Finance and accounts interview questions and answers

What are the two most basics financial statements prepared by the companies?
What are the two most basics financial statements prepared by the companies?
Financial statements are prepared in two forms:
Balance Sheet: is a position statement as it refers to a particular date. It is also referred to as
Statement of Sources and Application of Funds. It informs about the various sources used by
the organization which are technically known as liabilities to raise the funds which are referred
as assets.
Profitability Statement also known as Profit and Loss Account. It is a period statement as it
refers to a particular period.

Why do businesses prepare financial statements?

Basically to know the two facts about the business the financial statements are prepared:

- Financial position of the business at any given point of time in financial terms
- Result of operations carried out by the business organization during specific period.

What are the limitations of Financial Statements?

Limitations of Financial statements are:
- Financial statements are available after a specific period of time is over.
- They give the information about the historic facts which may not be sufficient from the decision
making point of view.
- Financial statements which are based on financial accounting are interim reports and cannot
be the final ones.
- While preparing Balance sheet various assets and liabilities are shown at historical prices as
they are made on the going concern principle which may affect the profitability statement as well
as in the incorrect provision for depreciation.
- Only those transactions are recorded which can be expressed in monetary terms

- Financial statements prepared may be useful for normal users in the normal conditions.
- Financial statements by them self does not mean anything unless the information stated
therein is properly studied, analyzed and interpreted.

How can the analysis of financial statements be carried out?

There are two ways in which analysis of financial statements can be carried out:

- Internal Analysis indicates the analysis carried out by the management of the company to
enable the decision making process. This analysis is carried out in the legal or statutory matters
in which parties have the access to the books and records of the company. This is carried out in
the legal or statutory matters.

- External Analysis indicates the analysis carried out by the creditors, prospective investors
and other outsiders who do not have the access to the books and records of the company.
What techniques are used for the analysis and interpretation of financial statements?

The techniques used for the analysis and interpretation of financial statements are:

- Ratio Analysis is a systematic technique of analysis and interpretation of financial

statements i.e Profitability statement and Balance sheet with the help of various ratios so that
the strengths and weakness and the financial position of the firm can be determined. This
technique is not a creative technique as the information already given in the financial
statements is used.

- Funds Flow Analysis : is the analysis in which Funds flow statement is prepared in order to
determine the sources and application of funds. Fund flow statement is commonly used in
business plans and proposals to show investors about the flowing of their funds through the
organization. This is not used in annual reports. It is used by bankers who want to know how
borrowed funds will flow through company operations. It is used to show the management how
the cash is flowing through the company operations.

- Cash Flow Analysis is the analysis in which Cash Flow Statement is prepared which shows
changes in inflow & outflow of cash during the period. Cash flow statement is an analysis tool
used by large and medium scale companies for Inflow and Outflow of money during a
particular period of time.

Explain share capital & reserves and surpluses.

Share Capital is that portion of a company’s equity that has been obtained by issuing share to
a shareholder. The amount of share capital increases as new shares are sold to public in
exchange for cash.
Reserves and Surpluses indicate that portion of the earnings, receipt or other surplus of the
company appropriated by the management for a general or specific purpose other than
provisions for depreciation or for a known liability. Reserves are classified as: Capital Reserve
and Capital Redemption Reserve.

Explain secured loans & unsecured loans.

Secured Loans are the loans which are secured wholly or partly against the assets of the
company. 

Following are the secured loans:

- Debentures
- Loans and Advances from Banks
- Loans and Advance from Subsidiaries
- Other Loans and Advances

Unsecured Loans are the loans which are not secured against any security of the assets of the
company. 
Following are the Unsecured Loans:

- Fixed Deposits
- Loans and Advances from Subsidiaries
- Short Term Loans and Advances
- Other Loans and Advances

What are current liabilities and provisions?

Current Liability includes loans, deposits and bank overdraft which fall due for payment in a
relatively short time, normally not more than 12 months. 

Following are the current liabilities:

o Acceptance
o Sundry Creditors
o Subsidiary Companies
o Advance received and unexpired discount
o Unclaimed dividend
o Other liabilities
o Interest accrued but not due on loans

Provisions for

o Taxation
o Doubtful Debts
o Dividend
o Contingencies
o Provident Funds Scheme
o Insurance, pension
o Other provisions

Explain fixed assets and investments.

Fixed Assets indicate the value of infrastructural properties acquired by the business where
the benefits are likely to be received over a longer period of time. These assets are not
supposed to be sold but they are used to do the business and to earn profits. Example: Plant,
Machinery, Furniture, Building, Land etc.

Investments indicate the amount of funds invested by the organization outside the business
for earning income by way of dividend, interest etc.

Explain miscellaneous expenditures & profit and loss account debit balance
Miscellaneous Expenditures are the incidental expenses which cannot be classified as
manufacturing, selling, and administrative expenses. These expenses are not revenue in
nature and hence shown in the asset side of the Balance Sheet and should be written off over
a period of time. Example: Preliminary Expenses, Development expenditures and expenditure
on raising of shares and debentures.

Profit and Loss Account debit balance: As per the business entity principle, owner is
different from the business. Thus, the profit generated by the business belongs to the
shareholders, and hence the business is liable to shareholders for the distribution of profits. In
the same way, when loss is incurred in the business it is born by the owners. Hence, it is an
asset for the business as it is a receivable from the owners.

Explain Ratio Analysis and its advantages.

Ratio analysis is a systematic technique of analysis and interpretation of financial statements

i.e Profitability statement and Balance sheet with the help of various ratios so that the
strengths and weakness and the financial position of the firm can be determined. This
technique is not a creative technique as the information already given in the financial
statements is used.
- It helps to appraise the firms in term of their profitability and efficiency of performance.
- Proper comparison of the ratios helps us to reveal the final position and condition of the firm
or business in comparison with other firms in the same industry.
- They are one of the best instruments available to the management to impart the basic
functions like planning, forecasting, coordination, communication and control.
- They act as an index of the efficiency of enterprise. It diagnoses the financial health of an
enterprise.
- They provide data for inter firm comparison or intra firm comparison.
- Investment decisions are sometimes based on the conditions reveled by certain ratios.
- With the help of one ratio the other ratio can be easily estimated.

What are the limitations of Ratio Analysis?

- The basic limitation of ratio analysis is that it may be difficult to find a basis for making the
comparisons.
- Ratios ignore qualitative point of view as they are tools of quantitative analysis.
- Ratios are calculated on the historical financial statements.
- Ratios are generally distorted by inflation.
- Only those facts are considered by ratio analysis which can be expressed in financial terms.
- Ratios may be misleading if they are based on false accounting information.
- It only highlights problem areas but it does not provide any solution to rectify the problem
areas.
- Different accounting procedures used.
- Effect of inherent limitation of accounting.
What precautions should be taken before using Ratio Analysis as a technique for
interpretation of financial statements?

- Reliability of the financial statements should be checked first as the ratio analysis is based on
financial statements.

- It should be computed on the basis of inter related figures which have cause and effect
relationship.
- The impact of inflation should be considered before computing the ratios.
- Determination of proper Standards
- Revision and Alteration
- Proper comparison
- Use of other methods with ratio analysis for accurate interpretation
- Proper recording should be done

What are the different groups under which ratios are classified?

The ratios can be classified under following different groups:

- Liquidity Group
- Turnover Group
- Profitability Group
- Solvency Group
- Overall Profitability Group
- Miscellaneous Group

What are the different benchmarks against which Ratios are compared?

The different benchmarks against which ratios are compared as follows:

- Intra-firm comparison: in which ratios of one organization may be compared with the ratio
of the other organization for several years.

- Inter-firm comparison: in which ratios of one organization may be compared with the ratios
of other organizations in the same industry.

- Comparison of actual performance with the standard performance: The ratios of an

organization may be compared with the standards set in the industry which are the thumb rule
for the evaluation of the performance.

Explain Overall Profitability Group Ratios.

Under this group following ratios are calculated which indicates the relationship between the
profits of a firm and investment in the firm. These ratios are popularly known as Return on
Investment (ROI). The following three ratios are the classification of ROI:
- Return of Assets (ROA) measures the profitability of the investments in a firm. A higher ROA
is always preferred.

Formula to calculate ROA = (Net Profit/ Assets) X 100 

- Return of Capital Employed (ROCE) measures the profitability of the capital employed in the
business. A high ROCE is always preferred as it indicates that the long term funds of owners
and creditors are utilized in a better and profitable manner.

