IMPORTANT POINTS IN FINANCIAL MGT
1.Production, marketing and finance r key operational areas in manufacturing organizations.
2.Finance is the most crucial one.
3.Finance refers to procurement of funds and application of funds.
4.R.C. Osborn defines Finance function as process of acquiring and utilizing funds.
5.Bonneville and Dewey defines Finance consists of raising, providing, managing of all money or funds of
any kind to be used in connection with the business.
6.Finance concerned with financing, investment & dividend policy decisions.
7.Fixed assets r assets which bring return to the organization over longer span of time.
8.Investment decisions in fixed assets r called Capital Budgeting decisions & that in current assets r called
Working Capital Management.
9.There is reciprocal relationship b/w dividend & retained profits.
10.Discounting rate is used to discount future cash flows reflects concepts of both time and risk.
11.If time period is too short and risk element is minimum, profit and wealth maximization will mean the
same things.
12.Corporation Finance deals with financial practices, policies & problems of corporate enterprises or
companies.
13.Private finance deals with financial matters of non- govtal organizations.
14.Proprietary firm is the easiest and most economical form of business organization to form and operate.
15.Members in partnership firms = 2 to 20 members.
16.At present, profit of partnership firm is taxed at flat rate of 35%.
17.Denomination value is called face value or nominal value.
18.Jt. stock co r limited liability organizations.
19.Being artificial person, co. enjoys perpetual existence.
20.Pvt ltd Co has 2 to 50 shareholders.
21. Public ltd Co has 7 to no restrictions shareholders.
22.In case of pvt ltd co., the right of shareholders to transfer shares is restricted.
23.Minimum paid- up – capital in case of Pvt Ltd Co. is Rs 1 lakh or more.
24. Minimum paid- up – capital in case of Public Ltd Co. is Rs 5 lakh or more.
25.Going concern concept affects valuation of assets and liabilities.
26.Conservation concept says anticipate all future losses and expenses but do not anticipate future
incomes and profits.
27. Conservation concept is applicable to current assets.
28.Schedule VI of Companies Act 1956, Part I deals with Balance sheet; Part II deals with Profit and loss
account; Part III – notes forming part of balance sheet & profit loss account; Part IV – Balance sheet
abstract and Company’s general business profile.
29.Liabilities include share capital, reserves & surplus, secured & unsecured loans, current liabilities
provisions.
30.Assets include fixed assets, investment, current assets, loan, advances, profit and loss account debit
balance.
31.Reserves indicate that portion of earnings, receipt or other surplus of Company appropriated by
management for general or specific purpose other than provisions for depreciation or for known liability.
32.Capital reserves can’t be distributed by way of dividends.
33.Revenue reserves r any other reserves other than capital reserves.
34.Secured loans include debentures; loans & advances from banks; loans & advances from subsidiaries;
other loans and advances.
35.Unsecured loans include fixed deposits; loans & advances from subsidiaries; other loans and advances;
short term loans and advances.
36.Liability includes loans, deposits & bank overdraft which fall due for payment normally not more than
12 months.
37.Quoted investments mean investments which r traded on recognised stock exchange.
38.Scheduled Bank is defined in section 2(e) of Reserve Bank ACT 1934.
39.Deferred revenue expenditure is neither capital nor revenue expenditure.
40. Deferred revenue expenditure should not be transferred to Profit & Loss account in the year of
occurrence.
41.Contingent liabilities r liabilities the crystallization of which depend on happening or non- happening of
certain events.
42. Contingent liabilities r not part of Balance sheet. They r disclosed below Balance sheet by the way of
“Foot Note.”
43.PAT = Operating profit+ Non Operating incomes - Non Operating expenses – taxation.
44.External analysis is carried out by creditors, prospective investors and other outsiders.
45.Ratio Analysis technique is available to management to impart functions of planning & control.
46.Liquidity ratios indicate short term position of organization & indicate efficiency with which working
capital is being used.
47.Commercial banks and short term creditors r interested in Liquidity ratios.
48.Current ratio = current assets/ current liabilities.
