1. Does PAT resemble the cash surplus of the business?

A financial performance ratio, calculated by dividing net income after taxes by net sales. A
company's after-tax profit margin is important because it tells investors the percentage of
money a company actually earns per dollar of sales.
PAT = Operating profit x (1 - Tax Rate)
PAT = Net Profit After Tax + after tax Interest Expense after tax Interest Income
For companies with no debt and thus no interest expense, NOPAT is equal to net profit. In
other words, NOPAT represents the company's operating profit that would accrue to
shareholders (after taxes) if the company had no debt.
2. How to calculate Net Worth of the business, Gross Working Capital and Net
Working Capital?
The amount by which assets exceed liabilities. Net worth is a concept applicable to
individuals and businesses as a key measure of how much an entity is worth. net worth is also
known as book value or shareholders' equity.
The sum of all of a company's current assets (assets that are convertible to cash within a year
or less). Gross working capital includes assets such as cash, checking and savings account
balances, accounts receivable, short-term investments, inventory and marketable securities.
From gross working capital, subtract the sum of all of a company's current liabilities to get
net working capital.
A measure of both a company's efficiency and its short-term financial health. The working
capital is calculated as:
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company
has enough short term assets to cover its short term debt. Anything below 1 indicates negative
W/C (working capital). While anything over 2 means that the company is not investing
excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.Also known as "net
working capital".
3.

Difference between Gross Fixed Assets and Net Fixed Assets?

Gross fixed assets is the total assets, usually at acquisition cost. The aggregate amount of
physical goods owned by a business. The value of a company's gross fixed assets is typically
assessed by accounting for each item at the price that the individual asset was originally
obtained for, and so this measure does not take into account the depreciation or consumption
over time of the fixed assets.
net fixed assets would be the balance sheet value after deduction of depreciation
Net Fixed Assets is the purchase price of all fixed assets (Land, buildings, equipment,
machinery, vehicles, leasehold improvements) less accumulated Depreciation, i.e. effectively
property, plant and equipment after depreciation. It is however defined as Total Assets - Total
Current Assets - Total Intangibles & Goodwill.

he net fixed assets calculation is useful for someone evaluating the fixed assets of an
acquisition candidate, and who must rely on financial information to develop an opinion
about those assets. If the calculation yields a very small amount in proportion to the gross
amount of fixed assets, this implies that the company has not invested in the replacement or
upgrade of its fixed assets - in short, the acquirer may find itself replacing many of the fixed
assets of the target company.
The concept is of less use for internal management purposes, since managers can easily
review the fixed assets in person and consult maintenance records to determine whether fixed
assets should be replaced.
5.

Difference between depreciation and amortization?

Depreciation is the scheduled charging to expense of a tangible asset over its useful
life. Amortization is the scheduled charging to expense of an intangible asset over its
useful life. Thus, the key difference between amortization and depreciation is that one
relates to intangible assets, and the other to tangible assets.
Another difference between the two concepts is that amortization is almost always
conducted on a straight-line basis

Definition

Concept

Used for

Methods

Examples

Depreciation
Amortization
The reduction in the value of an
asset due to usage, passage of
time, wear and tear,
Spreading an intangible asset's
technologically outdated or
cost over that asset's useful life.
obsolescence and other such
factors.
To spread capitalized expenditure
To prorate a tangible asset's cost and preliminary expenditure of
over that asset's life.
the asset over the useful life of
the asset.
Tangible assets like building,
Intangible assets like patents,
furniture, plant and machinery. goodwill, trademarks, loans etc.
Straight-line depreciation,
declining-balance method,
activity depreciation, sum-ofyears' digits method, units-ofBusiness amortization, negative
production depreciation method,
amortization zoning amortization
units of time depreciation, group
depreciation method, composite
depreciation method, tax
depreciation
The loan principal decreases over
The cost of the building is spread the life of a loan. The cost
out over the predicted life of the involved with creating the
building. The value of a car
equipment is spread out over the
decreases over years.
life of the patent for that
equipment.

6.

What do u mean by Net Topline?

The top line refers to a company's gross sales or revenues. Therefore, when people comment
on a company's "top-line growth", they are making reference to an increase in gross sales or
revenues. Bottom line describes how efficient a company is with its spending and operating
costs and how effectively it has been controlling total costs. Top line, on the other hand, only
indicates how effective a company is at generating sales and does not take into consideration
operating efficiencies which could have a dramatic impact on the bottom line.
7.

What do u mean by Dividend @100% ?

When the amount of dividend declared per share is equivalent to the face value of the share
then it is said that the Company has declared 100% dividend. For example, if any Company
declares dividend of Rs. 10/- per share on a share whose face value is Rs. 10/-, then it is said
that the Company has declared 100% dividend. Companies issue their shares with a face
value (FV) which may be anything from Re.1 to Rs.100/- or even more. Dividends are
declared in % of the FV. Thus a company having shares of FV 10/- declaring 100% dividend
means Rs. 10/- for each share. Dividends are NOT declared on market value which fluctuates
every moment in the stock market.
8.

Define Tax Shield?

