FINANCE AND ACCOUNTING INTERVIEW QUESTIONS

Q1.What is a Balance Sheet? Why is it prepared?

Balance Sheet is a Statement showing financial position of the business on a particular date. It has two side one source of funds i.e Liabilities, the left side of the balance sheet and application of funds i.e assets, the right side of the balance sheet. It is prepared after preparing trading and profit and loss account and has balances of real and personal accounts grouped and arranged in a proper way as assets and liabilities. It is prepared to know the exact financial position of the business on the last date of the financial year.

Q2.Difference between Funds flow and Cash flow statement:

A Cash flow statement is concerned only with the change in cash position while a funds flow analysis is concerned with change in working capital position between two balance sheet dates. A cash flow statement is merely a record of cash receipts and disbursements. While studying the short-term solvency of a business one is interested not only in cash balance but also in the assets which are easily convertible into cash.

 Q3.Difference between the Funds flow and Income statement:

A funds flow statement deals with the financial resource required for running the business activities. It explains how were the funds obtained and how were they used, whereas an income statement discloses the results of the business activities, i.e., how much has been earned and how it has been spent. A funds flow statement matches the “funds raised” and “funds applied” during a particular period. The source and application of funds may be of capital as well as of revenue nature. An income statement matches the incomes of a period with the expenditure of that period, which are both of a revenue nature.

Q4.What do you understand by Securities Market? What are the different types of securities market?

Security market is a market where securities are issued and traded. It is the market for different types of securities namely: Debt, Equity and Derivatives.

Debt market is further divided into three parts:

- Government securities market
- Money market
- Corporate Debt market

Equity market is divided into two parts:
- Primary market
- Secondary market

Derivatives market is also divided into two parts:
- Options market
- Futures market

Q5.What do you mean by Derivatives? Give an example.

The word derivative refers to a variable which has been derived from another variable. Thus derivatives have no value of their own as they derive their value from the value of some other assets which is known as underlying asset. They are specialized contracts which signify an agreement to buy or sell the underlying asset of the derivate up to a certain time in the future at a predetermined price. The value of the contract depends on the expiry period and also on the price of the underlying asset. For example – Derivative contract on crude oil depends on the price of crude oil.

Q6.What is Beta of an asset?

Beta of an asset is a way of measuring systematic risk of an asset. It shows how price of a security responds to changes in market price. It indicates the extent of movement of the returns of the stock with respect to the movement of market returns. Assets that are riskier than average will have Betas that exceed 1 and assets that are safer than average will have Betas lower than 1. The riskless asset will have a value of Beta=0. The Beta of the market portfolio or the average of Betas across al assets in the market is 1.

Q7.What do you understand by Stock market indices? Name the major stock market indices.

Stock market indices are used to measure the general movement of the stock market. It is used as a proxy for overall market movement. The major stock market indices are:

- Bombay Stock Exchange Sensitive Index (BSE) popularly known as Sensex. It reflects the movements of 30 sensitive shares from specified and non specified groups.

- S and P CNX nifty, known as Nifty Index. It reflects the movements of 50 scrips selected on the basis of market capitalization and liquidity.

Q8.What is the difference between Bombay Stock Exchange and National Stock Exchange?

Bombay Stock Exchange index or Sensex was started in 1986 whereas National Stock Exchange index namely Nifty started in 1995.
The base year for the sensex is 1978-79 and base value is 100 whereas the base year for nifty is 1994 and base value is 1000.
BSE consists of 30 scrips whereas NSE consists of 50 scrips.
BSE is screen based trading whereas NSE is ringless, national, computerized exchange.
BSE has adopted both quote driven system and order driven system whereas NSE has opted for an order driven system.

Q9.What is efficient market hypothesis?

Efficient market is one where the market price of the security is an unbiased estimate of its intrinsic value. The efficient market hypothesis is based on following assumptions:

Market is perfect and free without any trade restrictions.
Market absorbs all the information quickly and efficiently.
Information is free and costless and is freely available to all at the same time.
Information is fair and correct.
Market players can analyze the information quickly and it is absorbed in the market through buy and sell signals.

Q10.What is Mutual Fund? State types of mutual funds schemes.

Mutual Fund is an association which pools the savings of the investors who share common financial goals. The money collected by number of investors is invested in different types of financial instruments for the mutual benefit of its members. The income earned on these investments is then shared by the unit holders in proportion to the number of units held by them. A mutual fund has sponsor, trustees, asset Management Company and custodian. Mutual funds schemes are classified on the following basis:

- Maturity Period – Open ended and closed ended schemes.
- Investment Objective – Growth scheme, Income scheme, and balanced scheme.
- Other schemes – Liquid fund, Gilt fund Index fund, Sector fund and Tex saving fund.

Q11.What is the rights and obligations of the buyer and seller for the Call and Put options?

Rights and Obligations of the Buyer for Call Option:

- Pays premium
- Right to exercise and buy the shares
- Profits from rising prices
- Limited losses, unlimited gain

Rights and Obligations of the Seller for Call Option:

- Receives premium
- Obligation to sell shares if exercised
- Profits from falling prices or remaining neutral
- Unlimited losses, limited gain

Rights and Obligations of the Buyer for Put option:

- Pays premium Right to exercise and sell shares
- Profits from falling prices
- Limited losses, unlimited gain

Rights and Obligations of the Seller for Put option:

- Receives premium
- Obligation to buy shares if exercised
- Profits from rising price or remaining neutral
- Potentially unlimited losses, limited gain

Q12.Explain Options?

Options: An option gives the holder of the option the right to do some thing. The option holder option may exercise or not.

Call Option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.

Put Option: A put option gives the holder the right but not obligation to sell an asset by a certain date for a certain price.

Option Price: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.

Expiration Date: The date which is specified in the option contract is called expiration date.

European Option: It is the option at exercised only on expiration date it self.

Basis: Basis means future price minus spot price.

Cost of carry: The relation between future prices and spot prices can be summarized in terms of what is known as cost of carr

Q13.What is the different between debt and equity?