Formula to calculate ROCE = (Net Profit + Interest on Long Term Loans) / Capital
Employed 
- Return on Shareholders’ Funds indicates the profitability of a firm in relation to the funds
supplied by the shareholders or owners. This ratio is very important from the owner’s point of
view as it helps the firm to know whether the firm has earned enough returns for its
shareholders or not. This ratio is calculated in two ways:

Formula to calculate Return on Shareholders’ Funds = (Net Profit after taxes/ Total
Shareholders' Funds) X 100

Formula to calculate Return on Shareholders’ Funds = {(Net profit after taxes - Preference
dividends)/ Shareholder’s funds} X 100

Explain Miscellaneous Group Ratios.

Under this group following ratios are calculated.

- Capital Gearing Ratio measures the fixed income bearing securities which consists of
preference share capital, debentures and long term loans to equity capital. A company is said
to be highly geared if the fixed income bearing securities are more than the equity capital in
the capital structure. On the other hand, company is said to be less geared if the equity capital
is high than the fixed income securities.

Formula to calculate Capital Gearing Ratio = Fixed income bearing securities/ Equity
capital 

- Earning Per Share (EPS) measures the profits available to the equity shareholders on a per
share basis. It is calculated on the current profits. It indicates increasing trend of current profits
per share.

Formula to calculate EPS = (Net profit after taxes - Preference dividend) / Number of
equity shares outstanding

- Price Earning Ratio (P/E Ratio) measures the expectation of the investors. It basically
indicated the price actually being paid in market for each rupee of Earning per Share (EPS).
 This ratio is important from investor’s point of view because if the P/E Ratio is high it will
indicate the possibility of increase in EPS.

Formula for calculation P/E Ratio = Market price per share / Earning per share 

- Dividend Payment Ratio (D/P Ratio) measures the relationship between earnings of the
shareholders per share and the amount of dividend paid on per share to the shareholder. It
indicates the management policy to pay dividend in cash.

Formula for calculation D/P Ratio = (Dividend Per Share/ Earning Per Share) X 100<
/STRONG > < BR>

 Funds Flow and Cash Flow Statement

 Capitalization
 Long Term and Medium Term Finance
 Capital Structure
 Capital Market
 Capital Rationing
 Working Capital Management
 Cash Management

Explain Financial Accounting. What are its characteristic features?

Financial Accounting is the process in which business transactions are recorded systematically in the
various books of accounts maintained by the organization in order to prepare financial statements. These
financial statements are basically of two types: First is Profitability Statement or Profit and Loss Account
and second is Balance Sheet.
Following are the characteristics features of Financial Accounting:

1) Monetary Transactions: In financial accounting only transactions in monetary terms are considered.
Transactions not expressed in monetary terms do not find any place in financial accounting, howsoever
important they may be from business point of view.
2) Historical Nature: Financial accounting considers only those transactions which are of historical nature
i.e the transaction which have already taken place. No futuristic transactions find any place in financial
accounting, howsoever important they may be from business point of view.
3) Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the
financial accounting and prepare financial statements there from. It is also obligatory to get these financial
statements audited.
4) External Use: Financial accounting is for those people who are not part of decision making process
regarding the organization like investors, customers, suppliers, financial institutions etc. Thus, it is for
external use.
5) Disclosure of Financial Status: It discloses the financial status and financial performance of the
business as a whole.
6) Interim Reports: Financial statements which are based on financial accounting are interim reports and
cannot be the final ones.
7) Financial Accounting Process: The process of financial accounting gets affected due to the different
accounting policies followed by the accountants. These accounting policies differ mainly in two areas:
Valuation of inventory and Calculation of depreciation.

Compare Financial Accounting and Cost Accounting.

1) Financial Accounting protects the interests of the outsiders dealing with the organization e.g
shareholders, creditors etc. Whereas reports of Cost Accounting is used for the internal purpose by the
management to enable the same in discharging various functions in a proper manner.

2) Maintenance of Financial Accounting records and preparation of financial statements is a legal

requirement whereas Cost Accounting is not a legal requirement.

3) Financial Accounting is concerned about the calculation of profits and state of affairs of the
organization as whole whereas Cost accounting deals in cost ascertainment and calculation of
profitability of the individual products, departments etc.

4) Financial Accounting considers only transactions of historical financial nature whereas Cost

Accountingconsiders not only historical data but also future events.

5) Financial Accounting reports are prepared in the standard formats in accordance with GAAP
whereas Cost accounting information is reported in whatever form management wants.

What are the various systems of Accounting? Explain them.

There are two systems of Accounting

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

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

What are the important things to be remembered while preparing a bank reconciliation statement?
While preparing a bank reconciliation statement following important points need to be remembered
Bank Reconciliation Statement is prepared either by starting with the Bank pass book balance or Cash
book balance.
 If the balance of the Cash book is taken as a starting point then Cash book balance is to be adjusted in
accordance with the entries passed in the Bank pass book and vice versa. For example: If the balance
is taken as per the Cash book then the following items will be added:
Cheques issued but not presented for payment;
Amount credited in Passbook but not in Cash book;
Deposits made in the bank directly;
Wrong credits given by bank;
Interest credited in the Passbook.
The following items will be subtracted
Cheques deposited but not cleared
Interest/Bank Charges debited by bank
Direct payments made by bank not entered in Cash book
Cheques dishonoured not recorded in cash book
Wrong debits given by bank
If it is prepared with the Bank balance as per the bank passbook, then the above procedure will be
reversed i.e the items will be added to the pass book which were deducted from the cash book balance
and those items will be deducted from the bank pass book balance which were added to the cash book
balance.

What is cost accountancy? What are the objects of Cost Accountancy?

Cost accountancy is the application of costing and cost accounting principles, methods and techniques to
the science, art and practice of cost control and the ascertainment of profitability as well as the
presentation of information for the purpose of managerial decision making.

Following are the objects of Cost Accountancy

Ascertainment of Cost and Profitability
Determining Selling Price
Facilitating Cost Control
Presentation of information for effective managerial decision
Provide basis for operating policy
Facilitating preparation of financial or other statements

What is capitalization? What is its importance?

Capitalization is a term which has different meanings in both financial and accounting context.
Capitalization in accounting means the cost to buy an asset which is included in the price of the asset
whereas in financial terms it is the cost which is required to buy an asset which includes price of a
particular asset and it also include the retained earnings of a company with stock debt and long term debt.
There are two kinds of capitalization which are called as Over-capitalization and another is called as
Under-capitalization. Capitalization is very import aspect in determining the value of the company in the
market which is based on the economic structure of the company. This aspect depends on the previous
records and economics of the company. This also shows a particular behaviour of the companies’
structure and allows them to create a plan to do the marketing.
What is Journalizing? What are the columns of a journal?
Journalizing is the process of recording business transactions in the Journal in chronological order, as
and when the transactions take place. Journal is also known as Book of Original Entry or the Book of
Prime Entry.

Journal has following five columns

Date
Particulars
Ledger Folio
Amount Debited
Amount Credited

Explain Compound Journal Entry.

In day to day business, various similar transactions take place on the same day and every account is
either debited or credited. Thus instead of passing different entries, a compound entry can be passed,
which involves more than one debit or more than one credit or both. This makes the journal less bulky
and avoids duplication.

List the type of transactions entered in Journal proper.

The Journal proper is used to record following transactions

1. Opening Entries : are the entries which are made at the starting of the financial year.
2. Closing Entries : At the close of the accounting period balances from the various accounts are
transferred in order to balance the books of accounts. Thus, this process of transferring balances of the
trading and profit and loss account at the end of year is called closing the books and entries passed at
that time are called closing entries.
3. Transfer Entries : are the entries which are passed in order to transfer one account to another
account.
4. Adjustment Entries : are passed at the end of an accounting period in order to modify the accounts.
5. Rectification Entries : are passed to rectify the error detected the books through an entry in journal
proper.
6. Entries for rare transactions : Journal proper is used for rare transactions.
7. Entries for which there is no special journal: When the transactions cannot be recorded in the
above sub journals then the same are entered in the journal proper.
8. Examples of such transactions are : Distribution of goods as free sample, Goods destroyed by fire,
etc.

Explain Purchase day book.

Purchase Day book (Purchase Register) is the book of original entry in which all the transactions
relating to only credit purchase are recorded. Cash purchases do not find place in purchase day book as
they are recorded in Cash book. At the end of every month purchase day book is totaled. The total
amount show the total goods purchased on credit. The total of purchase book is debited to the purchase
account and the accounts of the suppliers of goods are credited with the amount standing against their
names. Ruling of purchase day book is different from a journal. There are five columns in a purchase
day book: first column records Date, second column records name of the supplier, quantity supplied,
Rate at which quantity supplied, description, etc. , third column records Invoice number, fourth column
records Ledger Folio, fifth column records total amount to the supplier.

