SHIV GUPTA
MBA, B.Com.
24, MALE
9021892850
shivgagal@gmail.com
shivgagal@yahoo.co.in
Content
- Accounting Terms
1.1 Accounts Payable
1.2 Accounts Receivable
1.3 Balance Sheet
1.4 Bank Reconciliation
1.5 Difference between Journal & Ledger
1.6 Golden Rules of Accounting
- Glossary Of Financial Terms
1.1 American Stock Exchange (AMEX)
1.2 Auction Market
1.3 Bear
1.4 Bear Market
1.5 Bull
1.6 Bid
1.7 Buy-and-Hold
1.8 Bond
1.9 Blue Chip Companies
1.10 Bonus Shares
1.11 Capital Markets
(a) Primary Markets
(a) Secondary Market
1.12 Custodian
1.13 Commodity
1.14 Common Stock
1.15 Call Option
1.16 Crash
1.17 Dividend
1.18 Debenture
1.19 Derivatives
1.20 Depository
1.21 Debt Instrument
1.22 Dematerialization
1.23 Equity Share
1.24 Earning Per Share (EPS)
1.25 Exchange Traded Fund (ETF)
1.26 Exchange
1.27 Futures
1.28 Fiscal Policy
1.29 Face Value of a Share/Debenture
1.30 Gross Domestic Product (GDP)
1.31 Hedging
1.32 Investment
1.33 Inflation
1.34 Issues
(a) Initial Public Offering (IPO)
(b) A Follow on Public Offering (Further Issue)
(c) Rights Issue
(d) A Preferential Issue
1.35 Issuer
1.36 Intraday Trading
1.37 Index
1.38 Investor
1.39 Liquidity
1.40 Lot
1.41 Leverage
1.42 Mutual Fund
1.43 NASDAQ
1.44 National Exchange For Automated Trading (NEAT)
1.45 National Stock Exchange (NSE)
1.46 Net Asset Value (NAV)
1.47 New York
1.48 Option
1.49 Preference Shares
1.50 Put Option
1.51 Portfolio Management
1.52 Retained Earning
1.53 Securities and Exchange Board of India
1.54 Strike Price
1.55 Securities
1.56 Sub Prime
1.57 Stock Symbol Extension
1.58 Settlement
1.59 Transfer Agent
1.60 The complete lifecycle of a U.S equity trade
1.61 Underlying Security
1.62 Volatility
1.63 What is the difference between stocks and shares?
1.64 Yield
- Cash Flow Statement
1.1 Meaning
1.2 Method
(a) Operating Cash Flow
(b) Financing Cash Flow
(c) Investing Cash Flow
1.3 Analyzing the Cash Flow Statement
1. Accounting Terms
1.1 Accounts Payable - A/P is a form of credit that suppliers offer to their customers by allowing them to pay for a product or service after it has already been received. This is a current liability. It’s shown in liabilities side of company balance sheet.
1.2 Account Receivable - A/R is one of a series of accounting transactions dealing with the billing of a customer for goods and services they have ordered.A current asset resulting from selling goods or services on credit (on account)
1.3 Balance Sheet - A listing of all assets and liabilities for an individual or a business. The surplus of assets over liabilities is the net worth, or what is owned free of debt. The Liabilities side of the balance sheets shows the sources of income into the business and the assets side shows how the income has been utilized.
1.5 Bank Reconciliation - is the process of comparing and matching figures from the accounting records against those shown on a bank statement. The result, any transactions in the accounting records not found on the bank statement or vice-versa are said to be outstanding.
Reasons for Reconciliation:
1) Cheques deposited into bank but not recorded in the bank book.
2) Cheques issued but not presented in bank.
3) Bank charges directly debited from bank account not mentioned in bank book.
4) ECS, not mentioned in bank book.
5) Interested credited into bank account not mentioned in bank book.
6) Cheques deposited not cleared.
1.6 Difference between Journal & Ledger - Journal: A first recording of financial transactions as they occur in time, so that they can be used for future reconciling and transfer to other official accounting records such as the general ledger. A journal will state the date of the transaction, which account(s) were affected and the amounts, usually in a double-entry bookkeeping method.
Ledger: A "book" containing accounts. For example, there is the general ledger that contains the balance sheet and income statement accounts.
1.7 Golden Rules of Accounting –
(1) Personal A/c: Debit the Receiver & Credit the Giver.
(2) Real A/c: Debit what is come in & Credit what is Goes out.
(3) Nominal A/c: Debit the Expenses or Losses & Credit the Income or Profit.
2. Glossary of Financial Terms
1.1 American Stock Exchange (AMEX) - Abbreviated AMEX. A market located in New York City that handles approximately one-fifth of all securities trades within the United States
1.2 Auction Market - A market in which buyers enter competitive bids, and sellers enter competitive offers simultaneously. The NYSE is an auction market.