First, some definitions The debt market is the market where debt instruments are traded. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate) and mortgages. The equity market (often referred to as the stock market) is the market for trading equity instruments. Stocks are securities that are a claim on the earnings and assets of a corporation (Mishkin 1998). An example of an equity instrument would be common stock shares, such as those traded on the New York Stock Exchange.

Q14.List the type of items which appear under the liability side of a balance sheet.

Items which appear under the liability side of Balance Sheet are:

* Capital
* Long Term Liabilities
* Loan from bank
* Mortgage
* Current Liabilities
* Sundry Creditors
* Advance from Customers
* Outstanding Expenses
* Income Received in Advance

Q15.What types of items appear under the assets side?

Items which appear under the assets side of Balance Sheet are:

Fixed Assets:

* Land,
* Building,
* Machinery,
* Furniture,
* Vehicles,
* Computers

Investments

Current Assets:

* Stock,
* Sundry Debtors,
* Cash Balance,
* Bank Balance,
* Prepaid Expenses

Q16.What are the various systems of Accounting? Explain them.

There are two systems of Accounting:

1) Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.

2) Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.

Q17.What type of errors do not affect the Trial Balance?

Following are the types of errors which do not affect the Trial Balance:

- Compensating Error
- Errors of Principle
- Errors of Omission
- Errors of Commission
- Wrong amount recorded in the subsidiary books

Q18.What is the difference between costing and cost accounting?

Costing is the process of ascertaining costs whereas cost accounting is the process of recording various costs in a systematic manner, in order to prepare statistical date to ascertain cost.

Q19.What is cost centre?

Cost centre is defined as a location, machine, person, department, division, or any equipment or group of these, in relation to which direct and indirect costs may be ascertained and used for the purpose of cost control. Thus, an organisation for the costing purposes is divided in convenient units and one of the convenient units is known as cost centre. Example: collecting, sorting, washing of clothes are the various activities which are separate cost centre in a laundry. The cost centre facilitates this function of cost control. Thus, correct identification of cost centre is a prerequisite for the successful implementation of cost accounting process. This also facilitates the fixation of responsibility in the correct manner.

Q20.Explain Opportunity Cost and Differential Cost.

Opportunity Cost is the cost incurred by the organisation when one alternative is selected over another. For example: A person has Rs. 100000 and he has two options to invest his money, either invests in fixed deposit scheme or buy a land with the money. If he decides to put is money to buy the land then the loss of interest which he could have received on fixed deposit would be an opportunity cost.

Differential Cost is the difference between the costs of two alternatives. It includes both cost increase and cost decrease. It can be either variable or fixed. Example: Cost of first alternative = 10000; Cost of second alternative = 5000; Differential Cost = 10000 – 5000 = 5000

Q21.What is the effect of depreciation of assets on profits received by owners?

Depreciation forms a part of cost which is used for arriving at correct estimation of profits, which then is distributed to the owners of the business in the form of dividend. Addition of depreciation to the cost reduces the amount of distributable profits.

By maintaining a depreciation account a part of the distributable profit is retained in the business as a reserve which is used to purchase new machinery or for other purposes in the future which reduces the profits or dividends received by the owners.

Q22.What method of depreciation calculation is used to calculate the tax liability according to Income Tax Act, 1961?

According to Income Tax Act, 1961 Written Down Method of depreciation is used to calculate the tax liability. In this method, depreciation is charged at predetermined rate, which is calculated on the balance of cost of asset less amount of depreciation previously charged. The rate at which the depreciation will be calculated is also specified in the Income Tax Act 1961.

Q23.How is depreciation calculated as per schedule XIV of Companies Act, 1956?

As per Schedule XIV of Companies Act, 1956 the company can calculate the depreciation by using either Straight Line Method or Written Down Value Method.

The rate to calculate depreciation is also specified in Schedule XIV. If any addition has been made to any asset during the financial year, depreciation on such an asset will be calculated on pro-rata basis from the date of such addition or upto the date on which such asset has been sold.

Q24.Compare: Depreciation as per Companies Act and Income Tax Act

Under the Companies Act: Depreciation is computed either using the straight line method or written down value method. In straight line method the amount of depreciation is uniform for all the years where in written down method the amount of depreciation is highest in the first year and gradually decreases in the subsequent years.

Under Income Tax Act: Depreciation is computed using written down value method. Also it is charged on the block of assets and not on individual assets. The block of assets means a group of assets for which the same rate of depreciation is applicable.

Q25.What is Marginal Costing?
Marginal Costing is ascertainment of the marginal cost which varies directly with the volume of production by differentiating between fixed costs and variable costs and finally ascertaining its effect on profit.

Q26.What is Cost Volume-Profit relationship?

Cost Volume-Profit (CVP) relationship is an analysis which studies the relationships between the following factors and its impact on the amount of profits.

- Selling price per unit and total sales amount • Total cost which may be in any form i.e. fixed cost or Variable cost.

- Volume of sales

In simple words, CVP is a management accounting tool that expresses relationship among total sales, total cost and profit. Cost Volume-Profit relationship is one of the important techniques of cost and management accounting. It is a powerful tool which furnishes the complete picture of the profit structure and helps in planning of profits. It can also answer what if type of questions by telling the volume required to produce. This concept is relevant in all decision making areas, particularly in the short run.

Q27.Explain Sunk Cost.

Sunk Cost is the sum that has already been incurred and cannot be recovered by any decision made now or in future. This cost is also called stranded cost. Example: A special purpose machine was bought by a company for Rs. 100000. The machine was used to make the product for which it was bought and now it is obsolete and cannot be sold. And it will be unwise to continue using that obsolete product to recover the original cost of the machine. In order words, Rs. 100000 already spent on that machine cannot be recovered in future. Such costs are said to be sunk costs and should be ignored in decision making process.

Q28.What is equity share and preference share ?

