Five Questions for

Interview
 JOURNAL ENTRIES

 A journal entry is the act of keeping or making records of any transactions either
economic or non-economic. The journal entry consists of several recordings, each of
which is either a debit or a credit. The total of the debits must equal the total of the
credits, or the journal entry is considered unbalanced.
 Example:
Furniture purchased for cash Rs. 10,000
Furniture A/c Debit 10,000
Cash A/c Credit
10,000
 GOLDEN RULES OF ACCOUNTING

 Debit the receiver, Credit the giver (For Personal Accounts)

 Debit what comes in Credit what goes out (For Real Accounts)
 Debit are all expenses and losses Credit all income and gains (For Nominal Accounts)
 RATIOS
1. Liquidity ratio - Assess a business liquidity i.e. its ability to convert its assets to cash and pay
off its obligation without any significant difficulty. Liquidity ratio are particularly useful for
suppliers, employees, banks etc.
 Current ratio – It measures a company’s ability to pay off its current liabilities with its total
currents assets such as cash, accounts receivables and inventories.
Formula:- Current ratio = Current assets / Current
Liabilities

 Quick ratio - This ratio subtracts inventories from current assets, before dividing that figure
into liabilities. The idea is to show how well current liabilities are covered by cash and by
items with a ready cash value.
Formula:- Quick ratio = Liquid asset / current liabilities
Where, liquid asses = current asset – stock – prepaid expenses
 Absolute liquidity ratio - Absolute Liquid Ratio is a type of liquidity ratio that is calculated
to analyze the short term solvency or financial position of the firm. It is calculated to exclude
the receivables from the current and liquid assets and to know about the absolute liquid assets.
Formula :- absolute liquid asset / current liabilities
Where, absolute liquid asset = cash in hand + cash at bank + marketable securities

 Cash ratio - The cash ratio is a liquidity measure that shows a company's ability to cover its
short-term obligations using only cash and cash equivalents.
Formula :- Cash and Cash equivalents / current liabilities
2. Turnover ratio - A turnover ratio represents the amount of assets or liabilities that a
company replaces in relation to its sales.
 Inventory turnover ratio – inventory turnover ratio indicates the number of times
inventory is sold during the year. Higher the number of times it indicates efficiency in
inventory movement.
Formula: – Inventory turnover ratio = Cost of goods sold / average stock
Where, Cost of goods sold = Opening stock + purchases – closing stock Average stock =
(opening stock + closing stock) / 2

 Receivable turnover ratio - The accounts receivable turnover ratio measures the time
it takes to collect an average amount of accounts receivable. It an activity ratio

 Capital turnover ratio – Capital turnover ratio is also called as equity turnover is a
measure that calculates how efficiently the company is managing the capital invested
by the shareholder in the company to generate revenue.
Formula – total sales / shareholders equity
 Asset turnover ratio - The asset turnover ratio, also known as the total asset turnover
ratio, measures the efficiency with which a company uses its assets to produce sales.
Formula: – Assets turnover ratio = Net sales / average total assets
Where, Net sales are the amount of revenue generated after deducting sales returns, sales
discounts, and sales allowances.
Average total assets are the average of aggregate assets at year-end of the current or preceding fiscal
year.

 Net working capital ratio – is the excess of current assets over current liabilities.
Formula :– Current asset - Current liability

 Cash conversion cycle - Cash conversion cycle is a metrics that expresses the time
(measure in days) it takes for the company to covert its investment in inventory and
other resources into cash flow from sales. It is also called as net operating cycle or
simply cash cycle.
Formula: – Cash conversion cycle = Days of inventory outstanding + days sales outstanding –
days payable outstanding
3. Operating Profitability ratios – this ratios show how well a company can generate
profits from its operation. Profit margin, return on assets, return on equity, return on
capital employed, gross margin ratio are examples.
 Earning margin – Earning margin is the ratio of net income to turnover express in
percentage. It refers to the final net profit used.
Formula:- Earning Margin = Net Income / Turnover * 100

 Return on investment - This financial ratio measures profitability in relation to the

total capital employed in a business enterprise.
Formula: - Return on Investment = Profit Before Interest and Tax / Total Capital Employed

 Return on equity - Return on equity is derived by taking net income and dividing it by
shareholder’s equity; it provides a return that management is realizing from the
shareholder’s equity.
Formula: - Return on Equity = Profit After Taxation – Preference Dividends / Ordinary
Shareholder’s Fund * 100
 Earnings per share - When buying a stock, you participate in the future earnings (or
risk of loss) of the company. Earnings per share (EPS) measures net income earned on
each share of a company's common stock. The company's analysts divide its net income
by the weighted average number of common shares outstanding during the year.
Formula:- EPS = (Earning after tax (EAT) – Preference dividend) / No. of equity
shares
4. Business risk ratios – we measure how sensitive is the company’s earnings with respect to
its fixed costs as well as the assumed debt on the balance sheet.
 Operating leverage – the leverages related with investment activities is known as
operating leverages. They may be defined as the companies ability to use fixed operating
cost to magnify the effects of changes in sales of its EBIT. It comprises of 2 imp cost i.e.
fixed cost and variable cost.
Formula:- Contribution / operating profits