A reduction in taxable income for an individual or corporation achieved through claiming

allowable deductions such as mortgage interest, medical expenses, charitable donations,
amortization and depreciation. These deductions reduce taxpayers' taxable income for a given
year or defer income taxes into future years.
For example, because interest on debt is a tax-deductible expense, taking on debt can act as a
tax shield. Tax-efficient investing strategies are a cornerstone of investing for high-net-worth
individuals and corporations, whose annual tax bills can be very high. The ability to use a
home mortgage as a tax shield is a major benefit for many middle-class people whose homes
are a major component of their net worth.
9.

Define After Tax Cost of an Expense?

10. What are the pre-requisites for gaining the benefits of Tax Shield?
Tax shields take several forms, but most involve some type of expenditure that is taxdeductible. For example, if a business takes out a loan and pays interest on it each month, the
interest payments are tax-deductible. Higher interest rates create larger tax shields. The
money a business saves from a tax shield is cash it doesn't need to pay to the government as
tax.
Tax shields increase cash flow because they keep more money in a business. The cash flow
statement, which is one of the financial statements that a business produces, lists expenses,
including taxes paid on operating activities and investment activities. Tax shields directly
reduce these amounts without affecting income. Analyzing a company's cash flow without
accounting for the impact of tax shields gives an incomplete picture of how money moves
through the business.

11. Define and give difference between Nominal and Effective Tax Rate?
The chief advantage to knowing the difference between nominal, real and effective rates is
that it allows consumers to make better decisions about their loans and investments. A loan
with frequent compounding periods will be more expensive than one that compounds
annually. A bond that only pays a 1% real interest rate may not be worth investors' time if
they seek to grow their assets over time. These rates effectively reveal the true return that will
be posted by a fixed-income investment and the true cost of borrowing for an individual or
business.
A marginal tax rate is the tax rate that will apply to the next marginal - or incremental amount of income (or deductions). It is calculated by dividing the amount of additional taxes
that will be due based on some decision (e.g., to take an IRA withdrawal) by the amount of
income involved.
By contrast, an effective tax rate is arguably simpler to calculate. The effective tax rate is
simply the client's total taxes paid, divided by total income. It represents a measure of the
total tax burden that the client bears on all his/her income.
12. Give different ways to account for Loss?
13. Why Loss is considered as an Asset?
Since it is a debit balance of profit and loss account it is shown in the assets side.
15. Give reasons for depreciation?
Depreciation, means a decline in the net value of the assets. A certain percentage of Fixed
asset is charged as depreciation in the every accounting period by the the business concern
for the purpose of knowing the exact value of the asset holding. The another main emphasis
of the depreciation process is to match up the expenses with the revenues reported in each
period.

Wear and tear. Any asset will gradually break down over a certain usage
period, as parts wear out and need to be replaced. Eventually, the asset
can no longer be repaired, and must be disposed of. This cause is most
common for production equipment, which typically has a manufacturer's
recommended life span that is based on a certain number of units
produced. Other assets, such as buildings, can be repaired and upgraded
for long periods of time.
Perishability. Some assets have an extremely short life span. This
condition is most applicable to inventory, rather than fixed assets.

Usage rights. A fixed asset may actually be a right to use something (such
as software or a database) for a certain period of time. If so, its life span
terminates when the usage rights expire, so depreciation must be
completed by the end of the usage period.

Natural resource usage. If an asset is natural resources, such as an oil

reservoir, the depletion of the resource causes depreciation (in this case, it
is called depletion, rather than depreciation). The pace of depletion may

change if a company subsequently alters its estimate of reserves

remaining.

Inefficiency/obsolescence. Some equipment will be rendered obsolete by

more efficient equipment, which reduces the usability of the original
equipment.

16. What are the methods of calculating Depreciation?

Refer the notebook
17. Why will a company choose SLM method for calculation of Depreciation in Books?
The straight-line method depreciates an asset on the assumption that the asset will lose the
same amount of value for the duration of its service life. The straight-line method requires
you to subtract the assets salvage value from the cost of the asset. The difference is then
divided by the useful life of the asset and the total is recorded as depreciation expense. As an
example, a company buys a new machine for $165,000 in 2011. The salvage value is $15,000
and the machines useful life is five years. The company should record depreciation of
$30,000 every year for the next five years.
The straight-line method over the modified accelerated cost recovery system recovery period
depreciates assets at a slower rate than the double declining method. Using this method
allows businesses to depreciate assets by the number of years in the recovery period.
19. What is MATERIAL for accountancy?
24. Define:
1.

Outstanding Expenses

2.

Prepaid Expenses

3.

Accrued Income

4.

Income Received in Advance

26. What do u mean by Accounting Standard?

Notebook (above 2)
27. Explain, Profit is an Opinion, Cash is a reality.?
The income statement reports profits which have been accrued or generated based on the
revenues and expenses in a particular financial period. However, a profit of $X does not mean
that a company has added $X to its bank balance. Then what exactly is the profit number and
what does it indicate? The profit number simply indicates that if a company realises its entire
revenue for a period and subtracts its expenses from this revenue $X is the money it will
make. However, in reality not all sales happen on a cash basis and therefore while the books

might report a significant profit the actual cash generated from operations is significantly
different from the reported profits.