Key difference is that while Preference shareholders enjoy the benefit of receiving their dividend distribution first; the equity shareholders enjoy voting rights in major company decisions, including mergers or acquisitions. A Company can issue two types of shares viz. Equity Shares and Preference Shares.

Q29.What is capital structure? What are the principles of capital structure management?

Capital structure is a term which is referred to be the mix of sources from which the long term funds are required for business purposes which are raised to improve the capital of the company. To fund an organization plan this capital structure is required which is the combination of debt and equity. The management ensures the capital structure accesses which are needed to fund future growth and enhance financial performance. The principles of capital structure management which are essentially required are as follows:-

1) Cost Principle
2) Risk Principle
3) Control Principle
4) Flexibility Principle
5) Timing Principle

Q30.What are the internal factors affecting capital structure?

The internal factors which are affecting capital structure are as follows:-

1) Cost of capital : - it is a process of raising the funds which involves the cost in planning the capital structure, the use of capital should be capable of earning revenue to meet the cost of capital. There are changes in this because of two reasons:

(i) Interest rates are less than dividend rates

(ii) Interest paid on borrowed capital is an allowable for income tax purposes.

2) Risk factor : Company raising the capital by borrowed capital, as it accepts the risk in two ways:

(i) Company maintains the payment of interest as well as installments of borrowed capital at predecided rate and time without being concerned about the profits and losses.

(ii) Borrowed capital is secured capital in the case where the company fails to meet the contract done with the lenders of the money.

3) Control Factor: These factors have been considered by the private companies while raising additional funds and planning the capital structure. In this company plans to raise long term funds by issue the equity and preference shares. It doesn't have relation with the borrowed capital.

Q31.What are the external factors affecting capital structure?

The external factors which are affecting the capital structure are as follows:-

1) Economic Conditions: If the economy is in state of depression, preference is given to equity form of capital which involves less amount of risk but it is avoided in some cases where the investor is not ready to take the risk. In this case company go on with the borrowed capital.

2) Interest Rates level : Form of borrowed capital will be delayed if the funds are available in high rates of interest but raising is not favourable.

3) Lending Policy : If policy is hard to understand and not flexible then it is good to go with the borrowed capital.

4) Taxation Policy: This policy should be viewed from both the sides from individual as well as corporate perspective. From the individual point of view both interest as well as dividend will be taxable in hands of lender.

Q32.What are the general factors affecting capital structure?

The general factors which are affecting the capital structure are as follows:-

1) Company constitution : In companies capital structure is very important as many companies treat it as a different entity. Private companies considers control factor as important whereas public company finds cost factor more important.

2) Company characteristics : Characteristic of the company which describe its infrastructure as size, age and credit plays pivotal role in deciding the capital structure. Smaller or newly started companies depend more on equity capital as they can do limited bargaining. Large companies or having good credit companies are in the position to get funds from the source of their choice.

3) Stability of Earnings : Fluctuations occurs if the sales and earnings of the company are not stable enough over a period of time. Stable company can take the risk.

4) Attitude of the Management: Attitude plays an important role as if the attitude is conservative then control factor gets the importance and if it is liberal then cost factor gets important.

Q33.Compare Component cost and Composite cost.

The component cost is the one which comes under the cost of capital and it has three levels:-

(i) Return at zero risk level: which tells about the expected rate of return when there is no risk involved in the project

(ii) Premium for business risk: This tells about the variance in operating profit due to change in sales.

(iii) Premium for financial risk: This tells about the captital structure risk.

It is the decision whether to buy components or services from an outsider or not. It requires understanding the cost associated with building and buying the components.

Composite Capital is also called the weighted average of component cost of common stock, preference shares and debt. In this each of the components is given an importance on its interest rate, risk analysis and management loss of control which is used to compute the composite capital.

Q34.Explain Average cost and Marginal cost

Average cost is also called as unit cost which is equal to the total cost divided by number of goods produced or also equal to the sum of average variable costs and the average fixed costs. This depends on the time period and also has the affect on the supply curve.

Marginal cost is the change in total cost which takes place when there is a change in quantity by one unit. It depends on the change in volume. It includes at each level of the production additional costs which is required to produce the next unit. For example building a building requires building the base then you require extra cost for space and other building material.

Q36.Explain Explicit cost and Implicit cost.

Explicit cost is the cost which is external to the business like wage, rent and materials. It gives clear picture of the cash outflow from business which is used to decrease the end result of profitability. This directly affects the revenue of the company.

Implicit cost is the result of one person who tries to satisfy his needs in search of an activity which gives no reward to him by money or another form of payment. It includes benefits and satisfaction. For example- goodwill. It is not counted in terms of money and it is indirect intangible cost.

Q37.Explain cost of capital and its importance.

Cost of the capital is the rate of return which is minimum which has to be earned on investments in order to satisfy the investors of various types who are making investments in the company in the form of shares, debentures and loans. It is used in financial investment which refers to the cost of a company's funds or the shareholders return on the company's existing deals. It is the required rate that a company must achieve to cover the cost of generating funds in the market. By seeing this only the investor invests the money in the company if the company is giving the required rate of return. It is a guideline to measure the profitability of different investments.

The importance of cost of capital is that it is used to evaluate new project of company and allows the calculations to be easy so that it has minimum return that investor expect for providing investment to the company. It has such an importance in financial decision making. It actually used in managerial decision making in certain field such as-

1) Decision on capital budgeting- It is used to measure the investment proposal to choose a project which satisfies return on investment.

2) Used in designing corporate financial structure- it is used to design the market fluctuations and try to achieve the economical capital structure for firm.

3) Top management performance- It evaluates the financial performance of top executives. It involves the comparison of actual profit of the projects and taken projects overall cost.

Q38.How is the cost of capital measured?

Cost of capital is measured in terms of weighted average cost of capital. In this the total capital value of a firm without any outstanding warrants and the cost of its debt are included together to calculate the cost of capital.

