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01 July 2015 difference between debt and equity?
difference between liability and debt?
what is debt equity ratio
what is current ratio
what is quick ratio acid test ratio
difference between reserve and provision
what is deferred revenue
what is deferred expenses
difference between deferral and accrual
bad debts and provision for bad debts
what is depreciation and its methods
what are month end closing entries/activities
complete set of financial statements and objectives of financial statements
deferred tax liability and asset
difference between deferred tax asset and deferred tax liability
net realisable value and fair value
what are trade discount and cash discount

01 July 2015 Debt V/s Equity



When it comes to funding a small business, there are two basic options: debt or equity financing.

Each has its advantages and drawbacks, so it’s important to know a bit about both so you can make the best decision for financing your business.

Debt Financing
Debt financing involves borrowing money, typically in the form of a loan from a bank or other financial institution or from commercial finance companies, to fund your business.

Getting a business loan generally requires good credit and solid financials, as well as collateral for larger loans.

Many small business owners are afraid to take on debt because they fear they may not have the cash flow to repay the debt (plus interest) in a timely fashion.

Others may be concerned that they don’t have the credit-worthiness to get a bank loan, and so don’t want to even bother applying.

But debt financing has some definite advantages that make it an option worth considering for any small business owner.

First and foremost, unlike with equity financing, debt financing allows you to retain control of your business, as ownership stays fully in your hands.

You may have to back up a loan with collateral, so if you default you may lose certain tangible assets, but you won’t lose creative and strategic control of your business.

In addition, taking on debt can build your business credit, which is good for future borrowing and for insurance rates.

It’s also worth bearing in mind that interest paid on loans is tax deductible, softening the blow of repayment somewhat.

Equity Financing
Equity financing involves bringing in investors or partners who provide capital in exchange for a share of ownership of the business.

These investors or partners generally invest because they expect to make a profit when the business becomes successful.

Unlike a loan, if you don’t make a profit, you usually aren’t required to pay them back. The absence of monthly loan payments can free up significant working capital for the business.

Many small business owners also are drawn to equity financing because, while investors or partners will only provide equity if they have faith in the earning power of your business, you don’t necessarily need the pristine financial history that is required for a loan.

This can be a crucial point for many small business owners, especially for those just starting a business without the two or three years of financials most banks look at.

The cost of these benefits is that you no longer retain sole control of your business.

This means that not only will your investors be entitled to a share of profits, but they also have a say in the running of your business and the direction it’s headed.

This may not seem like a problem at the beginning when you need cash, but can sometimes lead to conflict further down the road.

On the other hand, a strong, smart partner may be an asset to your business; especially if you find someone who is a good compliment to yourself.

If you’re the creative, visionary type, you may benefit from the balancing influence of a partner who is grounded and pennywise.

The Bottom Line
Because each type of financing has its own appeal, businesses often take advantage of both debt and equity financing, utilizing each to its best advantage.

Look at the benefits of each to see which may most help your business, and compare typical debt-to-equity ratios for other businesses in your industry when deciding what type of financing to seek.

01 July 2015 liability and debt

Sometimes liability and debt mean the same thing. For instance in the debt-to-equity ratio, debt means the total amount of liabilities. In this case, debt not only includes short-term and long-term loans and bonds payable, debt also includes accrued wages and utilities, income taxes payable, and other liabilities.




01 July 2015 DEBT/EQUITY RATIO

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.





Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones.




01 July 2015 CURRENT RATIO

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:





Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".



'Current Ratio'

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.

This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and prepaids as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales.




01 July 2015 QUICK RATIO

An indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows:

Quick ratio = (current assets – inventories) / current liabilities, or

= (cash and equivalents + marketable securities + accounts receivable) / current liabilities

The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company's liquidity position. Also known as the “acid-test ratio" or "quick assets ratio."

'Quick Ratio'
For example, consider a firm with the following current assets on its balance sheet:

Cash $5 million, marketable securities $10 million, accounts receivable $15 million, inventories $20 million.

This is offset by current liabilities of $20 million.

The quick ratio in this case is 1.5 and the current ratio is 2.5.

