MGT201 - Financial Management FAQs By

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Gilbert Farmer
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1 MGT201 - Financial Management FAQs By Explain me in detail with example what is "double taxation"? Answer: Double taxation occurs when tax is paid more than once on the same taxable income or asset. For example double taxation can arise when two or more tax jurisdictions prescribe comparable taxes for the same taxable entity. For example in Joint Stock Company, the company pays tax on its whole profit as well as when this profit is distributed among the shareholders, they have to pay tax individually as well Define threats. Answer: Threats are unfavourable events or circumstances that may hinder the company in the achievement of its objectives. See also: Strategic early warning, SWOT analysis. What is inventory management? Answer: Inventory management can be explained as the procedures that govern the different aspects of goods like how goods are received, stored, handled, and issued. companies? What is meant by s-type business and also explain the public and private limited Answer: S type of corporation means all the organizations in which members or shareholders are individually taxed. Company does not pay tax on its profit. What is meant by public limited companies? Answer: Public limited company is a company in which general public is invited for the membership of the organization. It is a company that issues shares, debentures etc through an initial public offering to the general public and these are listed on at least one stock exchange. What is meant by private limited companies?

2 Answer: Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering. What is meant by Capital Market? Answer: Capital market is the market for securities, where companies and governments can raise long-term funds. In this market, money is invested for periods longer than a year. Stock exchanges are the examples of capital markets. What is dividend? Answer: This is the part of the organization s profit which is distributed among the shareholders of the company. What is the difference between S Type Corporation and Corporation? Answer: S type of corporation means all the organizations in which members or shareholders are individually taxed. Company does not pay tax on its profit. Corporation is a simple or the regular corporation is the organization in which company has to pay tax on its combine profit as well as the shareholders have to pay tax on individual profits. What are debt and equity? Answer: Debt is the amount which is owed by the company and invested into the business. Equity is the amount which is invested by the shareholders of the organization. What are "PERSONAL CORPORATIONS"? Answer: These are the corporations which are formed by the persons of similar profession like a chamber is maintained by the lawyers. A private hospital is maintained by the doctors etc. What do you mean by financial engineering? Answer: Financial engineering is the creation of new and improved financial products through innovative design or repackaging of existing financial instruments Explain retained earnings.

3 Answer: Retained Earnings is the net profits or earnings retained by the company rather than disbursing to the shareholders in the form of dividends. Retained earnings are used to improve the business through development programs, promotion, R&D, etc. What is the function in financial management? Answer: Financial Management deals with the acquisition and management of the financial resources and assets. What's the scope of Financial Management and how we can compare with financial Accounting? Answer: Financial accounting is a major branch of accounting involving the collection, recording and extraction of financial information, and the summary of it in the form of a periodic profit and loss account, a balance sheet and a cash flow statement in accordance with legal, professional, and capital market requirements. As against it, financial managements is planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. Financial management is done with the aim to assist the management of company, whereas, financial accounting is carried out for reporting to external stakeholders about the financial position and condition of the company. What is the difference between direct and indirect securities? Answer: Direct securities are in different forms such as shares of any company, bonds and the debentures etc. Indirect securities include future contracts, options, swaps etc. What is the difference between common stocks and preferred stocks? Answer: Common stock is the regular shares in a company that give you ownership of a fraction of the company. Preferred stock is the type of shares which is representing partial ownership, also called equity, in a corporation. Preferred stock does not confer voting rights, but takes precedence in claims against the company s profits and assets. Why intrinsic value is always less then market value? Answer: In market value, we consider the price of the assets which is prevailing in the market it does not account for the depreciations, appreciations deterioration etc. But in intrinsic value we always take into account the expected future cash flows after considering the

4 discounting factor, depreciation, deterioration, appreciations etc. that s why intrinsic value is less than market value. What is a Derivative? Answer: The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. What are financial products? Answer: Financial products refer to those instruments that help you save, invest, get insurance or get a mortgage. Like shares, bonds, options, warrants etc. What is the financial deepening in the economy? Answer: Financial deepening is a term used often by economic development experts. It refers to the increased provision of financial services with a wider choice of services geared to all levels of society. Define financial accounting. Answer: The area of accounting concerned with reporting financial information to interested external parties/organizations. It is the field of accounting that provides economic and financial information on investors, creditors, and other external users What is the difference between financial accounting and financial management? Answer: Financial accounting is a major branch of accounting involving the collection, recording and extraction of financial information, and the summary of it in the form of a periodic profit and loss account, a balance sheet and a cash flow statement in accordance with legal, professional, and capital market requirements. As against it, financial managements is planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. Financial management is done with the aim to assist the management of company, whereas, financial accounting is carried out for reporting to external stakeholders about the financial position and condition of the company. What is Accelerated Depreciation?