 Financial leverage – categorize the relationship between the company EBIT or operating
profit and the earning available to equity shareholders. Helps to examine the relationship
between EBIT and EPS.
Formula:- Operating profit (EBIT) / profit before tax (PBT)

 Total leverage – when the company utilise both financial and operating leverage to
amplification of any changes in sales into a higher relative changes in Earning per
share(EPS). It is also called as composite leverage / Combined leverage. It shows the
relationship between the revenue in the accounts of sales and the taxable income.
Formula: – Operating leverage * Financial Leverage
5. Financial risk ratios – Financial risk ratios is used to evaluate any company’s capital structure
and debt levels, as a part of quantitative analysis.
 Debt equity ratio – Debt equity ratio is a leverage ratio that calculates the weight of total debt
and financial liability against total shareholders equity. This ratio highlights how a company’s
capital structure is titled either towards debt or equity financing.
Formula: – Debt equity ratio = total long term debt / equity fund

 Interest coverage ratio - The interest coverage ratio is a debt and profitability ratio used to
determine how easily a company can pay interest on its outstanding debt.
Formula: – Interest coverage ratio = EBIT / Interest expenses

 Debt-service coverage ratio - The debt-service coverage ratio applies to corporate,

government, and personal finance. In the context of corporate finance, the debt-service
coverage ratio (DSCR) is a measurement of a firm's available cash flow to pay current debt
obligations.
Formula :– Debt-service coverage ratio = Net operating Income / Total debt service
6. Stability ratios - stability ratio is used with a vision of the long-term. It uses to check
whether the company is stable in the long run or not.
 Fixed asset ratio - This ratio is used to know whether the company is having sufficient
fun or not to meet the long-term business requirement.
Formula:- Fixed Asset Ratio = Fixed Assets / Capital Employed

 Ratio to current assets to fixed assets –

Formula:- Ratio to Current Assets to Fixed Assets = Current Assets / Fixed Assets

 Proprietary ratio - The proprietary ratio is the ratio of shareholder funds upon total
tangible assets; it tells about the financial strength of a company.
Formula:- Proprietary Ratio = Shareholder Fund / Total Tangible Assets
7. Coverage financial ratios - This is used to calculate dividend, which needs to be paid to
investors or interest to be paid to the lender.
 Fixed interest cover - It is used to measure business profitability and its ability to
repay the loan.
Formula:- Fixed Interest Cover = Net Profit Before Interest and Tax / Interest Charge

 Fixed dividend cover - It helps to measure dividend need to pay to the investor.
Formula:- Fixed Dividend Cover = Net Profit Before Interest and Tax / Dividend on
Preference Share
8. Control ratios - Control ratio from the name itself, it is clear that its use to control
things by management. This type of ratio analysis helps management to check favorable or
unfavorable performance.
 Capacity ratio –
Formula:- Capacity Ratio = Actual Hour Worked / Budgeted Hour * 100

 Activity ratio –
Formula :- Activity Ratio = Standard Hours for Actual Production / Budgeted Standard Hour
* 100

 Efficiency ratio –
Formula: - Efficiency Ratio = Standard Hours for Actual Production / Actual Hour Worked *
100
 FINANCIAL STATEMENTS
 Financial statements are written records that convey the business activities and the
financial performance of a company. Financial statements are often audited by
government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing,
or investing purposes.
 Financial statements include:
a. Balance sheet
b. Income statement
c. Cash flow statement
1. Balance Sheet- A balance sheet is a financial statement that summarizes a company's
assets, liabilities and shareholders' equity at a specific point in time. These three balance
sheet segments give investors an idea as to what the company owns and owes, as well as
the amount invested by shareholders.
 The balance sheet adheres to the following
 formula:- Assets = Liabilities + Shareholder’s Equity
 Equity Assets- Within the assets segment, accounts are listed from top to bottom in
order of their liquidity, that is, the ease with which they can be converted into cash.
They are divided into current assets, those which can be converted to cash in one year
or less; and non-current or long-term assets, which cannot.
 Liabilities- Liabilities are the money that a company owes to outside parties, from bills
it has to pay to suppliers to interest on bonds it has issued to creditors to rent, utilities
and salaries. Current liabilities are those that are due within one year and are listed in
order of their due date. Long-term liabilities are due at any point after one year.
 Shareholder’s equity- Shareholders' equity is the money attributable to a business'
owners, meaning its shareholders. It is also known as "net assets," since it is equivalent
to the total assets of a company minus its liabilities, that is, the debt it owes to non-
shareholders.
2. Income Statement- An income statement is a financial statement that reports a
company's financial performance over a specific accounting period. Financial performance
is assessed by giving a summary of how the business incurs its revenues and expenses
through both operating and non-operating activities. It also shows the net profit or loss
incurred over a specific accounting period.
Also known as the profit and loss statement or statement of revenue and expense, the
income statement is the one of three major financial statements in the annual report. All
public companies must submit these legal documents to the Securities and Exchange
Commission (SEC) and investor public. The other two financial statements are the balance
sheet and the statement of cash flows. All three provide investors with information about
the state of the company's financial affairs, but the income statement is the only one that
provides an overview of company sales and net income
3. Cash Flow- Cash flow is the net amount of cash and cash-equivalents moving into and out of a
business.
 Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle
debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer
against future financial challenges.
 Negative cash flow indicates that a company's liquid assets are decreasing. Net cash flow is
distinguished from net income, which includes accounts receivable and other items for which
payment has not actually been received.
 Cash flow is used to assess the quality of a company's income, that is, how liquid it is, which can
indicate whether the company is positioned to remain solvent.
 Cash flow statements are divided into three categories: operating cash flow, investing cash flow
and financing cash flow. Operating cash flows are those related to a company's operations, that is,
its day-to-day business.
 Investing cash flows relate to its investments in businesses through acquisition; in long-term
assets, such as towers for a telecom provider; and in securities.
 Financing cash flows relate to a company's investors and creditors: dividends paid to
stockholders would be recorded here, as would cash proceeds from issuing bonds.
 Free cash flow is defined as a company's operating cash flow minus capital expenditures. This is
the money that can be used to pay dividends, buy back stock, pay off debt and expand the
business.
ONE THING BASE JOURNAL ENTRY