The quick ratio is more conservative than the current ratio because it excludes inventories from current assets. The ratio derives its name presumably from the fact that assets such as cash and marketable securities are quick sources of cash. Inventories generally take time to be converted into cash, and if they have to be sold quickly, the company may have to accept a lower price than book value of these inventories. As a result, they are justifiably excluded from assets that are ready sources of immediate cash.

Whether “accounts receivable” is a source of ready cash is debatable, however, and depends on the credit terms that the company extends to its customers. A firm that gives its customers only 30 days to pay will obviously be in a better liquidity position than one that gives them 90 days. But the liquidity position also depends on the credit terms the company has negotiated from its suppliers. For example, if a firm gives its customers 90 days to pay, but has 120 days to pay its suppliers, its liquidity position may be reasonable.

The other issue with including accounts receivable as a source of quick cash is that unlike cash and marketable securities – which can typically be converted into cash at the full value shown on the balance sheet – the total accounts receivable amount actually received may be slightly below book value because of discounts for early payment and credit losses.




01 July 2015 Quick Ratio


The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets.

Short-term investments or marketable securities include trading securities and available for sale securities that can easily be converted into cash within the next 90 days. Marketable securities are traded on an open market with a known price and readily available buyers. Any stock on the New York Stock Exchange would be considered a marketable security because they can easily be sold to any investor when the market is open.

The quick ratio is often called the acid test ratio in reference to the historical use of acid to test metals for gold by the early miners. If the metal passed the acid test, it was pure gold. If metal failed the acid test by corroding from the acid, it was a base metal and of no value.

The acid test of finance shows how well a company can quickly convert its assets into cash in order to pay off its current liabilities. It also shows the level of quick assets to current liabilities.

Formula

The quick ratio is calculated by adding cash, cash equivalents, short-term investments, and current receivables together then dividing them by current liabilities.




Sometimes company financial statements don't give a breakdown of quick assets on the balance sheet. In this case, you can still calculate the quick ratio even if some of the quick asset totals are unknown. Simply subtract inventory and any current prepaid assets from the current asset total for the numerator.

01 July 2015 Difference between Provision and Reserve

Provision and reserves both are created for covering future losses. If we do not make, we can face lots of losses and it will be impossible for us to survive by tolerating such losses. So, as a good person, we need to create provisions and reserves. But both are different terms. You can not use one term for other all the times. Know its main differences for proper use of both accounting terms.


1. Meaning

Provision : Provision is created to show certain liability. For example, from past experience, we have know there will be 10% bad debts out of total debtor asset. So, out of total revenue, we deduct provision for doubtful debt as show it as current liability.

Reserve : Reserve is created to show unknown liability. For example, we are doing business in share market. It is risky business. So, we have created Risk for fluctuation in share market as $ 20,000. In past experience, there was no loss but still we are showing it as liability and deducting from our total revenue.


2. As per Law


Provision : As per law, to create provision is necessary. That is reason, we show it as expense side in profit and loss account.

Reserve : As per law, to create reserve is not necessary. That is the reason, we deduct it out of net profit by making profit and loss appropriation account.


3. Aim of Creation


Provision : Main aim is to create provision to cover loss due depreciation and bad debts. So, we can buy new fixed asset and invest more money in debtors.

Reserve : Main aim of reserve is to provide financial strength to the business.


4. Accounting Treatment


Provision : We debit the profit and loss account and credit the provision account.

Reserve : We debit the profit and loss appropriation account and credit reserve account.


5. Investment

Provision : Fund created with provision can not be invested outside the business

Reserve : Fund created with reserve can be invested outside the business.


6. Showing in Balance Sheet

Provision : It is shown in balance sheet by deducting specific asset.

Reserve : It is shown in the liability side of balance sheet under reserve and surplus heading.



7. Use of Dividend


Provision : It can not be used for giving dividend to shareholder.

Reserve : It can be used for giving dividend to shareholder.


8. Other Usage

Provision : It is created for covering specific loss, so use for same purpose. For example, provision for depreciation fund can only be used for buying new fixed asset.

Reserve : Reserve can be used by any other purpose.