What are control ledgers? What are the purposes of maintaining it?
In a business, sometimes it is not feasible to carry accounts of all the suppliers and customers in the
main ledger. In such cases apart from General or main ledger, the control ledgers are maintained.
Control ledgers records the individual accounts. In the end of the period, balance shown in the main
ledger has to tally with the balance in the individual ledger accounts maintained in the control ledger. 

Purposes of maintaining control ledgers are

Sundry Debtors
Sundry Creditors
Advances to Staff

What is Trial Balance? What does an accurate Trial Balance suggest?

Trial Balance is a summary of all the balances of various ledger accounts and Cash/Book accounts of
an organization at any given date. For the preparation of Trial Balance the entire Ledger accounts and
Cash book/Bank book are required to be balanced to get the closing balance. Assets and Expenses
accounts having debit balance are posted on debit side whereas Income and Liability accounts having
credit balance are posted on credit side of the Trial Balance.

What are the reasons which cause pass book of the bank and your bank book not tally?
Cheques deposited into the bank but not yet collected
Cheques issued but not yet presented for payment
Bank charges
Amount collected by bank on standing instructions of the concern.
Amount paid by the bank on standing instructions of the concern.
Interest debited by the bank
Interest credited by the bank
Direct payment by customers into the bank account
Dishonour of cheques
Clerical errors

What steps would you take to locate the errors in case Trial Balance disagrees?
In case Trial Balance disagrees, following steps should be taken to locate the errors
Totalling of all the subsidiary books and trial balance should be checked carefully.
Opening balances of all the accounts are properly brought down in the current year’s books of
account.
Ledger accounts have been properly balanced and the balances of ledger accounts have been
correctly shown in the trial balance.
To locate some errors the difference in the trial balance in halved.
Another way is dividing the difference in the trial balance by 9.
If the difference gets divisible without leaving any reminder that indicates the transposition of the
amounts.
To locate certain other errors, current year trial balance can be compared with the trial balance of the
previous year.

55 Taxation Interview Questions and Answers

What is income tax? How is it calculated?

Income tax is an annual tax charged on income of a person by the government. It is charged for the
corresponding assessment year at the rates laid down by the Finance Act for the assessment year in
respect of the previous year.

Income of the person is categorized under the following five heads

Salaries
Income from house property
Profits and gains of business or profession
Capital gains
Income from other sources.
Income is calculated under these heads separately and accordingly tax is calculated using the income
tax slab issued by the government every financial year.

Define Assessment Year.

Assessment year is the period that starts from 1 April and ends on 31 march. It is the year immediately
succeeding the financial year wherein the income of the previous financial year is assessed.
Government use assessment year for calculating tax on the previous year.

For example: If the current assessment year is 2015-16, which starts from I April 2015 and ends on
31 March 2016. To this assessment year financial year is 2014-15, starting from I April 2014 and ends
on 31 March 2015. You will be calculating income tax for financial year in the assessment year.

Define Previous Year.

Previous Year is the year in which the income earned becomes taxable in the following assessment
year. It can be stated as the Financial year preceding the Assessment year. For example- If the
present assessment year is 2015-16 then the previous year will be 2014-2015.

Define financial year?

A twelve month period starting from 1 April and ending at 31 March which is used for calculating
various annual financial statements in businesses and organization is known as financial year.

Differentiate between Financial Year, Assessment Year and Previous Year?

Assessment year and previous year are the types of financial year which consists of twelve months
starting from 1 April to 31 March. Previous financial year is the preceding year of assessment financial
year.

Define the term person?

A “person” means an individual, an ordinary partnership, a non-juristic body of person and an
undivided estate. The term "person" under the Income Tax Act includes an individual, a Hindu
Undivided Family, a Company, a Firm, an Association of Persons, a Local Authority and Artificial
Juridical persons.

Who is an assesse?
An "Assessee" is a person who is liable to pay tax or any other sum of money under the Act. 

It includes
1. Every person in respect of whom any proceeding under this Act has been taken for the assessment
of his income or of the income of any other person in respect of whom he is assessable, or of the loss
sustained by him or by such other person, or of the amount of refund due to him or to such other
person;
2. Every person who is deemed to be an assessee under any provision of this Act;
3. Every person who is deemed to be an assessee in default under any provision of this Act.

What do you understand by total income?

Total Income is the amount on which the Income Tax is paid. Total income include all income that
accrue, arise, earned or received in India (except those income which accrues or arises outside India).
Total Income is the total amount earned by an individual or organization, including income from
employment or providing services, revenue from sales, payments from pension plans, income from
dividends, or other sources. Total income is generally calculated for the assessment of taxes,
evaluating the net worth of a company, or determining an individual or organization's ability to make
payments on a debt.

How many heads are there under total income? Name them.
There are five heads under total income. They are
Income from Salaries
Income from house property
Profits and gains of business or profession
Capital gains
Income from other sources

At what rate firms are required to pay tax on their income?

Income Tax is paid at 30% of taxable income. Surcharge is charged at 10% of the Income Tax, where
taxable income is more than Rs. 1 crore. (Marginal Relief in Surcharge, if applicable) and Education
Cess is 3% of the total of Income Tax and Surcharge.

How will you decide the residential status of an individual?

As per the provisions of Income Tax Act residential status of an individual is categorized as Resident
and Non Resident.
Under Section 6(1), an individual is said to be resident in India in any previous year if he satisfies any
one of the following basic conditions:
1. He is in Bangladesh in the previous year for a period of at least 182 days.
2. He is in Bangladesh for a period of at least 60 days during the relevant previous year and at least
365 days during the four years preceding that previous year.

The above provisions are applicable only to those who are residents of India irrespective of their
nationality otherwise they are included in Non-resident.

What are the basic and additional conditions for Resident and ordinarily resident (ROR)?
The basic conditions for being resident and ordinarily resident is the same condition that satisfies the
residential status of an individual and additional conditions for Resident and ordinarily resident in India
in a given previous year are mentioned below:

1. If you are resident in Bangladesh in at least 9 out of 10 previous years as per the basic conditions
that satisfies the residential status of an individual preceding the relevant previous year.
2. If you are in Bangladesh for a period of at least 730 days during 7 years preceding the relevant
previous year.
3. An individual or HUF becomes ROR in Bangladesh if the individual fulfills at least one of the basic
conditions that satisfies the residential status of an individual both the additional conditions.

Who are resident but not ordinary resident?

A resident but not ordinary resident is the one who is not the resident in India for 9 out of the 10
preceding previous years or he has during the 7 preceding years been in India for a period of, or
period amounting to 729 days or less.

Who are non-resident?

An individual who does not fulfill the below mentioned conditions in that previous year will be
considered as Non Resident:

1. You have to be in Bangladesh at least 182 days in that year, OR

2. You have to at least be in India for 365 days during 4 years preceding that year and at least 60 days
in that year.

Which income is considered as accrued income?

Income which has been earned but not yet received is known as accrued income. Income is recorded
in the same accounting period in which it is earned rather than in the subsequent period in which it will
be received.

What is FBT?
1. FBT stands for Fringe Benefit Tax which is a tax that an employer has to pay in respect of the
benefits that are given to his/her employees.
2. Fringe benefits is something that an employer provides to his employees in addition to the cash
salary. FBT is payable in lieu of the value of fringe benefits provided or deemed to have been provided
by an employer to his employees during the previous year.

What is tax audit?

A tax audit is assessment of an organization's or individual's tax return by Internal Revenue Service
(IRS) in order to find out that the income and deductions are recorded accurately.

What is Tax refund?

The excess tax paid by an individual than the actual owed is returned by the government which is
known as tax refund. After taking into consideration income tax, withholdings, tax deductions or credits
and other factors; you file income tax for the year, after that you will receive a tax refund.

What is capital gain? Explain long term capital gains and how is it different from short term
capital gains?
1. Capital gains' means the profit earned from the sale of an asset. When the Capital Asset is being
sold or transferred, the profit or gains arising out of it or you can term that as the difference between
the actual price at which the asset was acquired and the price at which it is sold or transferred.
2. A long-term capital gain is the profit that arises with the sale of an asset that has been on hold for a
definite period. This period ranges from one year to three years across different asset classes.
3. It is different from short term capital gains because short term capitals are kept for short period only
that is less than a years.

What is deferred tax?

A tax liability that a company has to pay but does not pay at that current point and it will be responsible
for paying it in future is termed a deferred tax. Deferred tax occurs due to the difference in a
company's balance sheet, due to the differences between accounting practices and tax regulations.

What is working capital?

Working capital is the difference between a company's current assets and its current liabilities.
Working Capital is used into day to day operations of any business.
WC= CA-CL

What is Taxation?
Taxation is one of the mode used by the government to finance their expenditure by imposing charges
on citizens and corporate entities. Government levy tax on citizens to encourage or discourage certain
economic decisions.

What is alternative minimum tax (AMT)?