49.Liquid ratio = liquid assets/ liquid liabilities.
50.Current assets include cash in hand or at bank, marketable securities, sundry debtors, bills receivables,
inventories, prepaid expenses, short term loans & advances.
51.Current liabilities include sundry creditors, bills payable, outstanding expenses, bank overdraft or cash
credit.
52.Current ratio 2:1 is considered to be ideal.
53.Liquid ratio 1:1 is considered to be ideal.
54.Liquid assets r all current assets except inventories and prepaid expenses.
55.Liquid liabilities r all current liabilities except bank overdraft or cash credit.
56.Ratios computed under Turnover group indicates efficiency of the organisation to use various kinds of
assets by converting them in the form of sales.
57.Fixed assets turnover ratio =Net sales/Fixed assets
58.Working capital includes difference b/w current assets and current liabilities.
59.Debtors turnover ratio = Net credit sales / closing sundry debtors.
60.Capital employed = Fixed assets + Investments + Current assets – Current liabilities
61.Capital Employed = Share capital + reserves & surplus + long term liabilities.
62.Shareholders, debenture holders & other lenders of long term finance r interested in solvency ratios.
63.Debt equity ratio = External liabilities / shareholder funds or Long term liabilities / shareholder funds.
64. Long term liabilities include debentures, term loans & deferred payment liabilities.
65.In case of redeemable pref. Share capital, if redeemable after 12 years, treated as equity & if before
12 years treated as debt.
66.Proprietary ratio indicates extent to which the owners funds r sunk in different kinds of assets.
67.If owner funds r less than fixed assets, it indicates that part of fixed assets is financed by creditors –
either long term or short term.
68.DSCR – Debt Service Coverage Ratio.
69.DSCR is calculated by banks/ financial institutions.
70.Non operating expenses r interest, dividend, loss on sale & assets, investment.]
71.High operating ratio means small margin of sales is avl. To meet expenses in form of interest, dividend
& other Non operating expenses.
72.Overall profitability group indicates the relationship between profits of firm & investments in firm.
73.ROA = (Net profit/sales) * 100
74.ROCE = (Net profit + Interest on long term sources / Capital employed) * 100.
75.Capital gearing ratio = Fixed income bearing securities/ equity capital.
76. Fixed income bearing securities consists of pref share capital, debentures & long term loans.
77.EPS = (Net PAT- Pref. dividend) / No. of equity shares outstanding.
78.EPS is calculated on net profit & not on retained profits.
79.P/E ratio indicates price currently being paid in market for each rupee of EPS.
80.Cash flow statement is summary of Cash book or receipts & pymt statement.
81.Funds flow statement does not consider non fund transactions.
82.Any increase in assets involves outflow of funds.
83. Any decrease in assets involves inflow of funds.
84. Any increase in liabilities involves inflow of funds.
85. Any decrease in liabilities involves outflow of funds.
86.Sources of funds r issue of shares & debentures; receipt of term loans & fixed deposits/ loans; sale of
fixed assets & investments; non operating income; operating profit; decrease in wking capital or decrease
in current assets or increase in current liabilities.
87.Application of funds include redemption of shares & debentures; term loan repymts; purchase of fixed
assets & investments; repymt of deposits/ loans; non operating expenses; operating expenses; operating
loss; dividends; increase in wking capital or increase in current assets or decrease in current liabilities.
88.Increase in current assets increases working capital.
89. Increase in current liabilities decreases working capital.
90. Decrease in current assets decreases working capital.
91. Decrease in current liabilities increases working capital.
92.Provision of tax is current liability & advance tax is current assets.
93.While funds flow statement usually considers transactions affecting the movement of capital, cash flow
statement considers movement only in respect of cash.
94.Capitalisation is total amount of long term funds available to company.
95.Dewinsg says Capitalization includes capital stock and debt.
96.Cost theory gives more stress on current outlays than on requirements which r necessary to
accommodate investments on going concern basis.
97.Cost theory of capitalization not useful in case of companies with irregular earnings.