1.3 Bear - An investor who acts on the belief that a security or the market is falling or is expected to fall.
1.4 Bear Market - A market in which prices of a certain group of securities are falling or are expected to fall.
1.5 Bull - An investor who thinks the market or a specific security or industry will rise.
1.6 Bid - An indication by an investor, a trader or a dealer of a willingness to buy a security or commodity. The price at which an investor can sell to a broker-dealer. The quoted bid is the price at which a Market Maker is willing to buy a stock.
1.7 Buy-and-hold - A long-term investing strategy in which an investor’s stock portfolio is fully invested in the market all the time.
1.8 Bond - A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer, unlike in the case of equities. A bond is a formal contract to repay borrowed money with interest at fixed intervals.
1.9 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.
1.10 Bonus Shares - The term bonus means an extra dividend paid to shareholders in a joint stock company from surplus profits. When a company has accumulated a large fund out of profits - much beyond its needs, the directors may decide to distribute a part of it amongst the shareholders in the form of bonus. Bonus can be paid either in cash or in the form of shares. Cash bonus is paid by the company when it has large accumulated profits as well as cash to pay dividend. Many a time, a company is not in a position to pay bonus in cash in spite of sufficient profits because of unsatisfactory cash position or because of its adverse effects on the working capital of the company. In such a position, the company pays a bonus to its shareholders in the form of shares; a free share thus issued is known as a bonus share.
1.11 Capital Market - 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.
(a) Primary Markets - The first opportunity that investors have to buy a newly-issued security occurs in the Primary Market. After the first purchases, subsequent trading is said to occur in the Secondary Market.
(b) Secondary Market - is the financial market for trading of securities that have already been issued in an initial private or public offering. An example is the New York Stock Exchange. All stock exchanges are part of the Secondary Market, where investors buy securities from other investors (as opposed to an issuing company).
1.12 Custodian - A financial institution that has the legal responsibility for a customer’s securities. This implies management as well as safekeeping.
1.13 Commodity - Any bulk good traded on an exchange or in the cash market. Examples include metals, grains, and meats.
1.14 Common Stock - A class of stock in a company, normally with voting rights. Corporations may have several classes of common stock, as well as Preferred Stock, or they may have a single class of common stock. Common stockholders are on the bottom of the ladder in a corporation’s ownership structure, and have rights to a company’s assets only after bond holders, preferred shareholders and other debt holders have been satisfied.
1.15 Call Option - An option contract that gives the holder the right to buy a certain quantity (usually 100 shares) of an underlying security from the writer of the option, at a specified price (the strike price) up to a specified date (the expiration date). Also called call.
1.16 Crash - A sudden, severe, and widespread decline in stock prices, usually resulting from both economic influences and panic.
1.17 Dividend - A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
1.18 Debenture - the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.
1.19 Derivatives - A derivative is a financial instrument or more simply, an agreement between two people or two parties - that have a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options.
Derivatives allow risk about the price of the underlying asset to be transferred from one party to another. For example, a wheat farmer and a miller could sign a futures contract to exchange a specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will be available because of events unspecified by the contract, like the weather, or that one party will renege on the contract. Although a third party, called a clearing house, insures a futures contract, not all derivatives are insured against counter-party risk.
From another perspective, the farmer and the miller both reduce a risk and acquire a risk when they sign the futures contract: The farmer reduces the risk that the price of wheat will fall below the price specified in the contract and acquires the risk that the price of wheat will rise above the price specified in the contract (thereby losing additional income that he could have earned). The miller, on the other hand, acquires the risk that the price of wheat will fall below the price specified in the contract (thereby paying more in the future than he otherwise would) and reduces the risk that the price of wheat will rise above the price specified in the contract. In this sense, one party is the insurer (risk taker) for one type of risk, and the counter-party is the insurer (risk taker) for another type of risk. http://www.vijaybharat.com/Understanding%20Derivatives.htm
1.20 Depository – A Depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, Government, securities, units etc.) in electronic form.
1.21 Debt Instrument - represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender.
In the Indian securities markets, the term bond’ is used for debt instruments issued by the Central and State governments and Public sector organizations and the term ‘debenture’ are used for instruments issued by private corporate sector.
1.22 Dematerialization – is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).
1.23 Equity Shares - The equity share basically represents ownership in the company. Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs. 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a share. Thus, the company then is said to have 20, 00,000 equity shares of Rs. 10 each. The holders of such shares are members of the company and have voting rights.
1.24 Earning Per Share (EPS) – EPS measures the profit available to the equity shareholders per share, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by number of outstanding shares. The profits available to the ordinary shareholders are arrived at as net profits after taxes minus preference dividend.