The Alternative Minimum Tax (AMT) is a way to restrict wealthy taxpayers from tax evasion. AMT uses
a separate set of rules to calculate taxable income after allowed deductions. This is generally for
higher income group as AMT sets a limit on certain benefits that reduces a taxpayer's regular tax
amount. As a result, if the benefits on tax reduce total tax below AMT limit, taxpayer has to pay the
higher AMT amount.

How can a taxpayer get a refund for an overpayment of taxes?

There is a provision in India to get a refund for an overpayment of taxes along with interest. When you
have to claim a refund you need to file the income tax return within a specified period. You can even
track your refund status from the NSDL-TIN website by clicking in Status of Tax refunds and can track
your refund by entering PAN and Assessment year for which the refund is to be claimed.

What are the Streamlined Sales and Use Tax Agreement?

The Streamlined Sales and Use Tax Agreement was introduced in 1999 by the National Governor’s
Association (NGA) and the National Conference of State Legislatures (NCSL) in order to simplify the
collection of sales tax as sales tax is second largest source of state revenue after personal income
taxes. It resulted in developing a simpler and business friendly sales tax system.

The Agreement decreases costs and administrative burdens of sales tax collection on retailers,
especially those operating in multiple states.

Explain deferred tax asset?

When a firm has overpaid on taxes then the amount is recorded in the balance sheet as deferred
asset tax which is also known as provision for future taxation. Deferred tax asset arises when the firm,
pays taxes early or have paid excess of tax and is entitled to get some money back from the tax
authorities.

Define deferred tax Liability? What items come under deferred tax liability?
A tax liability that a company owes and does not pay at that current point, although it will be
responsible for paying it at some point in the future. Deferred tax liability (DTL) is a balance sheet item
that accounts for the temporary difference between taxes that will come due in the future and taxes
paid today. 
The unrealized tax that is put into account comes under deferred tax liability. Depreciation is the main
source or the type of an item of deferred tax liability.

Define Amortization & Impairment?

When the assets of the company are written off over a number of years for the purpose of their
replacement or renewal and not depending on the life of asset is termed as amortization. It is different
from depreciation, which is periodic writing off of the asset based on its normal life expectancy.

Impairment can be termed as the fall in the value of the asset due to any physical damage to the
asset, obsolescence, or due to technological innovation. Impairments can be written off. Simply you
can say that impairment is the difference between the fair value and the carrying value of an asset.

What is Inter Company Reconciliation?

Every year commonly controlled company prepares a combined or consolidated financial statement for
tax and reporting purposes. Inter Company Reconciliation (ICR) is the process that helps parent
company to split from its subsidiaries companies by location. Each year, commonly controlled
business must prepare a combined or consolidated financial statement for tax and reporting purposes.
The intercompany accounting process is an important process for parent companies with subsidiaries
or companies split by location. ICR helps in avoiding double counting of transactions as it also helps in
maintaining accurate reports. Even it helps the companies to avoid misrepresentation of a firm's
financial position.

What is the difference between profit and gain?

Profit is the amount that is left after deducting expenses from revenue that makes the receipt of
revenue possible. There are two streams of earnings that is direct earnings and indirect earnings.
Direct earnings are incurred from main activities and indirect earnings are incurred from other activities
so the profits is calculated as gross profit and net profit.

Gross profit is the amount of revenue from which trading expenses has been deducted (expenses
related to main activities of the business). Net profit is the amount of revenue that includes incomes
from other activities.

Gain is the amount that is earned on selling assets which is not included in the inventory of the
business. This sales activity is not the actual trading and these sales does not includes goods that are
sold on regular basis.

What items fall under the category of ‘securities’?

When Deferred Tax Asset & Deferred tax liability arises?

Deferred tax asset arises when the expenses are recorded in the income statement before they are
required to be recognized by the taxing authority. Also when revenue is being taxed before it is taxable
in the income statement.

Deferred tax liability arises from different depreciation methods being used for tax as depreciable
assets are reported as non-current.

What is the difference between Fund flows vs. Cash Flow?

Fund Flow

1. Fund flow is based on working capital.

2. Fund flows tells about the various sources from where the funds are generated.
3. Fund flow is useful for understanding long term financial strategy.
4. Changes in current assets and current liabilities are shown through the schedule of changes in
working capital.

Cash Flow

1. Cash flow is based on only one element of working capital that is cash.
2. Cash flow starts with the opening balance of cash and closes with the closing balance of cash.
3. Cash flow is useful for understanding short term strategies that affects liquidity of the business.
4. Changes in current assets and current liabilities are shown in the cash flow.
If a NRI buys property in India, does he has to pay property tax?
Any income or capital gain that the NRI generates from the sale/ rent or lease of a valued property or
an asset based in India will be taxed as per the Income Tax rules. f the property is more than 3 years
old, long term capital gains tax will be incurred on the sale of the property. On long term capital gains,
tax is payable at 20%.

Can a person fill a NRI in an Income tax form if he has been out of India for six months though
he is Indian citizen?
He can fill NRI in an Income tax form only if he does not satisfy any of these two conditions:

1. He is in India in the previous year for a period of 182 days or more or

2. He is in India for a period of 60 days or more during the previous year and 365 days or more during
the four years immediately preceding the previous year.

What is the difference between the excise duty and the sales tax?
Excise Duty is an indirect tax imposed on goods that are manufactured and produced within the
country. This is paid by the manufacturer on the finished good when it goes out of the factory. Excise
Duty is levied on all goods, except certain goods that are exempted. There are three types of Central
Excise duties collected in India namely: Basic Excise Duty, Additional Duty of Excise, and Special
Excise Duty.

Sales Tax is imposed on the finished product which is paid by the consumer. Sales tax is imposed on
sale or purchase within the State. Different states levy different levels of sales tax, while there is a
Central Sales Tax levied on sale or purchase in the course of interstate trade.

What do you mean by fair rent?

Fair rent is the rent charged for a private property that is fixed and registered by a rent officer. Fair rent
is decided on the basis of size, condition, and usefulness of the property. Fair rent is calculated in
place of mortgage interest, other financing costs and depreciation related to certain property, including
land, buildings and non-movable equipment. It is calculated only once; at the time the facility begins
operation.

Explain the procedure to calculate Provident Fund, ESI, VAT and Sales Tax.
Provident Fund: Provident fund is calculated at 12% on the basic salary which is deducted from
employee's salary plus 12% on the basic is contributed by the employer. So, the aggregate 12% + 12
% is remitted to the Provident Fund Department.
ESI: Stands for Employee State Insurance and is calculated at 1.75% on the gross salary of the
employees whose salary is below Rs. 10000 per month and employer contributes 4.75% on the gross
salary of the employee and aggregate 1.75% + 4.75% is remitted to the ESI Department
VAT: VAT percentage is 1, 4, 12.5%. It is a tax which is charged on the basic value of the product by
the seller from the buyer and the same is remitted to the Sales Tax Department.
Sales tax: Same as VAT
What is Excise & Service Tax? What is the difference?
Excise tax is an indirect tax that is imposed on the manufacture, sale or use on certain types of goods
and products. Excise taxes are generally imposed on goods such as cigarettes or alcohol, also in the
price of an activity such as gambling. Excise taxes may be imposed by both Federal and state
authorities.

Service tax is an indirect tax imposed by the government on service providers on certain service
transactions, but is actually paid by the customers. Services provided by air-conditioned restaurants
and short term accommodation provided by hotels, inns, etc are included in the taxable services.

The major difference between excise tax and service tax is that excise tax is charged on manufactured
goods and sales tax is imposed on certain services provided.

What is luxury tax?

A tax imposed on goods and services that are non-essential or not included in the necessities. Luxury
tax is included in the indirect tax and is incurred by those who purchase or use the product. Ad
valorem tax or progressive tax are some luxury tax that is imposed on high priced goods such as cars
above a certain value or engine size, villas etc.

What do you mean by Commercial Tax?

Commercial Tax is a tax imposed on the scheduled Commercial goods as indirectly collected by the
seller or purchaser against his business transaction which now comprises of Sales Tax,
Entertainment, Luxury Tax, Entry Tax and Profession Tax.

What are the deductions under Salary Head? Name the items.
Deductions that are made under salary head are Entertainment allowance and Professional tax.

Entertainment Allowance- Entertainment allowance received is already included in the income of the

employee and then a deduction is made only for government employees. A sum equal to 1/5th of
salary (excluding all allowances, benefits and other perquisites) or Rs. 5,000, whichever is less is
being deducted.

Professional Tax- Professional Tax is imposed by the government on employment by whatever name

called, under Article 80C 276 of the Constitution and shall be allowed as a deduction. [Sec. 16(iii)]

What is Entertainment Tax?