Q. Sales of goods to Mr. A worth Rs 15,000 paid for with Rs. 10,000 in cash and Rs.
5,000 on credit.

Cash A/c Dr. 10,000

Account Receivable Dr. 5,000
To Sales A/c 15,000
Q. Bought goods from Amit for Rs. 2,00,000 at term 5% cash discount and 20% trade
discount. Paid 3/4th of the amount in cash at the time of purchase

Purchase A/c Dr. 1,60,000

To bank A/c 1,14,000
To Discount Received 6,000
To Amit’s A/c 40,000
EXPLAIN EBITDA, PAT & PBT?
1. EBITDA stands for earnings before interest, taxes, depreciation and amortization.
EBITDA is one indicator of a company's financial performance and is used as a proxy for
the earning potential of a business, although doing so has its drawbacks. Further, EBITDA
strips out the cost of debt capital and its tax effects by adding back interest and taxes to
earnings. In its simplest form, EBITDA is calculated in the following manner
 EBITDA = Operating Profit + Depreciation Expense + Amortization Expense
The more literal formula for EBITDA is:
 EBITDA = Net Profit + Interest +Taxes + Depreciation + Amortization PAT
2. PROFIT AFTER TAX (PAT) is the net profit earned by the company after deducting
all expenses like interest, depreciation and tax. PAT can be fully retained by a company to
be used in the business. Dividends, if declared, are paid to the shareholders from this
residue.

3. Profit before tax (PBT) is a profitability measure that looks at a company's profits
before the company has to pay corporate income tax by deducting all expenses from
revenue including interest expenses and operating expenses except for income tax. Also
referred to as "earnings before tax" or "pretax profit", this measure combines all of the
company's profits before tax, including operating, non-operating, continuing operations and
non-continuing operations. PBT exists because tax expense is constantly changing, and
taking it out helps give an investor a good idea of changes in a company's profits or
earnings from year to year.
 Contribution = Sales – Variable Cost
 Earnings Before Interest and Tax (EBIT) = Contribution – Fixed Cost
 Earnings Before Tax, Depreciation and Amortization (EBTDA) = EBIT – Interest
 Earning After Tax (EAT) = EBTDA – Tax
 Net Profit After Tax (NPAT) = EAT – (Depreciation + Amortization)
Types of Accounting Principles
 What is International Financial Reporting Standards (IFRS)International Financial
Reporting Standards (IFRS) are common rules that have been set, in order to ensure
consistency, transparency, and comparability in financial statements across the globe.
The primary role of IFRS is to specify how companies must maintain and report their
accounts, defining types of transactions, and other events with financial impact.
 What is Generally Accepted Accounting Principles GAAP?
Generally Accepted Accounting Principles or GAAP is a defined set of rules and
procedures that needs to be followed in order to create financial statements, which are
consistent with the industry standards. GAAP helps in ensuring that financial reporting
is transparent and uniform across industries. As financial information is based on
historical data, therefore in order to facilitate comparison between data from various
sources, GAAP must be followed.
 IFRS US GAAP

International Accounting Standard Board (IASB) Financial Accounting Standard Board (FASB)

IFRS follows principle base approach. US GAAP follows rule base approach.

IFRS applicable to more than 74 countires. US GAAP applicable onle for USA

Consider only two factors Consider multiple factors

US Gaap follows FIFO, LIFO and Weighted Average

IFRS follows FIFO and Weighted Average Method
Method.

Allows impairment losses to be reversed for all types Prohibits reversals of impairment losses for all types
of assets except goodwill of assets

Allows revaluation of the following assets to fair

value if fair value can be measured reliably: Revaluation is prohibited except for marketable
inventories, property, plant & equipment, intangible securities
assets, and investments in marketable securities