To calculate the company's weighted cost of capital, first the calculation of the costs of the individual financing sources:

Cost of Debt Cost of Preference Capital, Cost of Equity Capital, and cost of stock capital take place and the formula is given as:-

WACC= Wd (cost of debt) + ws (cost of stock/RE) + wp (cost of pf. Stock)

Q39.Explain Traditional approach of capital structure.

Traditional approach is also known as Net income approach but it is the simplest form. It is in between the other two theories named as Net income theory and Net operating income theory. This approach has been formulated by Ezta Solomon and Fred Weston. This theory gives the right and correct combination of debt and equity shares and always lead to enhanced market value of the firm. This approach tells about the financial risk which will be undertaken by the equity shareholders. This approach focuses mainly on increasing the cost of equity capital which will be done after a level of debt in the capital structure.

Q40.What is Modigliani- Miller (M and M) approach?

Modigilani-Miller approach is also known as MM approach which looks similar to Net operating income approach. It is in synchronization with the Net operating income approach and states in acceptance with the approach that cost of capital is independent of degree of leverage. It provides justification for operational and behavioural for constant cost of capital at any degree of leverage as this is not being provided by the Net operating Income approach. It is been assumed in this approach that capital markets are perfect and the investors are investing in the company from the same expectation of the company's net operating income in search of evaluating the value of the firm. The propositions of this approach can be mentioned in the following ways and it is as follows:-

1) Company's overall cost of capital and value of the firm is constant at any degree of leverage as it is independent of the capital structure.

2) Capital investment which has the minimum cut-off rate is also independent of project finances.

If this approach has advantages then it has certain limitations associated with it and the limitations are as follows:-

1) Investors find the leverages inconvenient and risk perception of corporate and personal leverage is different.

2) Corporate doesn't exist but it gets removed later.
3) Arbitrary process doesn't have any restrictions and it is also not be affected by transaction cost.

Q41.Explain these a.) Cost of debt ,b.) Cost of preference shares,c.) Cost of equity shares ,d.) Cost of retained earnings

a.) Cost of debt

It is used to measure the cost of capital. This is the first thing which should be calculated in the beginning to find out the cost of capital. It includes both contractual cost and imputed cost. It is defined as the required rate of return that an investment which is debt has to yield to protect the shareholder's interest.

b.) Cost of preference shares

Costs of preference share are also used to calculate the cost of capital and are the fixed cost bearing securities. In this the rate of dividend is fixed in advance when they are issued. It is equal to the ratio of annual dividend income per shares to net proceed. It is not used for taxes and it should not be adjusted for the same. Basically it is larger than the cost of debt.

c.) Cost of equity shares

Cost of equity shares is the hardest job to calculate and it also raises lots of problem while working on its calculations. Its main motive is to enable the management which is to make the decisions in the best interest of the equity holders. There is a certain amount of equity capital which must be earned on projects before raising any equity funds or acceptance of finance for other projects.

d.) Cost of retained earnings

Cost of retained earnings have the opportunity cost associated with it and it can be computed as well without any difficulty. The opportunity cost in this is same as the rate of return of the shareholders which determine the cut off point for the deals. It is also the rate of return which shareholders can get by investing after tax dividends in alternative opportunity.

Q42.Explain Earnings Per Share (EPS). How is it calculated? What is its signIficance?

Earning per share (EPS) is the amount of earning per each share of a company's stock. Companies require the EPS for their each income statement which shows about the continuing operations, discontinued operations, net income and outstanding items. EPS doesn't depend on the increase or decrease of the earning power of the company and gets calculated over number of years.

How is it calculated?

Earnings per share ratio (EPS Ratio) is calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. It is a small variance of return on equity capital ratio. The formula of Earning per share ratio is given as:-

“[Earnings per share (EPS) Ratio = (Net profit after tax - Preference dividend) / No. of equity shares (common shares)]”

What is its significance?

Earnings per share is a measure of profitability and it is viewed as the comparative earnings or the earning power of the respected firms. It is used from last four quarters but it can also be used to estimates the expected earnings of the next quarters as well.

Q43.What is Price Earning Ratio (P/E Ratio)? How is it calculated? What is its significance?

Price earnings ratio (P/E Ratio) is the ratio which is between the market price per equity and earning per share. High Price Ratio is used to give suggestion to the investors about their higher earning expected growth in future. It is usually used to compare the two P/E Ratio of different companies which are from the same industry. Investors should carefully note problems that arises with P/E Ratio measure to avoid biasing decision on many company's measure.

How is it calculated?

The P/E Ratio is calculated by dividing Market price per equity share to Earnings per share. This allows the company to estimate the appreciation in value of share of company and is used by investors for decision making on whether or not to buy shares in a particular company.

Following formula is used to calculate price earnings ratio:
“[Price Earnings Ratio = Market price per equity share / Earnings per share]”

For example:

The market price of share is Rs. 30 and earning per share is Rs. 5
Price Earning Ratio = 30/5 = Rs. 6

This shows that market value of every one Rs. of earning is Rs. 6. It is useful in calculation of financial forecasting and also helps in knowing whether or not the share of company are under or over valued.

What is its significance?

The significance of Price earning Ratio is it helps investor in deciding whether or not to buy the shares of particular company at a particular market price. Higher the P/E better is it for the company. If P/E ratio is low then the management should be more particular in knowing the cause of the fall as it can affect the company's position in the market.

Q44.Explain leverages.

Leverage is a general term which is used in financial management and it is used as a technique to multiply the gains and losses. It refers of attainment of more benefits on comparative lower level of investment or lower sales. There are many ways to attain leverage the most common of them all is borrowing money, buying the fixed assets and use of derivatives. Examples of these are as follows:-

1) Public corporation may leverage its equity by borrowing money. The more a company borrows less equity capital it needs so the profits and losses are shared among small group of people.

2) Business Corporation may leverage its revenue by buying fixed assets. This will get more fixed proportion to the company rather than variable cost as change in revenue will result in larger change in operating income.

Q45.What are the different types of leverages computed for financial analysis?