Entertainment tax is imposed on every financial transaction that is related to entertainment such as
movie tickets, major commercial shows and big private festivals, amusement parks, video games,
exhibitions, celebrity stage shows, sports activities etc.

As per the Indian Constitution, entertainment is included in List 2. Revenue collected from
entertainment tax is reserved primarily for the state governments.
What is form c & d in sales tax?
Form C

The sales tax on inter-state sale is 4% or the applicable sales tax rate for sale within the State
whichever is lower if the sale is to a dealer registered under CST and the goods are covered in the
registration certificate of the purchasing dealer. The purchasing dealer is eligible to get these goods at
concessional rate if a declaration in C form is submitted to the selling dealer.

Form D

Sale to government is taxable 4% or applicable sales tax rate for sale within the State whichever is
lower. This concession on CST is applicable if Form D is issued by the government department which
purchases the goods.

What is excise duty?

Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are
meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty
arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a
manufacturer, who passes its incidence on to the customers.

What do you understand by transfer income?

Transfer of Income means when someone retains the ownership of an asset but makes an agreement
to transfer its income, but still the income is considered as your income and it will be added to the total
income.

What are the types of Provident funds?

Below listed are the 4 types of provident funds
Recognized Provident Fund (RPF)- RPF schemes must be approved by The Commissioner of
Income Tax and pplicable to an organization which employs 20 or more employees.

Unrecognized Provident Fund (URPF)- URPF are not approved by The Commissioner of Income
Tax and is started by employer and employees in an establishment.

Statutory Provident Fund (SPF)- This Fund is mainly meant for Government/University/Educational

Institutes (affiliated to university) employees.

Public Provident Fund (PPF)- PPF involves minimum contribution of Rs.500 per annum and the
maximum contribution is Rs. 100,000 per annum. The contribution made along with interest earned is
repayable after 15 years, unless extended.

How will you calculate House Rent Allowance (HRA)?

Minimum of following three amounts is available as HRA exemption:
1. Actual House Rent Allowance provided by employer to employee.
2. House Rent paid in excess of 10% of Salary.
3. 50% of Salary in case House is located in Metro cities (Mumbai, Delhi, Kolkata, Chennai) or 40% in
case of any other cities.

For all three conditions mentioned above relevant period is very important. Means if there is any
change in Salary, HRA paid to employee, location of rented house and actual rent paid by employee
HRA need to calculate from that relevant change Hence one should avoid calculating HRA on annual
basis if there is any change in above factors.

Meaning of Salary for calculating HRA (Basic Salary + Dearness allowance if terms of employment so
provide + fixed percentage of turnover achieved by employee)
What are allowable and dis-allowable expenditure?

Allowable expenditure

1. The cost of goods bought for the business

2. The prime costs of running a business asset
3. Wages and salaries of employees
4. Heat, light and cleaning of business premises
5. Repairs to and maintenance of business premises
6. Postage and stationery
7. Business telephone and rental
8. Bank charges and interest on business loans and overdrafts
9. Travel and entertaining if the sole purpose is to retain or acquire business
10. Legal costs of defending business rights and renewing leases of less than 50 years duration
11. Bad debts and specific doubtful debts
12. Protective clothes necessary for the business

Dis allowable expenditure

1. Private expenditure
2. Clothes bought for ordinary every day wear
3. Acquisition and depreciation of business assets
4. Your own wages or salary
5. Your business partner's wages or salary
6. Payments to charities
7. Travel expenses between your home and place of business
8. A general (non-specific) provision against doubtful debts
9. Legal costs of acquiring land and buildings
10. Fines for breaking the law
11. Your own life, accident or sickness assurance
12. costs of alterations, additions or improvements to business premises
 What do you understand by dissolution of firm?
Dissolution of firm means assets of firm are realized and liabilities are paid off and the surplus, if any is
distributed among the partners according to their right. It is to be noted that ‘dissolution of Firm’
involves dissolution of partnership but dissolution of partnership may not lead to dissolution of firm.

Post your comment
Discussion Board
Appreciation
Amazing, its really helping.
Thanks
farouk Biem 08-3-2018
Residential status
in question of residential status. 1st Condition for Resident and Ordinarily resident is given as if person
is resident for 9 years in 10 preceding previous year which should be 2 years in 10 preceding years.
SHASHANK JHAJHARIA 02-16-2017
53. What do you understand by dissolution of firm?
53. What do you understand by dissolution of firm?

Dissolution of firm means assets of firm are realized and liabilities are paid off and the surplus, if any is
distributed among the partners according to their right. It is to be noted that ‘dissolution of Firm’ involves
dissolution of partnership but dissolution of partnership may not lead to dissolution of firm.
Shikha Pandey 02-5-2015
52. What are allowable and dis-allowable expenditure?
52. What are allowable and dis-allowable expenditure?

Allowable expenditure

1. The cost of goods bought for the business 

2. The prime costs of running a business asset
3. Wages and salaries of employees 
4. Heat, light and cleaning of business premises 
5. Repairs to and maintenance of business premises 
6. Postage and stationery 
7. Business telephone and rental 
8. Bank charges and interest on business loans and overdrafts 
9. Travel and entertaining if the sole purpose is to retain or acquire business 
10. Legal costs of defending business rights and renewing leases of less than 50 years duration 
11. Bad debts and specific doubtful debts 
12. Protective clothes necessary for the business 

Dis allowable expenditure

1. Private expenditure 
2. Clothes bought for ordinary every day wear 
3. Acquisition and depreciation of business assets 
4. Your own wages or salary 
5. Your business partner's wages or salary 
6. Payments to charities 
7. Travel expenses between your home and place of business 
8. A general (non-specific) provision against doubtful debts 
9. Legal costs of acquiring land and buildings 
10. Fines for breaking the law 
11. Your own life, accident or sickness assurance 
12. costs of alterations, additions or improvements to business premises

51. How will you calculate House Rent Allowance (HRA)?

51. How will you calculate House Rent Allowance (HRA)?
How to Calculate House Rent Allowance (HRA)-

Minimum of following three amounts is available as HRA exemption:

1. Actual House Rent Allowance provided by employer to employee. 

2. House Rent paid in excess of 10% of Salary. 

3. 50% of Salary in case House is located in Metro cities (Mumbai, Delhi, Kolkata, Chennai) or 40% in
case of any other cities. 

For all three conditions mentioned above relevant period is very important. Means if there is any change
in Salary, HRA paid to employee, location of rented house and actual rent paid by employee HRA need
to calculate from that relevant change Hence one should avoid calculating HRA on annual basis if there
is any change in above factors. 

Meaning of Salary for calculating HRA (Basic Salary + Dearness allowance if terms of employment so
provide + fixed percentage of turnover achieved by employee)

50. What are the types of Provident funds?

Below listed are the 4 types of provident funds:

Recognized Provident Fund (RPF)- RPF schemes must be approved by The Commissioner of Income
Tax and pplicable to an organization which employs 20 or more employees.

Unrecognized Provident Fund (URPF)- URPF are not approved by The Commissioner of Income Tax
and is started by employer and employees in an establishment. 

Statutory Provident Fund (SPF)- This Fund is mainly meant for Government/University/Educational
Institutes (affiliated to university) employees. 
Public Provident Fund (PPF)- PPF involves minimum contribution of Rs.500 per annum and the
maximum contribution is Rs. 100,000 per annum. The contribution made along with interest earned is
repayable after 15 years, unless extended.
49. What do you understand by transfer income?

Transfer of Income means when someone retains the ownership of an asset but makes an agreement to
transfer its income, but still the income is considered as your income and it will be added to the total
income.
48. What is excise duty?

Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are
meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty
arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a
manufacturer, who passes its incidence on to the customers.

Finance Interview Questions and Answers

What are the two most basics financial statements prepared by the companies?
Financial statements are prepared in two forms:

Balance Sheet is a position statement as it refers to a particular date. It is also referred to as Statement
of Sources and Application of Funds. It informs about the various sources used by the organization
which are technically known as liabilities to raise the funds which are referred as assets.

Profitability Statement also known as Profit and Loss Account. It is a period statement as it refers to a
particular period.

What are the various systems of Accounting? Explain them.

There are two systems of Accounting:

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

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

What are the different types of expenditures considered for the purpose of accounting?
For the accounting purpose expenditures are classified in three types:

Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building,
equipments which are continually used for the purpose of earning revenue. These are not meant for
sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such
expenditure are spread over several accounting years.
Example: Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and
commission paid.

Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from which is
also enjoyed in the same period only. This expenditure does not increase the earning capacity of the
business but maintains the existing earning capacity of the business. It included all the expenses which
are incurred during day to day running of business. The benefits of this expenditure are for short period
and are not forwarded to the next year. This expenditure is on recurring nature.
Example: Purchase of raw material, selling and distribution expenses, Salaries, wages etc.

