike price) by a given time (the expiration date). The owner of the call is speculating that the underlying stock will go up in value, hence, increasing the value of the option. The purpose can be to speculate with the option (hope it goes up and sell for a profit), to invest in the underlying stock at a locked in price if the stock price goes high enough, or to generate income. Each option contract equals 100 shares of stock. For example, an AAA MAR 65 call, would give the owner the right to buy 100 shares of AAA at $65 (strike price) per share between now and the third Friday in March (expiration date).
Put Option A put option gives the owner the right, but not the obligation, to sell the underlying stock at a given price (the strike price ) by a given time (the expiration date). The owner is speculating that the option will go up in value and the underlying stock will go down in value. The purpose can be to either speculate with the option (hope it goes up and sell for a profit) or trade the underlying stock at a locked in price if the stock price goes down enough. For example, an AAA MAR 65 put would give the owner the right to sell 100
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shares of AAA at $65 (strike price) per share between now and the third Friday in March (expiration date).
Hedging An investment strategy of lowering risk by buying securities that have offsetting risk characteristics. A perfect hedge eliminates risk entirely. Hedging strategies lower return since there is a cost involved in hedging. For example, a portfolio manager could short a futures contract which will perfectly offset any decrease in the value of the portfolio. Options and short selling stock can also be used for hedging. Hedge funds are investment pools that are free to use any hedging techniques they desire and they often make large bets in a relatively small number of different holdings.
Intraday Trading Intraday share trading refers to the buying and selling (or vise versa) of the same script in the same trading session ( on the same day).
Portfolio Management:
Where assets are combined into a portfolio that fits the investor's preferences (eg, level of risk) and
needs (eg, regular dividends).
The aim of Portfolio Management is to achieve the maximum return from a portfolio which has been
delegated to be managed by an individual manager or financial institution. The manager has to
balance the parameters which define a good investment ie security, liquidity and return. The goal is to
obtain the highest return for the client of the managed portfolio.
Blue Chip Companies:
A blue chip stock is the stock of a well-established company having stable earnings and no extensive
liabilities. Most blue chip stocks pay regular dividends, even when business is faring worse than usual.
They are valued by investors seeking relative safety and stability, though prices per share are usually
high.
Bond A long-term debt instrument on which the issuer pays interest periodically, known as „Coupon‟.
Bonds are secured by COLLATERAL in the form of immovable property. While generally, bonds have a
definite MATURITY, „Perpetual Bonds‟ are securities without any maturity. In the U.S., the term
DEBENTURES refers to long-term debt instruments which are not secured by specific collateral, so as to
distinguish them from bonds.
NASDAQ An acronym for National Association of Security Dealers Automated Quotations System, which
is a nationwide network of computers and other electronic equipment that connects dealers in the over-
the-counter market across the U.S. The system provides the latest BID and ASKING PRICES quoted for
any security by different dealers. This enables an investor to have his or her transaction done at the best
price. Due to NASDAQ, the over-the-counter market in the U.S. is like a vast but convenient trading floor
on which several thousand stocks are traded.
National Stock Exchange (NSE) It is a nationwide screen-based trading network using computers,
satellite link and electronic media that facilitate transactions in securities by investors across India. The
idea of this model exchange (traced to the Pherwani Committee recommendations) was an answer to the
deficiencies of the older stock exchanges as reflected in settlement delays, price rigging and a lack of
transparency.
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Volatility The measure of the tendency of prices to fluctuate widely. Prices of small companies tend to be more volatile than those of large corporations. Beta is a measure of volatility.
Liquidity
The ability to turn an asset into cash. A highly liquid asset is easy to sell because an active market exists
that sets prices which are continuously adjusted for supply and demand. An example is a listed stock or
mutual fund. A less liquid asset is real estate or a collectible
Lot A group of identical UNITS (for securities) or nearly identical units (for collectibles) of an investment that are traded at the same time and price. Open lots are the contents of open investments and can be long (buys) or short (short sell). Closed lots are the contents of closed investments and can be long (sell) or short (buy to cover).
Depository A system of computerized book-entry of securities. This arrangement enables a transfer of
shares through a mere book-entry rather than the physical movement of certificates. This is because the
scrips are „dematerialized‟ or alternatively, „immobilized‟ under the system.
Bear A person who expects share prices in general to decline and who is likely to indulge in SHORT
SALES.
Bear Market A long period of declining security prices. Widespread expectations of a fall in corporate
profits or a slowdown in general economic activity can bring about a bear market.