Net Profit Available To the Shareholder
EPS= ------------------------------------------------------------
Number of Ordinary Shares Outstanding
1.25 Exchange Traded Fund (ETF) - Abbreviated ETS. An open-ended Mutual Fund that can be continuously traded throughout the day. ETFs attempt to replicate the changes of an index of a specific financial market, so active management is unnecessary.
1.26 Exchange - A market where stocks are bought and sold. For example: New York
1.27 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.
1.28 Fiscal Policy - The federal tax and spending policies set by Congress or the president. These policies affect tax rates, interest rates and government spending in an effort to control the economy.
1.29 Face Value of a Share/Debenture – The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at maturity. Also known as par value or simply par. For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt security, face value is the amount repaid to the investor when the bond matures (usually, Government Securities and corporate bonds have a face value of Rs. 100). The price at which the security trades depends on the fluctuations in the interest rates in the economy.
1.30 Gross Domestic Product (GDP) - A measure of output from Any Country factories and related consumption in the United States U.S.
1.31 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.
Hedging is a technique that attempts to reduce risk. Hedging also occurs when an individual or institution buys an asset (like a commodity, a bond that has coupon payments, a stock that pays dividends, and so on) and sells it using a futures contract.
1.32 Investment – The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.
1.33 Inflation - A wide spread rise in prices that exceeds that rate of increased purchasing power.
1.34 Issues – Primarily, issues can be classified as a Public, Rights or Preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below:
(a) Initial Public Offering (IPO): is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.
(b) A Follow on public offering (Further Issue): is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.
(c) Rights Issue:: is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ration to the number of securities held prior to the issue. The route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.
(d) A Preferential Issue: is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the companies Act and the requirements contained in
1.35 Issuer - is a legal entity that develops, registers and sells securities for the purpose of financing its operations.
Issuers may be domestic or foreign governments, corporations or investment trusts. Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions.
1.36 Intraday Trading - Intraday share trading refers to the buying and selling (or vice versa) of the same script in the same trading session (on the same day).
1.37 Index – An Index shows how a specified portfolio of share prices is moving to order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.
1.38 Investor - A person who seeks to minimize risk in the purchase of securities. Companies with good track records are preferred and purchase at fair value is important. Companies are held for the long-term (at least 3 to 5 years) rather than trying to time the market.
1.39 Liquidity - The ability of a company to convert assets into cash or equivalents without significant loss. Good liquidity enables a company to earn discounts, maintain a good credit rating, meet obligations promptly, and take advantage of market opportunities.
This refers to how easily securities can be bought or sold in the market. A security is liquid when there are enough units outstanding for large transactions to occur without a substantial change in price. Liquidity is one of the most important characteristics of a good market. Liquidity also refers to how easily investors can convert their securities into cash and to a corporation's cash position, which is how much the value of the corporation's current assets exceeds current liabilities.
1.40 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).
1.41 Leverage - The extent to which a company uses debt to finance expansion and growth. It is measured by the Debt to Equity and Debt to Capital Ratios. When comparing companies’ leverage ratios, do so within the same industry, to be fair.
1.42 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’. It is substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefits include professional money management, buying in small amounts and diversification. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which is determined at the end of each trading session, NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds, such as money market mutual funds which are short term instruments.
1.43 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. U.S.
1.44 National Exchange For Automated Trading (NEAT) – NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), and is a state of-the-art client server based application. At the server end all trading information is stored in memory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7 %. For all trades entered into NEAT system, there is uniform response time of less than one second.
1.45 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
1.46 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.
1.47 New York Stock Exchange (NYSE) - The largest stock exchange in the United States
1.48 Option - A security that represents the right to buy or sell a specified amount of an underlying stock, bond, futures contract, etc. at a specified price within a specified time. The purchaser acquires a right, and the seller assumes an obligation. 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.
1.49 Preference Shares - are those shares which are given preference as regards to payment of dividend and repayment of capital. Preference shareholders are given preference over equity shareholders as in the case of winding up of the company, their capital is paid back first and then the equity shareholders are paid. Preference shareholders cannot exercise their voting rights on all the matters. They can vote only on the matters affecting their own interest.
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.
1.50 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 shares of AAA at $65 (strike price) per share between now and the third Friday in March (expiration date).
1.51 Portfolio Management - Where assets are combined into a portfolio that fits the investor's preferences (i.e. level of risk) and needs (i.e. 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 (i.e. security, liquidity and return). The goal is to obtain the highest return for the client of the managed portfolio.
1.52 Retained Earning - The earnings retained by a company after payment of all expenses and dividends. Retained earnings grow as they accumulate year after year. They are shown on the company’s books as a cumulative amount in the Balance Sheet section under Shareholder Equity.