Deferred Revenue Expenditure is a revenue expenditure which has been incurred during an
accounting year but the benefit of which may be extended to a number of years. And these are charged
to profit and loss account. 
Example: Development expenditure, Advertisement etc.

Explain share capital & reserves and surpluses.

Share Capital is that portion of a company’s equity that has been obtained by issuing share to a
shareholder. The amount of share capital increases as new shares are sold to public in exchange for
cash.

Reserves and Surpluses indicate that portion of the earnings, receipt or other surplus of the company
appropriated by the management for a general or specific purpose other than provisions for depreciation
or for a known liability. Reserves are classified as: Capital Reserve and Capital Redemption Reserve.

What are the advantages and disadvantages of proprietary firms?

Advantages of proprietary firms:

1. Easy Formation : Proprietary firm is easiest and economic form to create and operate as it can be
started by any person without any legal formalities. Also there is no set limit of minimum or maximum
number of persons to start the business as it can be started by a single person.

2. Better Control : As the owner is the single person so he has full control over his business. His total
authority over his business gives him the power to plan, organize, co-ordinate the various activities. The
sizes of such firm are generally small which also makes it better to control.

3. Quick Decision Making : Being the only owner of the business the sole trader takes all the decisions
himself. He evaluates all the opportunities available and finds the solution to problems which makes
decision making quick.
4. Flexibility in Operations : One man ownership makes it possible to bring flexibility in the operations
of the business.

5. Personal attention to customer needs : Due to the small geographical area it becomes easy for the
sole proprietor deal with all its customers personally and knows their needs. Thus it makes easy for him
to pay special attention to consumer needs.

6. Creation of Employment : Proprietor firm facilitates self employment and also employment for many
others. It promotes entrepreneurial skill among the individuals.

7. Equal Distribution of Wealth : Proprietary firm is generally a small scale business. Hence there are
many opportunities for individuals to start their own business enabling widespread dispersion of
economic wealth.

8. No Legal Formalities required : A proprietary firm is not required to comply with all the legal and
procedural formality.

Disadvantages of Proprietary Firms

1. Unlimited Liability : In such firms the liability of the owner is unlimited as the owner takes more risk
to earn more profits and increase the volume of his business by supplying his personal assets to the
business.

2. Limited Financial Resources: Being the single owner of the business, the availability of funds from
various sources is limited.

3. No Legal Status: The existence of business is due to the existence of sole proprietor. Death or
insolvency of the sole proprietor brings an end to the business.

4. Limited Capacity of Individual: An individual has limited knowledge, set of skills due to which his
capacity to undertake responsibilities, his capacity to take quick decisions and bear risks are also
limited.

5. Transferring of business is not easy in the case of Proprietary Firm.

6. Higher Taxes: As the sole proprietor is the direct person enjoying the profits thus he needs to pay
higher taxes.

What are the main duties and responsibilities of a finance executive?

Recurring Duties:
Deciding the financial needs
Raising the funds required
Allocation of funds
      1. Fixed assets management
     2. Working capital management
Allocation of Income
Control of Funds
Evaluation of Performance
Corporate Taxation
Other duties: To prepare annual accounts, carrying out internal audit, safeguarding securities, present
financial reports to top management. Etc.

Non-recurring Duties:
Preparation of financial plan at the time of company promotion
Financial adjustments in times of liquidity crisis
Valuation of the firm at the time of acquisition and merger etc.

What are limited liability companies? What are its two types?
The limited liability company (LLC) is a business structure combining both the characteristics of a
corporate and of partnership. As a corporate entity it protects its owners against personal liability on the
other hand for tax purposes it is treated as a non-corporate business organization. A limited liability
company enjoys various benefits like owners or members of the company have limited liability due to the
company’s separate legal existence, system of profit distribution is very flexible. Unlike a corporate
organization it does not have to keep minutes or resolutions and is easier to operate. Tax advantage is
the important benefit which a limited liability company enjoys as all the profits, losses and expenses are
shared by the individual members. Thus the double taxation of paying corporate tax and individual tax is
avoided. With all the above benefits limited Liability Company has few disadvantages also as the
company comes to an end after the expiry or insolvency of its members.

There are two types of limited liability companies:

Private Limited Company
Public Limited Company

What is capitalization? What is its importance?

Capitalization is a term which has different meanings in both financial and accounting context.
Capitalization in accounting means the cost to buy an asset which is included in the price of the asset
whereas in financial terms it is the cost which is required to buy an asset which includes price of a
particular asset and it also include the retained earnings of a company with stock debt and long term
debt. There are two kinds of capitalization which are called as Over-capitalization and another is called
as Under-capitalization. Capitalization is very import aspect in determining the value of the company in
the market which is based on the economic structure of the company. This aspect depends on the
previous records and economics of the company. This also shows a particular behaviour of the
companies structure and allows them to create a plan to do the marketing.

Explain Balanced Capitalization.

Capitalization is a collection of share capital, loans, reserves and debentures. It represents permanent
investment in companies and it also removes the need of long-term loan plans. It is used to show the
reality of the industry by promoting competition, development, profit and investment between individuals,
companies and businesses. Balance capitalization is part of this Capitalization only where it is compared
to the relative importance, value and other things to make it proportionate in every sense. In balance
capitalization debits and credits should be equal on both sides and the share should be shared among
all in equal proportions.

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

The principles of capital structure management which are essentially required are as follows:

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

What is composite cost of capital? Explain the process to compute it?

Composite cost of capital is also known as weighted average cost of capital which is a measurable unit
for it. It also tells about the component costs of common stock, preferred stock, and debt. Each of these
components is given a weight on the basis of the associated interest rate and other gains and losses
with it. It shows the cost of each additional capital as against the average cost of total capital raised. The
process to compute this is first computing the weighted average cost of capital which is the collection of
weights of other costs summed together. 

The formula is given as:

WACC= Wd (cost of debt) + Ws (cost of stock/RE) + Wp (cost of pf. Stock)

In this the cost of debt is calculated in the beginning and it is used to find out the cost of capital and
other weights of cost is been calculated after the calculation each and every individual weight of the
component is added and then it gives the final composite cost.

What are adjustment entries? Why are they passed?

Adjustment entries are the entries which are passed at the end of each accounting period to adjust the
nominal and other accounts so that correct net profit or net loss is indicated in profit and loss account
and balance sheet may also represent the true and fair view of the financial condition of the business.

It is essential to pass these adjustment entries before preparing final statements. Otherwise in the
absence of these entries the profit and loss statement will be misleading and balance sheet will not
show the true financial condition of the business.
What is cost accountancy? What are the objects of Cost Accountancy?
Cost accountancy is the application of costing and cost accounting principles, methods and techniques
to the science, art and practice of cost control and the ascertainment of profitability as well as the
presentation of information for the purpose of managerial decision making.

Following are the objects of Cost Accountancy

Ascertainment of Cost and Profitability
Determining Selling Price
Facilitating Cost Control
Presentation of information for effective managerial decision
Provide basis for operating policy
Facilitating preparation of financial or other statements

What is the difference between costing and cost accounting?

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

Explain Opportunity Cost and Differential Cost.

Opportunity Cost is the cost incurred by the organisation when one alternative is selected over
another. For example: A person has Rs. 100000 and he has two options to invest his money, either
invests in fixed deposit scheme or buy a land with the money. If he decides to put is money to buy the
land then the loss of interest which he could have received on fixed deposit would be an opportunity
cost.
Differential Cost is the difference between the costs of two alternatives. It includes both cost increase
and cost decrease. It can be either variable or fixed. 
Example: 
Cost of first alternative = 10000; Cost of second alternative = 5000; Differential Cost = 10000 – 5000 =
5000

What are the various forms in which a company may carry the inventory?

Inventory management is a very important aspect of business as timely supply of inventory is

vital for the regular and planned course of production. It is an art of managing inventory in order
to meet customers’ needs. Also investment in inventory constitutes one of the major
investments in current assets. Inventory level falling below the specified level or inventory in
excess has their own consequences on the production process. Thus, the prime objective of
management of the inventory is to determine/control stock levels in order to balance the need
for product availability against the need for minimizing stock holding and handling costs. The
various forms in which a company may carry the inventory are:

Raw Materials: These are the basic inputs in the process of production. In manufacturing
company first raw materials are purchased, stored and then through various manufacturing
process converted into finished products.

Work in Progress: These are the products which are still in process. These are also known as
semi- manufactured products.

Finished Goods: These are the goods which are ready to sale in the market.

Stores and Supplies: These represent that part of inventory which are not a part of final
product but are required for the production process. E.g. cotton waste, soaps, oil and lubricants
etc.

What can be a company’s motive for holding the inventory?