Different types of leverage computed for financial analysis and they are as follows:-

1) Operating Leverage : - it is a leverage which refers to the enhancement of profits because there is a fixed operating cost which is involved with each and every component. When the sales increases fixed cost doesn't increase and it results in higher profits. Higher fixed expenses results in higher operating leverage which leads to higher business risk.

2.) Financial Leverage : - It is a leverage which refers to high level of profitability because of high fixed financial expenses. It includes interest on loan and preference dividend. Higher financial leverage indicates higher financial risk as well as higher break points. In this kind the managers have flexibility in choice of capital structure.

3.) Combined Leverage: - it is a leverage which refers to high profits due to fixed costs. It includes fixed operating expenses with fixed financial expenses. It indicates leverage benefits and risks which are in fixed quantity. Competitive firms choose high level of degree of combined leverage whereas cooperative firms choose lower level of degree of combined leverage.

Q46.Explain Operating Leverage. How is it computed? What does high/low operating leverage indicate?

Operating leverage works on fixed cost as well as variable costs. It analyzes both of the costs and it remains in the company which has the highest proportion of fixed operating cost in relation to variable operating costs. The company uses fixed assets in operation of the company or vice versa. The company which is dealing in high operating leverage makes more money from additional sales if the company's cost doesn’t increase to produce more sales. For example the software developing company's cost structure remains fixed and limited to the development and marketing cost. It doesn't matter how many components they sell the cost remain fixed. It helps the investor in dealing with the information on the risk analysis of the company. High operating leverage sometimes helps benefiting companies and sometimes remain vulnerable to sharp economic and business cycle swings.

How is it computed?

Operating leverage is highest in companies which got fixed operating cost in relation to variable operating cost. It tells investor about the companies position and the risk profile of the company. It is measured when a company has fixed costs that are regardless the sales volume. When company has fixed cost then the percentage change in profits due to changes in sales volume is greater than the percentage change in sales. The computation of this is known as degree of operating leverage (DOL) which gives the extent to which operating profits change as sales volume changes. It is given as:-

DOL (Degree of operating leverage) = %age change in income / %age change in sale

Q47. What does high/low operating leverage indicate?

Operating leverage indicate about the company and its future profitability. It also help in assessing the level of risk which has been offered to the investors. Through this investors can estimate the profitability under certain conditions. High operating leverage indicates profits and it tells about the company's more money making policies from each additional sale if the increase cost doesn't increase to produce more sales whereas low operating leverage indicate the declining of profit margins and decreasing in earnings.

Q48.What do following indicate?
a.) High operating leverage, high financial leverage.
b.) High Operating leverage, low financial leverage.
c.) Low operating leverage, high financial leverage.
d.) Low operating leverage, low financial leverage.

a.) High operating leverage, high financial leverage.
High operating leverage and high financial leverage indicates the risky investment made by the company's shareholders. This also indicates that company is making few sales but with high margins. This shows the risk if a firm incorrectly forecasts future sales. If the future sales have been manipulative forecasted then it create a difference between actual and budgeted cash flow, which affects the company's future operating ability. The financial leverage poses high risk when a company's return on assets doesn't exceed interest on loan, which lowers down company's return on equity and profitability.

b.) High Operating leverage, low financial leverage.
High operating leverage indicates that company is making few sales but with high margins. This shows the risk if a firm incorrectly forecasts future sales. If the future sales have been manipulative forecasted then it create a difference between actual and budgeted cash flow, which affects the company's future operating ability. Low financial leverage indicates that management has adopted a very good approach towards the debt capital. This decreases the management decision making on earning per share. This is the optimum situation.

c.) Low operating leverage, high financial leverage.
If financial leverage is high than the funds are obtained mainly through preference shares, debentures and debts. This makes the base solid by keeping the operating leverage low on scale. The financial decision can be maximized as the management's concern can be earning per share which will favour the debt capital only. This will increase when the rate of interest on debentures is lower than rate of return in business. The decision is based on earning per share without any indication of the risks involved.

d.) Low operating leverage, low financial leverage.
This is also a worst situation where both operating leverage and financial leverage are low which results in undesirable consequences. Low degree of these leverages shows that the amount of fixed costs is very small and proportion of debts in capital is also low. The management in this situation might loose number of profitable opportunities and investments.

Q49.Explain the theories of capital structure.

Capital structure is a term which is referred to be the mix of sources from which the long term funds are required for business purposes which are raised to improve the capital of the company. The theories which are involved in these are as follows:-

1) Net operating income (NOI):- this is an approach in which both value of the firm and weighted average cost are independent of capital structure. Individual holding the debt and equity receives the same cash flows without worrying about the taxes as they are not involved in it.

2) Traditional approach and Net income (NI) approach :- this is an approach in which both cost of debt, and equity are independent of capital structure. The components which are involved in it are constant and don’t depend on how much debt the firm is using.

3) MM hypothesis with and without corporate tax : This approach tells that firm's value is independent of capital structure. The same return can be received by shareholders with the same risk.

4) Miller’s hypothesis with corporate and personal taxes : This approach gives important advantage over equity. This ignores bankruptcy and agency costs.
5) Trade-off theory: costs and benefits of leverage.

Q50.What does capital market mean? How does the company raise funds in capital market?

Capital market is the market in which financial securities have been traded between the individuals and the institutions. These institutions sell securities on capital markets in public and private sectors to raise funds. This market is composed of both primary and secondary markets. The parts of capital markets are both stock and bond markets.

Large Corporation grow by doing innovations and by raising the capital to finance expansion. Corporations have five primary methods which are used to raise funds in capital market.

1) Issue of bonds : - Bond is an amount of money which has to be given at a certain date or dates in future. Bondholders receive interest payments at fixed rate and specific dates. Corporate issues bonds because interest rates which must pay investors are lower than rates of borrowing and holders can sell bonds to someone else before they due.

2) Issue of preferred stock : - company choose this to raise capital. If a company have financial trouble the buyers of shares gets special status. If profits are limited then owners will be paid the dividend after bondholders receive the interest payments.