01 July 2015 Deferred revenue

Deferred revenue refers to payments received in advance for services which have not yet been performed or goods which have not yet been delivered. These revenues are classified on the company's balance sheet as a liability and not as an asset.

01 July 2015 A deferred expense is a cost that has already been incurred, but which has not yet been consumed. The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is charged to expense.

01 July 2015 What is the difference between an accrual and a deferral?

An accrual occurs before a payment or receipt. A deferral occurs after a payment or receipt. There are accruals for expenses and for revenues. There are deferrals for expenses and for revenues.

An accrual of an expense refers to the reporting of an expense and the related liability in the period in which they occur, and that period is prior to the period in which the payment is made. An example of an accrual for an expense is the electricity that is used in December, but the payment will not be made until January.

An accrual of revenues refers to the reporting of revenues and the related receivables in the period in which they are earned, and that period is prior to the period of the cash receipt. An example of the accrual of revenues is the interest earned in December on an investment in a government bond, but the interest will not be received until January.

A deferral of an expense refers to a payment that was made in one period, but will be reported as an expense in a later period. An example is the payment in December for the six-month insurance premium that will be reported as an expense in the months of January through June.

A deferral of revenues refers to receipts in one accounting period, but they will be earned in future accounting periods. For example, the insurance company has a cash receipt in December for a six-month insurance premium. However, the insurance company will report this as part of its revenues in January through June.

01 July 2015 What is the provision for bad debts?

The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for Doubtful Accounts, or Allowance for Uncollectible Accounts. In this case Provision for Bad Debts is a contra asset account (an asset account with a credit balance). It is used along with the account Accounts Receivable in order to report the net realizable value of the accounts receivable.

Provision for Bad Debts might also be an the income statement account also known as Bad Debt Expense or Uncollectible Account Expense. In this situation, the Provision for Bad Debts reports the credit losses that pertain to the period shown on the income statement.

https://www.caclubindia.com/forum/bad-debt-vs-provision-of-doubtful-debt-120133.asp




01 July 2015 Depreciation

http://www.investopedia.com/walkthrough/corporate-finance/2/depreciation/types-depreciation.aspx

01 July 2015 Closing Entries

http://www.myaccountingcourse.com/accounting
-cycle/closing-entries

01 July 2015 Objectives Of Financial Statement Analysis

The major objectives of financial statement analysis are as follows


1.Assessment Of Past Performance



Past performance is a good indicator of future performance. Investors or creditors are interested in the trend of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment. These trends offer a means for judging management's past performance and are possible indicators of future performance.



2.Assessment of current position



Financial statement analysis shows the current position of the firm in terms of the types of assets owned by a business firm and the different liabilities due against the enterprise.



3.Prediction of profitability and growth prospects



Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other users in judging earning potential of business enterprise.



4.Prediction of bankruptcy and failure



Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of business failure.



5. Assessment of the operational efficiency



Financial statement analysis helps to assess the operational efficiency of the management of a company. The actual performance of the firm which are revealed in the financial statements can be compared with some standards set earlier and the deviation of any between standards and actual performance can be used as the indicator of efficiency of the management.




01 July 2015 deferred tax liability


A deferred tax liability occurs when taxable income is smaller than the income reported on the income statements. This is a result of the accounting difference of certain income and expense accounts. This is only a temporary difference.

01 July 2015 deferred tax asset and deferred tax liability

https://www.caclubindia.com/articles/meaning-of-deferred-tax-liability-asset-in-simple-words-13385.asp

01 July 2015 DEFINITION of 'Net Realizable Value - NRV'
The value of an asset that can be realized by a company or entity upon the sale of the asset, less a reasonable prediction of the costs associated with either the eventual sale or the disposal of the asset in question.

'Net Realizable Value - NRV'
Net realizable value is a commonly used method of evaluating an asset's worth in the field of inventory accounting. NRV is part of GAAP rules that apply to valuing inventory, so as to not overstate or understate the value of inventory goods.




01 July 2015 NVR & Fair Value

http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91320524

01 July 2015 Cash Discount & Trade Discount


https://www.caclubindia.com/forum/cash-discount-and-trade-discount-164065.asp



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