98.Earning theory of capitalization considers amount of capitalization on basis of expected future earnings
of Co, by capitalizing future earnings at appropriate capitalization rate.
99.While established concerns prefer earnings theory, new concerns prefer cost theory of capitalization.
100.Over capitalization is existence of excess capital as compared to the level of activity & requirements.
101.Under capitalization is excess of real worth of assets over aggregate of shares & debentures
outstanding.
102. Under capitalization is not economic problem but problem in adjusting capital structure.
103.Effects of Over capitalization affect the company, shareholders, consumers & society at large.
104.Ultimate effect of over capitalization is liquidation and winding up of company.
105.Situation of under capitalization increases competition for the company; employees discontentment &
consumer get the feeling that they r being exploited.
106. Under capitalization is preferred situation.
107.When share capital is not represented by assets of equal value, the situation may mean intro of water
in capital or watered capital.
108.Concept of watered capital is confined to time of promotion of the company.
109.Sorces for long term & medium term requirement of funds r shares, debentures, term loans, public
deposits, leasing & hire purchases; retained earnings.
110Share is smaller unit into which overall requirement of capital of company is sub divided.
111.Equity shares r corner stones of financial structure of the company.
112.Investors in equity shares r real owners of the company.
113.Funds raised by the company by way of equity shares r required to be repaid only at the time of
closing down of the company.
114. Funds raised by the company by way of preference shares r required to be repaid during existence of
the company.
115. Funds raised by the company by way of equity shares r available to the company on unsecured basis.
116.Equity shares as investment is risky for investors.
117.Preference shares carry dividend at fixed rate which is payable even before any dividend is paid on
equity shares.
118. Company can issue preference shares max for 20 years. They r not permanent capital available to
company.
119.In case of preference shares, rate of dividend is pre fixed.
120.Convertible preference shares r those which can be converted to equity shares at later date, terms of
conversion being known to the investors in the beginning only.
121.Debenture is a document containing acknowledgement of indebtedness issued by the company &
giving undertaking to repay the debt at specified rate or option of the company & in meantime to pay
interest at fixed rate and at intervals stated in the debenture.
122.Investors who invest in debentures r creditors of company.
123.Debenture is secured.
124.Interest on debentures is payable even if the company doesn’t earn profits.
125.Registeredr debentures r those holders of which r registered in company as debenture holders &
those can be transferred to another person only through the company.
126.Holders of bearer debentures can be transferred to anybody by mere delivery.
127.Public deposits r unsecured borrowings for the company.
128.NBFCs – Non Banking Finance Companies.
129.Minimum period for which deposit can be accepted shall be 6 months and maximum 36 months.
130.Maximum interest which company may pay on deposits will be 12.5% at monthly rests.
131.Free reserves include capital redemption reserves & share premium.
132.After accepting deposits, every company should furnish to depositor, within 8 weeks from the date of
receipt of money or realization of cheques, deposit receipt.
133.If deposit is repaid after 6 months from the date of deposit but before its expiry, Rate of interest on
such deposit will be reduced by 1% from the rate which company would otherwise have paid.
134.Small depositor is depositor who has deposited in financial year sum not exceeding Rs. 20,000 in the
company.
135.Under leasing agreements, the company acquires the right to use asset without holding title to it.
136.Owner of asset is called lessor and user of asset is called lessee.
137.Leasing increases borrowing capacity of the firm.
138.Depreciation is considered by hirer as expenditure.
139.Leasing is referred to as “off the balance sheet mode of financing” for lessee.
140.While amounts paid by lessee to lessor r considered to be revenue expenditure, that paid by hirer to
hiree r not considered to be revenue expenditure.
141.In financial lease, lessor acts as financer.
142.While in financial lease, lessee bears the cost of maintenance, repairs & insurance of asset; in
operating lease, lessor does that.
143.Operating lease is for shorter span of time.
144.In sale & lease back, on sale of asset to lessor, the ownership of assets gets transferred to lessor.