3) Sell of common stock : - if financial condition of the company is good then it can raise the capital issue the common stock. Bank helps the companies to do the investment and issue stock. Investors’ gets interested if the company pays large dividends and offers steady income. Value of shares increases if investor expects the corporate earning to rise.

4) Borrowing:- companies used to raise short term capital by getting the loans from banks or other sources. After good market run the profits which the company gets can be used to finance their operating by retaining their earnings.

Q51.What "rights issue" do the shareholders of a company have under Companies Act, 1956?

The rights and duties of shareholders are defined from time to time of issue of shares. The rights of shareholders are fixed which can't be altered unless the Companies Act gets modified.

Right issue which shareholders hold of a company under Companies Act, 1956 are as follows:-

1) Rights attached to shares of any class can be varied with the consent of shareholders holding not less then 75% of issued shares.
2) Rights of Dissenting Shareholders: Protection by Companies Act is given to the shareholders who doesn't consent to or vote for variation of their rights. If there is any variance in any rights of any class of shareholders then holders of not less than 10% of shares of that class can apply to the court to have the variation cancelled. It won't have any affect till it is been approved by the court.
3) Voting rights of the members: - Every member of public company which have the shares holding equity have votes in proportions to his share in paid up equity capital.

4) Preference shareholders don't have any voting rights. They can vote only on matters which are directly related to the rights attached to preference share capital.
There is a right to vote for every equity shareholder at general meeting. No company can stop any member from his voting right on any ground. The members voting rights can be changed if member doesn't make payment or other sums which are due against.

Q52.Can a company make public issue of equity shares if partly paid shares are not fully paid up?

Yes, a company can make public issue of equity shares if partly paid shares are not fully paid as equity shares are that part of share capital of company which is not been included in the preference shares. The condition which has to be considered for this is that at any time after 2 years of expiray from the date of starting of company or after 1 year of shares allotment, public company shares the issues within the authorised area, and directors must decide to offer shares to existing holder of equity shares in proportion to capital which has been paid up on the holder's shares at the time of further issue.

a.)  Listed Company : Listed company issues the pricing by making it free for the equity shares securities through the public/rights issue. It makes composite issue of capital (public and right basis which is been made through the offer document in which allotment for both public and rights components is proposed which are used to issue securities at different prices.

b.) Unlisted Company : Unlisted company also does the same as the listed company does as it is used to exachange within the recognised stock. It is also not easy to find rights issues as shareholders are unable to raise funds to take the rights which might not have the aletrnate available as the firm's shares are also not listed. In this a company has to rely on the profits which they have got as their main source of equity or they can seek to raise venture capital or can also take debt from others.

Q53. 1. State whether each of the following statements isTrue (T) or False( F)

(i)                   Financial statements are an important source of informationto shareholders and stakeholders.

(ii)                 Both the BS and the IS shows the financial position of fenat the end of the year.

(iii)         (BS of a company must be prepared in the horizontal formatonly

(iv)         Preparation of Profit & Loss Appropriation A/c isa equirement  under  the  Companies  Act, 1956.

(v)          Ratio Analysis is the only technique of analysis of financial statements.

(vi)         Methodical presentation of financial statements helps in Nation of various ratios.

(vii)        In Common Size Statements, each item is expressed as a percentage of some common items (total).

(viii)      Trend Percentage Analysis helps in Dynamic Analysis.

(ix)         Liquidity Ratios help in analyzing the cash position of the firm.

(x)          In calculation of Acid Test Ratio, Inventory is included incurrent assets

(xi)         .Working Capital Turnover Ratio may be classified as an Activity Ratio

(xii)        .Debt-Equity Ratio is a measure of long-term solvency of a firm.

(xiii)      GP Ratio and NP Ratio give the profitability of the firm from the point of view of the shareholders.

(xiv)      Return on Equity and Earnings per Share are one and the same thing.

(xv)        DU PONT Analysis looks into the elements of profits.

(xvi)      Ratio Analysis provides the solution to the financial problems.

Answers: (i) T, (ii) F, (iii) F, (iv) F, (v) F, (vi) T, (vii) T,(viii) T, (ix) F, (x) F, (xi) T, (xii) T, (xiii) F, (xiv) F, (xv) T,(xvi) F.]

Q54. Define Financial Management.

Financial management is that specialized activity which is responsible for obtaining and affectively utilizing the funds for the efficient functioning of the business and, therefore, it includes financial planning, financial administration and financial control.

Q55.State the primary objective of Financial management.

 To maximize the shareholders wealth.

Q56. State the decisions involved in Financial management.

a) Investment decision b) Financing decision c) Dividend decision

Q57.What is meant by Financial Planning?

Financial planning means deciding in advance, the financial activities to be carried on to achieve the basic objective of the firm. The basic objective of the firm is to get maximum profits out of minimum efforts.

Q58.What are the objectives of financial planning?

 a) to ensure availability of fund whenever required. b) to see that the firm does not raise funds unnecessarily.

Q59.What is Working Capital ?

 The capital required for day to day operations of the business is called Working capital.

Q60. State the difference between gross working capital and net working capital.

Gross working capital is the sum/ aggregate of the current assets, whereas Net working capital = Current assets – current liabilities.

Q61. What is meant by capital budgeting decision?

A long term Investment decision is called capital budgeting decision.

Q62.Are the share holders of a company likely to gain with a debt component in the capital employed ? Explain with the help of an example?

The shareholders of a company are very likely to gain with debt component in the capital employed by way of trading On equity as it increases the earning per share(EPS) of the share holders.

Q63.Qus:2 Under which accounting standard , cash flow statement is prepared ? Under accounting standard-3(Revised).

Q64.Why do we add back non cash items to net profit while calculating cash flow from operating activities.

Non cash items reduce the net profit without reducing the cash balance.

Q65. How will you classify loans given by HDFC while preparing cash flow statement.

 As Operating Activities.

Q66 How will you classify deposits by customers in SBI while preparing cash flow statement.

 Operating Activities

Q67. Where will you show purchase of furniture in cash flow statement ?