5 Answer: A depreciation method which allows faster write-offs than the straight line method. This method provides a greater tax shield effect than straight line depreciation. Explain Double Declining Balance Depreciation. Answer: Method of accelerated depreciation, in which double the straight-line depreciation amount is taken the first year, and then that same percentage, is applied to the un-depreciated amount in subsequent years. What is Liquidation value of a business? Answer: The estimated total amount that could be realized from selling the business's individual assets, after satisfying all of the business's liabilities. What are corporate bonds? Answer: A Corporate Bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business Define a portfolio. Answer: A portfolio is a list of holdings in securities owned by an investor or institution. Or a collection of securities held by an investor. What is the difference between MVA (Market value added) and EVA (Economic Value Added)? Answer: Market value added (MVA) is a calculation that shows the difference between the market value of a company and the capital contributed by investors (both bondholders and shareholders). In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity. The formula to calculate market value is Market value= market value-invested capital Economic Value Added EVA is a measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit What is the difference between bond and debenture? Answer: Debentures and bonds are similar, but bonds are more secure than debentures. In the case of both, the company pays a guaranteed interest that does not change in value

6 irrespective of the fortunes of the company. However, bonds are more secure than debentures, and carry a lower interest rate. In the case of bonds, the company provides collateral for the loan. Moreover, in case of liquidation, bondholders will be paid off before debenture holders. A debenture is more secure than a stock, but not as secure as a bond. In case of bankruptcy, you have no collateral you can claim from the company. To compensate for this, companies pay higher interest rates to debenture holders. What does the term Inventory turnover imply? Answer: This ratio measures the number of times, on average; the inventory is sold during the period. What is the difference between stock and capital? Answer: Funds provided by owners of a business in return for shares of ownership or a portion of membership is generally known as capital. And the capital of corporation is divided into small units and each unit is called a share. Share is basically unit of ownership of a corporation. For example the share capital of ABC firm is Rs. 100,000 and it is divided into small units of each Rs. 10, so No. of shares will be 10,000. Why is the dividend paid to the preferred shareholders before the common shareholders? Answer: Both of these are classes of shareholders. Mostly the preferred shareholders are paid dividends at fixed-rate or Floating-Rate. All the profits which are left are available for the common shareholders. Common shareholders have the advantage that rest of the profits are all for them, it may happen that their dividend is more than the preferred shareholders. Actually the preferred shares have blended features of debentures and common share. Define Risk free interest rate. Answer: Risk free interest rate is the theoretical rate of return attributed to an investment with zero risk. The risk-free rate represents the interest on an investor's money that he or she would expect from an absolutely risk-free investment over a specified period of time. In theory, the risk-free rate is the minimum return an investor should expect for any investment, as any amount of risk would not be tolerated unless the expected rate of return

7 was greater than the risk-free rate. In practice, however, the risk-free rate does not technically exist; even the safest investments carry a very small amount of risk. Explain Direct & Indirect cash flow Statements. Answer: Indirect method cash flow statement: It begins with the net income figure taken from the income statement (profit and loss account) and then makes several adjustments which fall under three main headings: (1) Expenses not involving cash outflows (2) Cash outflows not recorded as expenses; and (3) Revenues not involving cash inflows. These adjustments convert the net income into net cash-flow from operating activities. Direct method cash flow statement: It begins with cash provided by the sales from which cash paid for operating expenses is deducted to arrive at the net cash flow from operating activities. Indirect Securities: The securities do not generate any cash flow; however, its value depends on the value of the underlying asset. What is the capital outflow? How it is related to trade balance? Answer: Capital outflow is an economic term describing capital flowing out of (or leaving) a particular economy which can be caused by any number of economic or political reasons. Trade balance is the part of a nation's balance of payments dealing with imports and exports that is trade in goods and services, over a given period. If capital outflow exceed capital inflow, the trade balance if said to be unfavorable. Answer: due. What is Ageing Schedule? A list of accounts receivable broken down by number of days until due or past What does the term Unrealized gain refer? Answer: Profit which has been made but not yet realized through a transaction, such as a stock which has risen in value but is still being held. Unrealized profits are usually not taxable. What is Window Dressing? Answer: It is the act or an instance of making something appear deceptively attractive or favorable. For example, this strategy is used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance

8 What is the difference between simple interest and discrete compound interest? Answer: Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days. Compound interest is calculated each period on the original principal and all interest accumulated during past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously. What is the purpose or meaning of pro forma cash flow statement? Answer: Pro forma means based on projection or estimation. So, its means pro forma cash flow statement is the cash flow statement prepared for future based on estimation. Answer: situations. What is a forecast? Forecast means prediction in advance. It is the process of estimation in unknown Define lumpy asset. Answer: Lumpy assets are the assets that cannot be acquired in small increments but must be obtained in large, discrete units or in other words the assets of which you have to maintain a minimum inventory level. For example, usually an entire plant must be built at one time not half a plant one year, and another half several years later. What does the term Compounding cycle means? Answer: Compounding cycle is the time after which compounding takes place (like once a year, 2 times in year, etc.). for example, if the interest is paid 2 times in a year, then compounding cycle will be half year or semiannually (1 year/no. of compounding in a year) Explain discounting Answer: Discounting is actually calculating the present value of a future amount. Discounting is done with the aim of comparing the net cash flows at one point in time so that we can make better decisions. Like, Rs today is less that Rs a year after. When you have to make decisions regarding future cash flows, you must discount the cash flows.

9 Define opportunity cost. Answer: Opportunity cost is actually the cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. What is discounting cash flow? Answer: Discounting is actually calculating the present value of a future amount. So, discounted cash flows are the cash flows after calculating their present value. What does the term rate of return mean? Answer: Rate of return is the annual rate of return on an investment, calculated as a percentage of the total amount invested. Like if you keep your money in bank and you are paid 10% return, that 10% is the rate of return. What is the difference between Periodic Interest Rate & Effective Interest Rate? Answer: The periodic interest rate, sometimes called the nominal rate, is the interest rate a lender charges on the amount you borrow. It is the percentage of interest charged at each compounding period. The periodic interest rate can be calculated by dividing the nominal interest rate by the number of compounding periods per year. Effective Interest Rate is the actual interest paid on a loan, or earned on a deposit account, depending on the frequency of compounding or effect of inflation. It is different from the nominal rate of interest which ignores compounding and other factors. For example, the stated rate of interest on a Rs. 1,000 investment is 8% which is the nominal rate; whether the interest is paid quarterly, semiannually, monthly, etc. is not known. For this purpose, effective interest rate is calculated that is the interest rate on a debt or debt security that takes into account the effects of compounding. For example, if one has a fixed-income investment that pays 3% interest each month. 3% is the periodic interest rate (for each month). The annual effective rate of interest is more than 3% because compounding the interest adds results in a (slightly) greater principal each month on which the interest rate is calculated. What is the difference between stock holder and stack holder? Answer: Stockholders are the shareholders of a firm which are the owners of that firm. While, the stakeholders are the individuals or groups with an interest in the success of an

10 organization. Stakeholders may include suppliers, customers, owners, government, etc. and stockholders as well. Define NPV and IRR. Answer: The present value of a series of future net cash flows that will result from an investment, minus the amount of the original investment is known as Net present value (NPV). The discount or interest rate at which the net present value of an investment is equal to zero is called Internal rate of return (IRR). What is the difference between Annuity and Perpetuity. Answer: An annuity is a series of equal cash flows occurring for a specific time period (that has certain end). As against it, Perpetuity is an annuity that has no definite end or a stream of cash payments that continues forever. What is the difference between Ordinary annuity and annuity due? Answer: An ordinary annuity is a series of equal cash flows occurring for a specific time period with payments made at the end of each period. Annuity due is a series of equal cash flows occurring at the beginning of equal intervals of time

Who of the following make a broader use of accounting information?

Who of the following make a broader use of accounting information? Accountants Financial Analysts Auditors Marketers Which of the following is NOT an internal use of financial statements information? Planning