145.Retained earnings or plough back profits indicates that whatever profits r earned by the company r
not distributed by it by the way of dividend but r kept aside for being used in the future for expansion or
other purposes.
146.Capital structure refers to mix of sources from which long term funds required by business r raised.
147.According to the cost principle, ideal capital structure should minimize financing cost & maximize EPS.
148.During boom & prosperity, company can issue equity shares to get the benefit of investors to invest &
in depression debt capital.
149.Return which the company pays on borrowed funds is income tax deductible.
150.Own capital is unsecured.
151.If policies of lending banks r too harsh or rigid, company should be advised not to go for borrowed
funds.
152.In pvt. Ltd company, control plays vital role & in public. Ltd company, cost plays vital role.
153.If management attitude is conservative, control plays vital role & if management is aggressive cost
plays vital role.
154.For capital budgeting decisions, composite cost of capital is considered.
155.Implicit cost is hidden cost not incurred directly.
156.IRR – Internal Rate of Return.
157.In Optimal capital structure, valuation of firm is maximum & overall cost of capital is minimum.
158.Acc. to D/P approach, before the investor pays certain price for purchasing equity shares of company,
he expects certain return on investment in the form of dividend.
159.Marginal contribution = sales- variable cost.
160.P/E ratio is vital to the operator on stock exchange buying & selling shares.
161.Operating leverage means effect of change in sales quantity on EBIT.
162 Operating leverage = contribution / EBIT.
163.Financial Leverage = EBIT/ (EBIT- Interest).
164.Use of Financial Leverage is useful so long as debt capital costs less than what it earns.
165. Financial Leverage ignores implicit cost of debt.
166.Combined leverage = operating leverage * financial leverage.
167.Acc to net income approach proposed by Durand, there exists direct relationship b/w capital structure
& valuation of firm & cost of capital.
168. Acc to net income approach, valuation of firm & its cost of capital is independent of its capital
structure.
169.Leverage has no impact on share market prices or cost of capital.
170.Listed company can make public issue if size is less than 5 times its pre- issue net worth.
171.Lock- in- period for promoter contribution shall be 3 years from date of commercial production or date
of allotment of shares whichever is later.
172.Minimum application money payable by applicant alongwith application shall not be less than25% of
issue price.
173.Public issue of shares shall be kept open for minimum 3 wking days & not more than 10 working
days.
174.Rights issue shall be kept open for minimum 30 wking days & not more than 60 working days.
175.If issue size is greater than Rs 100 crores, 2 ratings from 2different credit rating agencies r required
to be obtained.
176.If issue of debentures is having maturity period of more than 18 months, company shall appoint
Debenture trustee.
177.DRR – Debenture Redemption Reserve.
178.DRR shld be created out of post tax profits earned by the company.
179.DRR is treated as free reserve while issuing bonus shares.
180.Underwriting is a contract where underwriter agrees to subscribe directly or to procure subscription
for that portion of issue which is not taken up by the public.
181.Bankers to issue r banks who provide term finance or working capital finance to company &
underwrites the issue.
182.If market price of equity shares is less than the exercise price during exercise period, company may
not get subscription for shares.
183.Float rate is minimum Rate of interest payable by company on bonds even if base rate falls below
certain limit.
184.Cap Rate is maximum Rate of interest payable by company on bonds even if base rate increases
beyond certain limit.
185.DDB is Deep Discount Bonds which were issued by IDBI in 1992 for the first time.
186.SPN – Secured Premium Notes were issued by TISCO in 1992.
187.Credit rating indicates safety associated with the particular instrument issued by the company but
doesn’t indicate financial health of the company as a whole.
188.CRISIL – Credit Rating & Info. Services of India Ltd.
189.IICRA – Investment Info & Credit Rating Agency.
190.CARE – Credit Analysis & Research Ltd.
191.Debt equity ratio after buy back of shares shouldn’t be more than 2:1 except where Central
Government allows higher ratio in case of some company.
192.Generation of projects take place at top management or sometimes also at lower level.
193.Amount recvd from outside source of working capital finance constitute cash inflows.