 As Outflow under Investing Activities.

Q68. Give examples of non cash transactions.

Give any two examples- (i) Acquisition of fixed asset by issue of debentures or shares. (ii) Conversion of debentures into shares.

Q69. A company receives a dividend of Rs. 5 Lakhs on its investment in other company’s share will it be Cash inflow from operating or investing activities in case of a. (i) Finance Company. (ii) Non-Finance Company.

 It will be operating activities in case of a finance company and investing activities in case of non-Financing Company.

 Q70.Give four example of movement between cash and cash equivalents.

Cash deposited into bank, Cash withdrawn from bank for office use, purchase of short term marketable securities, , sale of short term marketable securities

Q71. How are various activities classified as per AS-3 (Revised) ?

 (i) Operating Activities. (ii)Investing Activities. (iii)Financing Activities.

Q72. Give one example each of an extra ordinary item under operating, investing and financing activity.

Examples of extraordinary items under:- (a) Operating activity – claim received from insurance company against loss of stock. (b) Investing activity – amount of compensation received against acquisition of land belonging to the enterprise. (c) Financing activity – payment for buy-back of equity shares of the company.

Q73, Cash flow from operating Activities + Cash flow from Investing Activities + Cash flow from Financing Activities =…………………

…= Net Increase /Decrease in cash and Cash Equivalents.

Q74.Qus:12 What are the two methods which can be employed to calculate net cash flow from operating activities ?

 Direct Method and Indirect Method.

Q75. "What Do You Think Is the Single Best Evaluation Metric for Analyzing a Company's Stock?"

The first point of analysis you use in evaluating a company is its operating profit margin, and you prefer this metric because it provides an indication of not only basic profitability but also gives a solid indication of how well managed the company is overall. Alternately, you can offer that the price/earnings to growth ratio (PEG) is the single most complete equity valuation metric because it factors in projected earnings growth rate, and is, therefore, superior to the commonly used price/earnings ratio (P/E).

Q76. What Is the Best Way to Evaluate a Company With Negative Cash Flows?

The best methods for evaluating companies with historically negative cash flow are discounted cash flow analysis or relative valuations such as the price-to-sales (P/S) ratio. You consider it essential, in looking at a company with negative cash flows, to conduct a thorough fundamental analysis of the company and the current state of its industry rather than simply looking at a single evaluation metric.

Q77. Between DCF Analysis and Transaction or Public Comparables, Which Is Most Likely to Give the Highest Company Valuation?

The fairly simple and straightforward answer to this question is it depends on variables such as the discount rate used in the DCF analysis, the choice of comparables, the strength or weakness of the industry, and the specific companies being compared.

Q78. Compare the Cost of Debt Financing to Equity Financing"

First, the interest cost of debt financing is tax-deductible. Secondly, common stock investors generally command higher premiums since they are not guaranteed returns and are in the worst position in the event of liquidation. You can possibly pick up some extra credit points by qualifying your answer by noting that increasing D/E ratios eventually results in higher costs for both debt and equity.

Q79.Which is more expensive, debt or equity financing?

The answer is the cost of equity is generally considered to be higher for two main reasons. First, the interest cost of debt financing is tax-deductible. Secondly, common stock investors generally command higher premiums since they are not guaranteed returns and are in the worst position in the event of liquidation. You can possibly pick up some extra credit points by qualifying your answer by noting that increasing D/E ratios eventually results in higher costs for both debt and equity.

Q80. How do you stay current with the market?

 Equity analysts always carry out current research on specific markets, industries, companies, sectors, or countries. Research is done through the internet, by interacting directly with corporate employees, clients, and company headquarters. They regularly read relevant magazines and newspapers.

Q81. What expertise does the job require?

In general terms, the job requires financial expertise – the equity analyst must be a highly trained financial expert, with knowledge of every rapidly-changing aspect of the financial world.

Q82. What key qualities allow you to succeed in your job? 

Try not to speak theoretically, about analysts in general. Speak about yourself. Talk about multi-tasking and ability to work under pressure. Give examples of your analytical skills.

Q83.What exactly do you do in the capacity of an equity analyst?

 More specifically, you analyze a particular niche of the financial world (be explicit). Then you communicate back with the clients and make suggestions on what or how to buy/sell/hold.

Q84.Do you have any experience preparing financial reports?

The ability to communicate effectively, both in speech and writing, is part of the job. Equity analysts prepare written reports and analysis briefs. They are conversant in the various formats and templates of analyses and reports typically required in the financial world.

Q85.What are the difference between profit & loss account & income and expenditure accounts?

Profit & Loss Account: Profit and loss account is prepared to know the present status of the company. the profit and loss account is prepared to know profit or loss of any organization. It is the accounts prepared during in the final accounts of the company

Income And Expenditure Account: Usually income and expenditure account is prepared by the nonprofit organizations to know there income & expenditure status. Example: trusts, old ages

Q86.What Is Return On Investment (ROI)?

It is a fundamental measure in finance. It is differ from one to other persons. Many business people measure return on investment (ROI) to know the understandings exactly where they are .Return means generally profit after tax.Return on investment (ROI) is the ultimate measure of any business. In simple how much they invested & in return how much you earned

Q87.Reserve vs Provision:

The objective of reserve is to meet future unknown losses and liabilities. In cause of provision is to meet the known losses & liabilities. Both will have different accounting treatments in the books of accounts.
 Accounting Treatments

Reserve will be shown in debit side of profit & loss account and liabilities side in balance sheet. Provision will be shown in debit side profit & loss account and assets side in balance sheet as deduction from the concerned asset.

Q88.DSCR:(Debt Service Coverage Ratio)

The amount of cash required to meet principal payments and annual interests is called debt service coverage ratio (DSCR). It can be calculated as follows: Net Income/Total Debt Service Normally this ratio is seen by the bank officers to know property income loans

Q89.What Is Minority Interest?

The subsidy portion of stock is less than 50% less of holding to the parent company.  Usually this kind of companies may not exercise full authority. A minority interest company will not exercise rights same as parent company.