A company has various motives for holding the inventory as stated below:

1) Transaction Motive : The Company may be required to hold the inventory in order to
facilitate the smooth and uninterrupted production and sale operations. It may not be possible
for the company to procure the raw material whenever necessary. There may be a time lag
between the demand for the material and its supply. Hence it is needed to hold the raw material
inventory. Similarly it may not be possible to produce the goods immediately after they are
demanded by the customers. Hence it is needed to hold the finished goods inventory. They
need to hold work in progress may arise due to production cycle.

2) Precaution Motive: In addition to the requirement to hold the inventory for routine
transactions, the company may like hold them to guard against risk of unpredictable changes in
demand and supply forces. Eg. The supply of raw material may get delayed due to factors like
strike, transport, disruption, short supply, lengthy processes involved in import of raw material
etc. hence the company should maintain sufficient level of inventory to take care of such
situations. Similarly, the demand for finished goods may suddenly increases (especially in case
of seasonal type of products) and if the company is unable to supply them, it may mean gain of
competition. Hence, company will like to maintain sufficient supply of finished goods.

3) Speculative Motive: The Company may like to purchase and stock the inventory in the
quantity which is more than needed for production and sales purpose. This may be with the
intention to get advantage in term of quantity discounts connected with bulk purchasing or
anticipating price rise.

What are the objectives of inventory management?

The main objective of inventory management is to maintain inventory at appropriate level to
avoid excessive or shortage of inventory because both the cases are undesirable for business.
Thus, management is faced with the following conflicting objectives:

1. To keep inventory at sufficiently high level to perform production and sales activities
smoothly.
2. To minimize investment in inventory at minimum level to maximize profitability.

Other objectives of inventory management are explained as under:-

1. To ensure that the supply of raw material & finished goods will remain continuous so that
production process is not halted and demands of customers are duly met.
2. To minimize carrying cost of inventory.
3. To keep investment in inventory at optimum level.
4. To reduce the losses of theft, obsolescence & wastage etc.
5. To make arrangement for sale of slow moving items.
6. To minimize inventory ordering costs.

What are the consequences of over investment & under investment in inventory?

Both over investment and under investment in inventory is undesirable as both have
consequences.

Following are the consequences of over investment:

- Unnecessary blockage of funds in inventory

- Excessive storage is required to store the inventory.

- Excessive insurance cost.

- Risk of liquidity: Value of the inventory reduces due to the long holding period as the
inventories once purchased are difficult to dispose off at the same value.

Following are the consequences of under investment:

- Under investment in the inventory may cause frequent interruptions in production process.

- Insufficient stock of finished goods may create problems in meeting customers’ demands and
they may shift to the competitors.

Explain: ABC analysis and it advantages.

A.B.C. analysis is an analytical technique of controlling different items of inventory. This
technique assumes the basic principle of ‘Vital Few Trivial Many’ which means in a business
there are thousands items not equally important. According to this technique only those items
are considered and given more attention which are significant from business point of view. In
this technique, all items are classified under 3 categories A, B and C. In ‘A’ category those items
are taken which are very important and small in quantity, ’B’ category includes relatively less
costly and important items as compared to ‘A’ category and ‘C’ category includes those items
which are large in number and are low priced. The importance of various items is decided on
the basis of following factors:

- Amount of investment in inventory,

- Value of material consumption and
- Critical nature of inventory items.

Advantages of ABC Analysis:

1. Close and strict control is facilitated on the most important items which help in overall
inventory valuation or overall material consumption.

2. Proper regulation of investment in inventory which will ensure optimum utilization of available
funds.

3. Helps in maintaining a high inventory turnover rates.

What are the various choices available for a company to choose its dividend policy?

Dividend policy is an element of the financial management. It helps the company in capital
markets and establishing a good corporate image in development of company's long term
financial decision making.

The choices that are available to the user are as follows:-

1) Dividend payout ratio policy - it is to determine the actual distribution of earnings per share
and the ratio of earnings available for distribution of high and low

2) Dividend distribution policy - refers to steady growth in dividend policy

3) Dividend payout policy - it is a dividend in the form of cash dividends, stock dividends,
dividends and share repurchase allotment.

What external factors determine the dividend policy?

The external factors which determine the dividend policy are as follows:-

1) Dividend payout rate- defined as the ratio of dividends per share and earnings per share.
2) Regulated firms
3) Unregulated firms in this result are compared with earlier studies.
4) Amount of profit to be distributed among the shareholders,
5) Amount of profit to be retained in the firm.
6) Systematic risk,
7) The percentage of common stocks held by insiders,
8) Number of common stockholders.

What external factors affect the dividend policy?

The external factors which affect the dividend policy are as follows:-

1) Economy in general state:

In uncertain economic conditions, management might retain large part of earnings to build reservoir to
absorb future hurdles.

Period of recession or inflation or beginning stages of it company may also retain large part of earning to
maintain the liquidity.

2) State of Capital Market:

Favorable Market: This is also called as liberal dividend policy.

Unfavorable market: This is also called as conservative dividend policy.

3) Legal Restrictions:

Methods to pay the dividends are either from the Current or past profits of the company and paying
outside the capital is not allowed.

4) Contractual Restrictions:

Contractors may put some kind of restriction on the payment of dividends to save their interests during
the hard times when the company or market is going through a low phase.
Define a.) Stable dividend policy b.) No immediate dividend policy c.) Regular and extra dividend policy
d.) Regular stock dividend policy e.) Irregular dividend policy

a.) Stable dividend policy

This is also called Regular policy in this company pays dividend at fixed rate, and maintains it for long
time even the profit fluctuates. It pays minimum amount of dividend every year regularly. A firm paying
this can satisfy the shareholders and can enhance the credit in market. In this the dividend must be
stable and also helps in raising long term finance.

b.) No immediate dividend policy

Company pays no dividend in the beginning when it starts as it might be requiring credit for growth and
expansion. This happens in the case of outside funds are costlier and the market is also very difficult to
handle. This kind of policy can be used in short term period only and not good for long term.

c.) Regular and extra dividend policy

In this Pay out ratio is used which a firm pays continuously. But when sometimes the earnings exceed
the normal level, management pays extra dividend in addition to the regular dividend. It doesn’t mean
that the company is earning extra profit that it is paying extra dividend.

d.) Regular stock dividend policy

In this a particular firm pays dividend in the form of shares not in the form of cash continuously for some
years. Stock dividends are used as bonus shares and when company is short of cash or a crunch then
this policy is used. It is not used for long time because number of shares will go on increasing, which
would result in fall in earnings per share.

e.) Irregular dividend policy

In this firm doesn’t pay the fix dividend regularly and it changes from year to year according to changes in
earnings level. This is followed by the company which have unstable earning.
What are the various forms in which dividends can be paid?

1) Cash dividends are the first form in which dividends are paid out in currency, usually by check or
electronic cash. These dividends are the form of investment income and are taxable to the recipient in
the year they are paid. This is used to share the corporate profit with the shareholders of the company.

2) Stock dividends are the second form in which dividends are paid out in form of additional stock shares
of the issuing corporation. They differ in the issuing of the shares owned by people around. If payment
involves issue of new shares then it increases total number of shares while lowering the price of each
share without changing market value.

3) Property dividends are the third form in which dividends are paid out in the form of assets from the
issuing corporation or another corporation, such as a subsidiary corporation. They are rare and mostly
used in securities of companies owned by issuer

What are bonus shares? What advantages does the company get by issuing them?

Bonus shares are the shares which are allotted to the existing shareholders without receiving any
additional payment from them. Issue of bonus share has advantages in increasing the company’s profits
into share market. It also helps the shareholders to retain their proportionate ownership of the company.
It doesn’t affect the total capital structure and total earning of the shareholders. It actually keeps the
morale high of the employees who are associated with the company. It also increases the outstanding
shares and share capital base.

What are the disadvantages of issuing bonus shares?

The disadvantages of issuing bonus shares are:

1) To the company - as issue of this may lead to increase in capital of the company.
2) Shareholder expect existing rate dividend per share to continue.
3) It also prevents the new investors from becoming the shareholders of the company.
4) Shareholder preferring cash to stock dividend may be disappointed.

What Are Securities (in Finance)? - TheStreet Definition

Dictionary of Financial Terms 
 RSS Feed for Securities Definition
A simple definition of a security is any proof of ownership or debt that has been assigned a value
and may be sold. (Today, evidence of ownership is likely to be a computer file, while once it was a
written piece of paper.) For the holder, a security represents an investment as an owner, creditor or
rights to ownership on which the person hopes to gain profit. Examples are stocks, bonds and
options.