194.Sales revenue – Costs = Net revenue
195. Net revenue – Tax liability = Revenue after taxes.
196. Revenue after taxes + depreciation = Net cash inflow.
197.Costs of interest & dividends not to be considered while calculating costs.
198.In compounding, interest is compounded & becomes a part of initial principal at the end of
compounding period.
199.Techniques for evaluation of capital expenditure proposals not considering time value of money r Pay
back period & ARR(Accounting Rate of Return).
200.Pay back period is period within which cash inflows = cash outflows.
201.Pay back period = Cash outlay / annual cash inflow.
202. Pay back period is suitable where the risk of absolescence is high.
203.ARR = Total profits / (net investment in project * no. of years of profit) * 100.
204. Techniques for evaluation of capital expenditure proposals considering time value of money r
discounted pay back period; NPV(Net Present Value); IRR(Internal Rate of Return); Profitabilty index or
benefit cost ratio.
205.IRR is the rate at which discounted cash inflows match with discounted cash outflows.
206.IRR may be called “break even rate” of borrowing for the company.
207.IRR indicates discounting rate at which NPV is zero.
208.While cash inflows can’t be estimated accurately, cash outflows can be estimated accurately.
209.Capital rationing refers to situation where the company has more acceptable proposals requiring
greater amount of funds than is available with the company.
210.Acc to Certainty – Equivalent approach, future cash inflows themselves r adjusted by using Certainty
– Equivalent coefficient.
211. Certainty – Equivalent coefficient = Certainty cash inflows / risky cash inflows.
212.The higher the risk, lower Certainty – Equivalent coefficient & vice versa.
213.CFBT – Cash flows Before Tax.
214.Current assets r assets that can be converted in the form of cash or used during the course of normal
operations within the short span of time(say 1 year), without any reduction in the value.
215.In case of manufacturing organizations, Current assets may be found in the form of stocks,
receivables, cash & bank balances, sundry loans & advances.
216.If organization is trading organization, reqt of wking capital will be on the higher side.
217.In small scale organizations, reqt of wking capital is high due to high amount of overheads, high
buying & selling costs.
218.If purchases r required to be made on cash basis & sales r to be made on credit basis to cope with
competition existing in the market, it will result into wking capital is high.
219.Variable wking capital is wking capital required over & above fixed wking capital.
220.Spontaneous sources r unsecured in nature, vary with level of sales &do not have explicit costs
attached to them.
221.ICD – Intercorporate Deposits.
222.ICDs r for 3 or 6 months; r unsecured source for raising funds & is relationship based borrowing made
by the company.
223.Commercial paper is unsecured promissory note issued at discount.
224. Commercial paper can be issued for maturity period of 15 days to one year.
225.Company whose tangible net worth of the company as per latest audited balance sheet not less than
4 crores can issue commercial paper.
226. tangible net worth means share capital * free reserves duly reduced by intangible assets like
accumulated losses, deferred revenue expenditure etc.
227.IPA – Issuing &Paying Agent.
228.In non fund based lending, fund position of lending bank position of lending bank remains intact.
229.Bank guarantee is typically found in seller’s market & bank guarantee transactions applicable in case
of credit transaction.
230.Letter of credit is found in international trade.
231.Parties to Letter of credit r importer, exporter & issuer who is bank of importer.
232.Exporter is beneficiary of Letter of credit.
233.In revocable Letter of credit, issuing bank can cancel or change obligation to make payment or
honour bills or drafts drawn upon it.
234.Combination of irrevocable & confirmed Letter of credit can be considered to be guaranteed payment
on the part of exporter.
235.Lending bank commits physical outflow of funds in fund based lending.
236.Overdraft is given by bank for short period. Interest is payable on actual amount drawn & is
calculated on daily basis.
237.Packing credit is facility given by bank to enable the company to buy or manufacture goods to be
exported.
238.Under pledge, possession of goods is with bank & goods pledged r in custody of bank.
239.Under lien, bank has right to retain goods belonging to company until debt due to bank is paid.
240.Particular lien – valid till claims r fully paid.