Bull A person who expects share prices in general to move up and who is likely to take a long position in
the stock market
Transfer agent: The person or firm that cancels the shares in the name of the seller and
The complete lifecycle of a U.S equity trade : Order Capture, its execution in the market,
affirmation/confirmation, foreign exchange, clearing, settlement, and reporting.
Mutual Fund Fund operated by an investment company that raises money from shareholders and
invests it in stocks, bonds, options, commodities or money market securities. The sum of the collected
amount is called „Corpus‟.
Retained Earnings Net profits kept to accumulate in a business after dividends are paid.
Custodian A financial institution that has the legal responsibility for a customer's securities. This implies
management as well as safekeeping.
Capital Markets : The capital market (securities markets) is the market for securities, where companies
and the government can raise long-term funds. The capital market includes the stock market and the
bond market. It is a place where investors come together to buy and sell shares.
Primary Markets: The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built into the price of the
security offering, though it can be found in the prospectus
Secondary Market: The secondary market is the financial market for trading of securities that have
already been issued in an initial private or public offering.
Q) What is the difference between stocks and shares? Ans: “Stock” is a general term used to describe the shares of any company and "shares" refers to a
specific stock of a particular company. So, if investors say they own stocks, they are generally
referring to their overall ownership in one or more companies. If investors say they own shares - the
question then becomes - shares in what company?
Stocks : A type of security that signifies ownership in a corporation and represents a claim on part of
the corporation's assets and earnings.
Shares : A unit of ownership interest in a corporation or financial asset. While owning shares in
a business does not mean that the shareholder has direct control over the business's day-to-day
operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any
are declared in the form of dividends. The two main types of shares are common shares and preferred
shares.
A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholders or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as stock split may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise. Some corporate actions such as name change have no direct financial impact on the shareholders.
Purpose
The primary reasons for companies to use corporate actions are:
Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share.
Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock suffers. Stocks priced too high will not be affordable to all investors and stocks priced too low may be de-listed. Corporate actions such as stock splits or reverse stock splits increase or decrease the number of outstanding shares to decrease or increase the stock price respectively. Buybacks are another example of influencing the stock price where a corporation buys back shares from the market in an attempt to reduce the number of outstanding shares thereby increasing the price.
Corporate Restructuring : Corporations re-structure in order to increase their profitability. Mergers are an example of a corporate action where two companies that are competitive or complementary come together to increase profitability. Spin-offs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies. Corporate actions includes, name changes, spin-offs, cash stock mergers, forward and reverse stock splits. Corporate Actions are the benefits given to the shareholders by their companies.
Types
Corporate actions are classified as Voluntary, Mandatory and Mandatory with Choice corporate actions.
Mandatory Corporate Action : A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, pari-passu and spinoffs. Strictly speaking the word mandatory is not appropriate because the share holder per se doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory Corporate Action.
Voluntary Corporate Action : A voluntary corporate action is an action where the share holders elect to participate in the action. A response is required by the corporation to process the action. An example of a voluntary corporate action is a tender offer. A corporation may request share holders to tender their shares at a pre-determined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the corporations agents, and the corporation will send the proceeds of the action to the shareholders who elect to participate.
Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For example in case of a cash/stock dividend option, the shareholder can elect to take the proceeds of the dividend either as cash or additional shares of the corporation. Other types of Voluntary actions include rights issue, making buyback offers to the share holders while delisting the company from the stock exchange etc.
Mandatory with Choice Corporate Action : A Mandatory with Choice corporate action is a mandatory corporate action where share holders are given a chance to choose among several options. An example is cash/stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied.
Corporate Actions Information
When a company announces a corporate action, registered shareholders are told of the event by the company's registrar. Financial data vendors collect such information and disseminate it either via their own services to institutional investors or via online portals in the case of individual investors.
Stock split
A stock split or stock divide increases or decreases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included.
Spin-Offs
A spin-off is a new organization or entity formed by a split from a larger one, such as a television series based on a pre-existing one, or a new company formed from a university research group or business incubator. In literature, especially in milieu-based popular fictional book series like mysteries, westerns, fantasy or science fiction, the term sub-series is generally used instead of spin-off, but with essentially the same meaning.
Spin-offs as a descriptive term can also include a dissenting faction of a membership organization, a sect of a cult, or a denomination of a church. In business, a spin-off is essentially the opposite of a merger. In computing, a spin-off from a software project is often called a fork.
A spin-off product is a product deriving elements of design, branding or function from an existing
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product, but which is itself a new distinct product.
Corporate spin-off
The common definition of spin out is a division of a company or organization that becomes an independent business.
Government spin-off
Civilian goods which are the result of military or governmental research are also known as spinoffs.