1.53 Securities and Exchange Board of India (SEBI) – is the regulatory authority in India
§ Regulating the business in stock exchanges and any other securities markets.
§ Registering and regulating the working of stock brokers, sub-brokers etc.
§ Promoting and regulating self-regulatory organizations.
§ Prohibiting fraudulent and unfair trade practices.
§ Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self-regulatory organizations, mutual funds and other persons associated with the securities market.
1.54 Strike Price - The price the owner of an option can purchase or sell the underlying security. The purchases and sales are also known as calls and puts.
1.55 Securities – The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA), 1956, includes instruments such as shares, bonds, scrips, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government.
1.56 Sub Prime - The term used for lending to borrowers at a higher rate than the prime rate as they have a higher risk of default. Subprime borrowers typically have low credit scores due to prior bankruptcy, missed loan payments, home repossession etc.
1.57 Stock Symbol Extension - The character or characters that may follow the stock symbol to uniquely identify a listed security. It can be a single alphabetic character, two alphabetic characters, or a combination of two plus one characters with a maximum of eight characters for the stock symbol, extension and separator dots in between. For example, BMO.PR.U. Currently, they include:
§ A-B - class of shares
§ DB - debenture
§ E - equity dividend
§ H - NEX market
§ IR - installment receipts
§ NO, NS, NT - notes
§ P - Capital Pool Company
§ PR - preferred
§ R - subscription receipts
§ RT - rights
§ S - special U.S.
§ U, V - U.S.
§ UN - units
§ W - when issued
§ WT - warrants
1.58 Settlement - The process whereby obligations arising under a derivative transaction are discharged through payment or delivery or both. In other words, “The process that follows a transaction when the seller delivers the security to the buyer and the buyer pays the seller for the security.”
1.59 Transfer Agent - A trust company appointed by a listed company to keep a record of the names, addresses and number of shares held by its shareholders. Frequently, the transfer agent also distributes dividend cheques to the company's shareholders.
1.60 The complete lifecycle of a U.S equity trade - Order Capture, its execution in the market, affirmation/confirmation, foreign exchange, clearing, settlement, and reporting.
1.61 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.
1.62 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.
1.63 What is the difference between stocks and shares? - Answer: “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.
1.64 Yield - This is the measure of the return on an investment and is shown as a percentage. A stock yield is calculated by dividing the annual dividend by the stock's current market price. For example, a stock selling at $50 and with an annual dividend of $5 per share yields 10%. A bond yield is a more complicated calculation, involving annual interest payments, plus amortizing the difference between its current market price and par value over the life of the bond.
3. Cash Flow Statement
1.1 Meaning - According to Institute of Cost & Work Accounts of India, “Cash Flow Statement setting out the flow of cash under different heads of sources and their utilizations to determine the requirements of cash during the given period and prepare for its adequate provisions.
A Cash Flow Statement is a statement showing inflows & outflows of cash. It can be called as a “Statement of changes in financial position-cash basis.”
Cash Flow Statement analysis the reason for changes in balance of cash in hand and at bank as on one date to a next date after a gap, usually the accounting period.
Conclusion by me, “Cash Flow Statement is a statement for study of changes in different items of Working Capital.”
1.2 Methods –
(a) Operating Cash Flow:
Inflows - Money received from customers for sales of products or services.
Outflows - Money paid to suppliers, employees, etc. for normal business expenses.
Outflows - Money paid to suppliers, employees, etc. for normal business expenses.
(b) Financing Cash Flow:
Inflows - Money received from stockholders purchasing company stock, from bondholders for bonds payable, and money borrowed from banks and other creditors.
Outflows - Money paid to stockholders for dividends, to bondholders, banks and other creditors.
Outflows - Money paid to stockholders for dividends, to bondholders, banks and other creditors.
(c) Investing Cash Flow:
Inflows - Money received from selling assets, including land, buildings equipment, stocks, bonds. Money received from loans made to others, such as Notes Receivable.
Outflows - Money paid to purchase assets; and money paid out to make loans to others.
Outflows - Money paid to purchase assets; and money paid out to make loans to others.
1.3 Analyzing the Cash Flow Statement - Analyzing cash flows is an important part of financial statement analysis. Here are some important things to look for:
(1.) There should be a net Increase in Cash from Operating Activities. If operations don't produce positive cash flows, the business will soon be in trouble. Without adequate operating cash flows, the company may have to dip into cash reserves or sell investments to meet regular payment of expenses.
(2.) If a company shows net Increase in Investing Cash Flows, it means they are selling off assets. That is generally not a good sign. I would also look to see if the company was posting losses and had negative cash flows from Operating activities. This might indicate that Management is selling off assets to pay bills. More analysis is needed in this case.
No comments:
Post a Comment