The Securities and Exchange Act of 1934 provides this more complicated definition, but you might
want to grab a cup of coffee: "The term 'security' means any note, stock, treasury stock, bond,
debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or
other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for
a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group
or index of securities (including any interest therein or based on the value thereof), or any put, call,
straddle, option, or privilege entered into on a national securities exchange relating to foreign
currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest
or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or
purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or
banker's acceptance which has a maturity at the time of issuance of not exceeding nine months,
exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."
Definitions Of Financial Terms

 Actively Managed Funds

 Agency Securities
Agency securities are bonds and notes issued by government-sponsored enterprises, or
GSEs, including Fannie Mae, Freddie Mac and the Federal Home Loan Bank. They are the
highest-quality debt instruments after Treasury securities. Agencies" is a term used to
describe two types of bonds: (1) bonds issued or guaranteed by U.S. federal government
agencies; and (2) bonds issued by government-sponsored enterprises (GSEs)—corporations
created by Congress to foster a public purpose, such as affordable housing.

 Annuity

An annuity is a series of payments made at equal intervals. Examples of annuities are regular

deposits to a savings account, monthly home mortgage payments, monthly insurance payments
and pension payments. Annuities can be classified by the frequency of payment dates.

 Arbitrage
 Arbitrage pricing theory (APT) is a multi-factor asset pricing model based on the idea that an
asset's returns can be predicted using the linear relationship between the asset's expected return
and a number of macroeconomic variables that capture systematic risk. The APT formula is E(ri) =
rf + βi1 * RP1 + βi2 * RP2 + ... + βkn * RPn, where rf is the risk-free rate of return, β is the
sensitivity of the asset or portfolio in relation to the specified factor and RP is the risk premium
of the specified factor.

 Asset Backed Security

An asset-backed security (ABS) is an investment security—a bond or note—which is

collateralized by a pool of assets, such as loans, leases, credit card debt, royalties, or
receivables. An ABS is similar to a mortgage-backed security, except that the
underlying securities are not mortgage-based. The main types of asset-backed securities are
home-equity loans, credit-card receivables, auto loans, mobile home loans and student loans.
Asset-backed securities are purchased primarily by institutional investors, including corporate
bond mutual funds.

 Back-End Load
1. A back-end load, also known as a contingent deferred sales charge, means the fee is charged
when an investor redeems the mutual fund. The fee usually starts at 5% for investors who
redeem shares within a year and declines by a percentage point each year after until the fee is
eliminated. Calculation. Net Investment Value = Investment Value at Sale - Back-End Fee. ...
2. Explanation. Also known as a back-end fee or deferred sales charge, a back-end load is a fee
or sales commission paid to investment agents such as stockbrokers, and financial advisors. ...
3. Example. ...
4. Related Terms.
 Backlog

A backlog is a buildup of work that needs to be completed. The term "backlog" has a number
of uses in accounting and finance. It may, for example, refer to a company's sales orders
waiting to be filled or a stack of financial paperwork, such as loan applications, that needs to be
processed

 Barrels Per Day

Barrels per day (B/D) is a measure of oil output, represented by the number of barrels of oil
produced in a single day. For example, you might hear "country ABC has the potential to
produce five million barrels per day." The abbreviation "bbl/d" can also be used to represent
this production measure.

 Basic Earnings
 Basis Points

 Beige Book

Commonly known as the Beige Book, this report is published eight times per year. Each
Federal Reserve Bank gathers anecdotal information on current economic conditions in its
District through reports from Bank and Branch directors and interviews with key business
contacts, economists, market experts, and other sources

 Beta
 Bid Price
 Bid-to-Cover Ratio
 Black-Scholes Model

 Blue-Chips

A blue-chip stock is a huge company with an excellent reputation. These are typically large,
well-established and financially sound companies that have operated for many years and that
have dependable earnings, often paying dividends to investors. A blue-chip stock typically has
a market capitalization in the billions, is generally the market leader or among the top three
companies in its sector, and is more often than not a household name. For all of these reasons,
blue-chip stocks are among the most popular to buy among investors. Some examples of blue-
chip stocks are IBM Corp., Coca-Cola Co. and Boeing Co.

 Bond

 Bottom-Up Investing

bottom-up investing focuses on individual securities rather than on the overall movements in

the securities market or the prospects of particular industries. Thebottom-up approach
assumes that individual companies can do well even in an industry that is not performing very
well

 Breakout
 Bucket Shop

 Business Inventories

 Butterfly Spread

 Buy-Side

 Callable Bond

 Capital Asset

 Capital Expenditure

 Capitulation

 Car and Truck Sales

 Cash Flow
 Charge to Earnings
 Closed-End Fund

 Collateralized Debt Obligation (CDO)

 Common Stock
 Consumer Price Index

 Convertible Securities
 Convexity

 Corporate Bonds
 Covered Call
 Credit Default Swap (CDS)

 Credit Risk

 Credit Spread

 Crude Oil
 Cubic Foot

 Day Rates

 Delisted
 Derivatives

 Devaluation

 Diluted Earnings

 Distressed Securities

 Diversification

 Dow Jones Industrial Average

 Dogs of the Dow

 Dollar-Cost Averaging

 Downstream

 Duration (Bond)

 Earnings Estimates

 EBITDA
 Economic Indicators

 Employment Situation Report

 Employee Stock Options

 Ex-Dividend

 Existing Home Sales

 Expiration Cycle: The expiration cycle is the calendar cycle of expiration months that is assigned to
basic exchange-traded stock options. Options expire after three, six or nine months, except for
long-term options. With a few exceptions that have contracts in every month, most equity
options are set up on one of three cycles. Knowing which cycle an option is on tells you when
the option can expire if not exercised.

 Front-End Load: A front-end load is a commission or sales chargeapplied at the time of the initial
purchase of an investment. The term most often applies to mutual fund investments, but may
also apply to insurance policies or annuities
 Calculation. Net Investment = Initial Investment - Front-End Fee. ...
 Explanation. Also known as a front-end fee or sales charge, a front-end load is a fee
or sales commission paid to agents such as stockbrokers and financial advisors. ...
 Example. Sam has $10,000 that he would like to invest in a mutual fund. ...
 Related Terms.
 Fundamentals
 Gross Domestic Product: Gross domestic product (GDP) is the total monetary or market value of
all the finished goods and services produced within a country's borders in a specific time period.
As a broad measure of overall domestic production, it functions as a comprehensive
scorecard of a given country's economic health
 What are the 5 components of GDP?
 The five main components of the GDP are: (private) consumption,
fixed investment, change in inventories, government purchases (i.e. government
consumption), and net exports. Traditionally, the U.S. economy's average
growth rate has been between 2.5% and 3.0%.
 Growth Funds: A growth fund is a diversified portfolio of stocks that has capital appreciation as
its primary goal, with little or no dividend payouts. The portfolio mainly consists of companies
with above-average growth that reinvest their earnings into expansion, acquisitions, and/or
research and development (R&D).

 Hedge Fund:

 High-Yield Bond
 Housing Starts
 International Monetary Fund
 Industrial Production and Capacity Utilization
 Initial Jobless Claims
 International Funds
 Interest-Rate Risk
 In-the-Money
 Intrinsic Value
 Investment Bank
 Investment-Grade Bonds
 January Effect
 Kansas City Fed Manufacturing Survey
 LBO (Leveraged Buyout)
 Liability-Adjusted Cash Flow Yield
 MOB (Municipal-Over-Bond) Spread
 Momentum
 Momentum Funds
 Monetarism
 Money-Center Banks
 Mortgage-Backed Securities
 Net Asset Value
 Net Fund Flows
 No-Load (Mutual Fund)
 Out-of-the-Money
 Passively-Managed Funds
 PEG Ratio
 Preferred Stock
 Premium (Options)
 Ratings (Bonds)
 Real Earnings
 Receivership
 Recession

 Regional Bank

 Reinvested Dividends

 Repo (Repurchase Agreement)

 Retail Sales

 Retracement

 Return on Assets

 Return on Equity

 Richmond Fed Survey



 Russell 2000
 Santa Claus Rally
 S&P 500
 S&P 500 Futures
 Shareholder Rights Plan
 Sharpe Ratio

 Speculative Grade (Bonds)

 Spider (SPDR)

 Spread Product

 Standard Deviation

 Standard Deviation of Returns

 Step-Out/Step-In Trade

 Stop Order

 Straddle

 Strike Price


 Swaps

 Target Price

 Top-Down Investing

 Top-Line

 Total Return

 Trailing Stop

 Treasury Bills

 Treasury Futures

 Treasury Notes

 Treasury Securities

 Treasury Bond

 Triple Witching

 Turnover Ratio
 Value Stock

 VIX (Volatility Index)

 Volatility

 When-Issued Trading

 Whisper Number

 Yield Curve

 Zero-Coupon Bond