Media spin-off
Media spin-off is the process of deriving new radio, video game, film series, book series or television programs from existing ones.
Net Asset Value (NAV) The per share price of a mutual fund. For a no-load fund, NAV is the price received by both buyers and sellers. For front loaded mutual funds, NAV is equivalent of the bid price (what shareholders can get for selling a share), while the offering price is the price buyers must pay per share (and includes front load). The NAV is usually calculated at the end of each trading day by taking the closing prices of all securities owned plus cash and equivalents and subtracting all liabilities then dividing by the number of shares outstanding, which for open-end funds, fluctuates depending on daily number of redemptions and purchases. Many new funds are issued at a NAV of $10. After a distribution, the NAV falls by the amount equal to the distribution.
Types of Shares
Equity Shares: It is also known as Ordinary Shares. Equity Shares have voting rights, but
dividend is paid at last.
Preference Shares: Preferred stock differs from common stock in that it typically does
not carry voting rights but is legally entitled to receive a certain level of dividend
payments before any dividends can be issued to other shareholders.
Mutual Fund
A Mutual Fund is a pool of money collected from investors and is invested according to stated
investment objectives such as portfolio diversification, reduction in risk, professional management, tax
benefits etc…
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Derivatives
Financial instruments such as futures and options, which derive their value from underlying securities
including bonds, bills, currencies, and equities.
Futures / Forwards: Investment contracts which specify the quantity and price of a commodity
to be purchased or sold at a later date.
Options: A contract that gives the owner the right to buy or sell a security at a specific price
within a specific time limit. Options can be further classified as call option and put option.
• Call option: An option to buy a certain asset by a certain date for a certain price
• Put option: An option to sell a certain asset by a certain date for a certain price
Hedging: An investment strategy of lowering risk by buying securities that have off-setting risk
characteristics
Arbitrage: An act of buying securities in one market and selling in another at higher prices. It
takes advantage of a price differential existing in the prices of the same commodity or security
in two or more different markets.
Speculation: An act to take high risks for high return. It gives liquidity to the market.
Collateral Management: Collateral management services are a method of securing a loan with
physical commodities. They are deposited as a pledge or guarantee that the loan will be repaid at
maturity; if not paid the commodities may be sold to reimburse the lender
1 Merger
Merger involves dissolving of two firms and creating one new entity or continuing of one of the old entity names.
Mergers represent a very important form of corporate restructuring. Mergers, as used in financial literature, subsume both absorption and consolidation. Example of
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absorption : Hindustan Lever and Ponds merged but the resultant entity remained Hindustan Lever.
A consolidation involves a combination of two or more firms as a result of which a
new firm comes into being and the existing firms are dissolved. E.g. Hindustan Ciba Geigy and Sandoz merged to form Novartis
2 Takeover
A takeover involves the acquisition of a certain or entire block of equity capital of a company, which enables the acquirer to exercise control over the affairs of the
company. SEBI has specified a takeover code, which the acquiring company has to follow so that investor interests are protected.
3 SWAP RATIO
When two or more companies merge or demerge, a consideration is payable to
shareholders of merged entity. For example, company A is merging into Company B, then company B has to pay consideration to shareholders of company A. This may be in cash or by shares of the company B. When the shares are being issued
to shareholders of company A, a reasonable ratio is worked out by valuation experts. This ratio is called swap ratio. Consider following examples:
• 1. A and B company merge to make company C and shares of company C are given to shareholders of A and B based on individual ratio worked out for each company.
• E.g. Hindustan Ciba and Sandoz merged to form the new entity Novartis. The ratio in which the shares of Novartis were issued to Hindustan Ciba and Sandoz is
called SWAP RATIO. • 2. Company A merges into B and shares of B are given to shareholders of A on a
fixed ratio. • E.g. Times Bank has merged into HDFC Bank. The Swap Ratio decided was 5.75 :
1. ie. for every 5.75 shares held in Times Bank by it's shareholder 1 Equity share of HDFC Bank was alloted.
• 3. A merges into B and shareholders of A are given shares of C, held as investments by B in a fixed ratio.
• 4. Company A divests its one division into separate company and existing
shareholders are given shares in the new company. • E.g. Recently Sterlite Industries has decided to split into 3 units viz. Copper , aluminium and telecom cables.
4 Employee Stock Option Plan (ESOP)
The companies in order to reward and retain its employees offer them option to buy
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the shares of the company. This is known as Employee Stock Option Plan (ESOP). Usually the options are exercisable at a price lower then the market price. They are
regulated by SEBI and have Tax Implications as prescribed by the act from time to time.