241.Banks enjoy general lien.
242.Daheja committee was appointed in October 1968 to examine the extent to which the credit needs of
trade & industry r likely to be inflate & how to check such trends.
243.Tandon committee was appointed in August 1975 under Mr P.L. Tandon.
244.Chhore committee was appointed in April 1979 under Mr K.B. Chhore.
245.WCTL – Wking Capital Term Loan.
246.Marathe committee was appointed in 1982 to review credit authorization scheme(CAS) which was in
existence since 1965.
247.In 1988, CAS was replaced by Credit Monitoring Arrangement(CMA).
248.Nayak Committee- to recognize contribution made by SSI sector to the economy.
249.Cash is most liquid type of current assets.
250.Cash remaining idle involves cost in form of interest & opportunity costs.
251.Objective of cash mgt is to reduce operating cash reqt. To minimum possible extent without affecting
routine transactions.
252.Float indicates difference b/w bank balance as per bank book and as per bank pass book or bank
statement.
253.Decentralized collections r useful to reduce postal & bank float.
254.Receivable management is to achieve trade off b/w risk & profitability.
255.Objective of Receivable management is to increase credit sales to such extent that risk of non
recoverable dues is reasonable & within control.
256.Cost associated with Receivable management may be in the form of credit administration costs, cost
of bad debts & opportunity cost of funds blocked in receivables.
257.Products having inelastic demand, have small credit period.
258.Buyer’s market required to offer more credit period.
259.if aggressive management attitude, more credit period.
260.NCP – Normal Credit Period.
261.Factoring indicates relation b/w financial institutions & business organization who in turn sells goods/
services to its customers.
262.If factoring is with recourse factoring, risk of non payment by customers is assumed by the client &
not by the factor.
263.While Bills discounting is financial function, factoring is financial & administrative function.
264.Factoring services in India started on the basis of recommendations of Kalyanasundram Committee
appointed in 1989.
265.ECGC – Export Credit Guarantee Commission.
266.Over investment is unnecessary blocking of funds, excessive storage & insurance cost; risk of
liquidity.
267.If purchase quantity increases, ordering cost reduces & carrying cost increases.
268.Ordering cost = (A/Q) * O.
269.Carrying cost = (Q/2) * c.
270.Reorder level = Max. lead time * max. usage.
271.Max. level = Reorder level * reorder quantity- (Min. usage * min. lead time).
272.Min. level = Reorder level-(normal usage * normal lead time)
273.Danger level =Normal usage * leadtime for emergency purchases.
274.Safety stock = (Max. usage * max. lead time) – (Normal usage * normal lead time)
275. Safety stock = min. level
276.Max level = safety stock + EOQ
277.Reorder level = safety stock + (Normal usage * normal lead time).
278.Average stock level = safety stock +(EOQ/2).
279.Inventory turnover = value of material consumed / average inventory held
280. Value of material = opening stock + purchases – closing stock.
281.Bill of materials(BOM) is the list of all materials required for a job process or production order.
282.No. of orders = Annual consumption / EOQ.
283.Irrelevance approach is by Modiglani & Miller.
284.Acquisition of funds will result in reduced share values.
285.Relevance approach by Walter & Gordon holds view that there is direct relationship b/w dividend
policy of the company and its value in terms of market price of its shares.
286.If the company ants to pay dividend in cash, provisions of Company act 1956 r to be followed & if
wants to issue bonus shares, provisions of SEBI guidelines r required to be followed.
287.Pvt. ltd. Company will restrict payment of dividend.
288.Irregular dividend policy is followed by the company having unstable income.
289.Board of directors can only declare interim dividend.
290.Any amount declared by the company but which remains to bepaidor claimed within 30 days from its
declarations, company shall, within 7 days from the expiry of such 30 days, transfer this unpaid amount to
separate account opened with the scheduled bank.
291.Bonus share doesn’t involve cash outflow but involves only transfer of retained earnings to the share
capital.
292.On issuing bonus shares, reserves of the company reduces & share capital of the company increases.