Q90. Define?

Average Accounting Return

The Avg earnings of the project after deducting the tax and deprecation / book value of the investing amount in its life.

Private Equity:

The Equity shares not listed in the public stock exchange .these equity's are strictly controlled by stock exchange. Private equity may be in 3 kinds that is, merger or sale, recapitalization, and initial public offering

Current Ratio:

This ratio shows the measure of assets and liabilities. It can be calculated as current assets / current liabilities

Hedging
Buying securities in one market and selling the securities in another market is called Hedging. Perfect hedgers are very rare in stock market

Commercial Paper

Commercial paper is issued by the corporations and large banks for a fixed maturity period of time. Usually the period lies between 1 to 270 days period of the tenure.

Zero-Bound Interest Rate:

The central bank may set the percentage of principal to owned. Zero-Bound Interest Rate Mean that there are no interest rates is reduced in order to promote the economic growth. in earlier of 1990's interest rates given by the Japanese central bank. This is normally done in order to reduce the inflation in the economy.

Q91.Define Ratio Analysis

An analysis is maid using the current year data numbers to estimate the future . it is a fundamental analysis made to know the financial figures.

Q92. Explain Liquidity ratio's

Current Ratio-It is used to calculate to know weather current current assets are enough to pay the current debts. The ideal ratio is 1:1.It can be calculated as follows:
Current Ratio = Current Assets / Current Liabilities

The company current ratio is too low; the following actions can be taken

·                     Paying some of the debts

·                     Rising some funds or loans which is less than  a year

·                     Rising new requites to increase your current assets

·                     Maintain some reserve from profits to meet the current transactions 

Acid Test Ratio: The ratio explains about the shot terms liquidity. The higher quick ratio indicates that the company in the stable position. We can obtain the quick assets =current assets -stock. It can be explained as follows:

Quick assets/ Current Liabilities

Q93.Turnover Ratio's:

Receivables Turnover ratio explains about how the Receivables are collected on an average days .It can be calculated as follows:

Net Credit Sales / Debtors Or Avg Accounts Receivables.

Inventory Turnover ratio's 

To know the avg inventory level.It is calculated as follows:

COGS / Cost of Goods Sold / Avg Inventory 

To know the avg collection period 

Avg debtors / Avg Daily Credit Sales 

To know inventory period

365/debtors Turn Over Ratio

Fixed-Asset Turnover Ratio:

The ratio is calculated on net sales to fixed assets. the highest ratio ensures how the management is using the investments in fixed assets.

Net Sales/Net Fixed Assets 

Total Assets Turnover Ratio

This ratio denotes the use of total assets in terms of sales. it is to know the difference between total assets and the fixed assets of the firm.it can be calculated as follows:
Net Sales / Total Assets

Q94.Leverage Ratio's:

It measures the risk of company.generally if the company have more debt then the risk is higher because all the assets are to be distributed in case of company becomes bankrupt . The Ratio analysis is to calculate every aspect of the company 

Debt Equity Ratios:

The Value of the organization or company is given by its debt holders when you compare with its real owners.

It is calculated as follows:

Total Debt / Total Equity

Interest Coverage ratio:

After taken borrowings by the company in debt , generally interest charges are applied. this ratio is measured the ability that the interest is payable or not with income earned by the company it is measures as follows:

It is calculated as follows:

Earnings before tax and interest /interest

The Debt Service Coverage Ratio (DSCR):

The debt service coverage ratio (DSCR), also known as "debt coverage ratio. The debt service coverage ratio (DSCR),, also called as "debt coverage ratio," is the ratio calculated to meets the payments and debts with the return income.it easy to loans when this ratio is more. it can be calculated as follows: 

Profit After Tax+ Deprecation+ Non Cash Exp+ Interest On Term Loans / Interest On Term Loans + Payment On Long Term Loans

Q95.Profitability Ratios 

Explains the profit margin,return on equity , return on assets, return on capital employed, return on share holders equity, Earning per share  that all are the income generating by the company :

·                     Gross profit ratio= gross profit / Net sales * 100

·                     Net profit ratio= Net profit / Net sales * 100

·                     Return on total assets= profit before int & tax / Fixed assets + current assets

·                     Return on capital employed = Net profit after tax / Total Capital Employed

·                     Return on share holders equity= Net profit after tax / avg total share holder equity or Net worth

·                     Earning per share= Net profit available to share holders / No.Of shares outstanding

·                     PE ratio = Market price per share / EPS ( earnings per share).

Q96.Explain About DCF? ( Discounted Cash Flow)

It is a discounted cash flow. This type of cash flow is used to calculate the potential of the investments. It is similar to cash flow statement but uses for future projections of free cash flow at discounted price. 

Q97.Financial Impact Of Business Buying A New Equipment In Terms Of Balance Sheets, Income Statements, And Cash Flows?

·                     There is no impact on income statement in initial stages but plant, property, and equipment will go increase & cash will be less in balance sheet, this shows more capital out flow.

·                     Deprecation can be one reason to go income down as  (property, plant, and equipment) retain their earnings, because deprecation is non cash item of expense that end with low net income.

·                     The value can be added same to cash flow section in operations

Q98.What Is WACC: (  Weighted Average Cost Of Capital )

WACC means weighted average cost of capital. It includes every source of capital that takes in to many factors in to consideration like tax rates, depreciation, equity & debt 

Q99.Define Deferred Tax Asset

It is created when the business payed more tax to IRS than reported on income statement. This can be produced from net operating loss & revenue generated to the business

Q100.Diffference between Recurring & Mon Recurring Expenses:

The expenses occurred reputedly or occurred many times, that can be monthly, yearly or in other form Example:These types of expense include a car payment, mortgage, phone bill, cable bill, utilities, etc. These expenses in demand constant stream of income

Non Recurring Expenses:

It is also called as one time expenses; it may not recurred regularly like one in a while Example:

·                     Purchase of building

·                     Purchase of machinery