Cash flow change, on the other hand, reflects the actual cash inflow and outflow which has
happened over a financial period (typically a quarter or a year). It indicates the amount of
cash increase or decrease which has happened over the financial period. Therefore a cash
inflow of $100 essentially means that the company has added $100 to its bank balance. We
now know the major difference between income statement and cash flow statement and will
now look at the significance of a cash flow statement to an investor.
Profit is not a true determinat of the value of a company,when a firm records profit and report
proftit it does so in its book but the solvency of the firm is what keep the firm going and
prevents it from bankrupcy.therefore a firm management of cash is very vital to the growth
and survival of the firm
28. Why is Opening Stock added to purchases and treated as a Expense?
Refer notebook
29. How do u calculate Capital Employed?
There is a very easy and simple formula to calculate capital employed regarding a particular business. In order
to calculate capital employed we require total assets and the current liabilities of a firm. The formula of capital
employed is as under:Capital Employed = Total Assets Current Liabilities
In other words the capital employed for a firm is equal to the non-current debt and the owners equity that is
invested in his business. The non-current debt and the equity are the sources of long term financing for the
business. Other sources of the capital employed are the short term debts that are also a good source of financing
but they remain visible at the end of the balance sheet of that particular year. The formula shows that capital
employed involves the total assets of a business. The total assets of the business consist of owners equity and
capital derived from shares of the company. Total assets of a company also include the fixed assets and the
current assets of the company. Another factor included in the total assets of the firm is the gross borrowings of
the firm.
Another formula to calculate capital employed is based on the figures of equity and loans. This formula is
described as under:Capital Employed = Equity + Loans
Here the loans are the considered to be the non-interest bearing liabilities of the firm.
If you want to break down the assets and liabilities to calculate the capital employed by a firm you can use the
formula as mentioned below:Capital Employed = Share Holder Funds + Creditors Long Term Liabilities + Provisions of
Liabilities and charges
In more clear terms see the formula mentioned below:Capital Employed = equity share capital +pre share capital +debenture capital + long term loans

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Capital Employed as shown in the denominator is the sum of shareholders' equity and debt
liabilities; it can be simplified as (Total Assets Current Liabilities).
32. Difference between Capital and Revenue Expense?

33. Can Capital Expense be treated as Revenue Expense for Calculation of Tax Liability?
In the folder (all 2 answers)
34. What do u mean by Capitalization of Expense?
Companies expense costs related to the business which offsets revenue, but there are
instances where companies will record costs as an asset on the balance sheet. This is what
you call capitalizing or capitalizing of expenses. Note that this is completely different to
capitalization/capital structure, which is how a firm finances its overall operations and growth
by using different sources of funds.
To start, you need to group assets into two categories.
1. assets that are expected to produce a future benefit such as inventory,
equipment and property
2. assets that are expected to be exchanged for another asset such as cash,
receivables and investments

As an example for no.1, assume that a company has spent $10,000 for a two year insurance
policy. At the time of the purchase, the entire amount represents a future benefit and would
therefore be an asset. After one year passes the insurance policy would only have one year of
insurance asset ($5,000) on the balance sheet with the other half ($5,000) now being
classified as an expense.
35. Define Contingent Liability?
In the notebook.
41. What is excise duty and when is it paid?
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.
The term "excisable goods" means the goods which are specified in the First Schedule and
the Second Schedule to the Central Excise Tariff Act, 1985 , as being subject to a duty of
excise and includes salt.
The term "manufacture" includes any process,
1. Incidental or ancillary to the completion of a manufactured product and
2. Which is specified in relation to any goods in the Section or Chapter Notes of the First
Schedule to theCentral Excise Tariff Act, 1985 as amounting to manufacture or
3. Which, in relation to the goods specified in the Third Schedule, involves packing or
repacking of such goods in a unit container or labelling or re-labelling of containers

including the declaration or alteration of retail sale price on it or adoption of any other
treatment on the goods to render the product marketable to the consumer.

44. Difference between Book Profits and Taxable Profits?

Books Profit/Accounting Profit

Taxable Profit

calculated using GAAP (Generally Accepted

Accounting Principles) reporting, includes all
related costs of doing business
straight-line depreciation to report accounting
profit
companies report accrued revenues and
expenses in financial reporting to derive
accounting profit

companies report cash revenues and expenses

in tax reporting to obtain taxable income

Companies report revenues when earned in

the reporting period even though customers
have not paid for the revenue-related sales.
Consequently, such revenue recognition
increases the accounting profit.

Companies dont report any revenues unless

they have collected cash from customers for
the sales. As a result, the taxable income in
the same period is potentially lower than the
accounting profit.

Accounting profit may also exceed taxable

income in certain reporting periods due to
prepaid expenses.

companies report the full amount of cash

expenditures as the expense in the current
period, lowering taxable income.

Deferred revenue expense

Implementation of ERP treated as deferred
revenue expense

Treated entirely as revenue expense

Accounting profit may exceed taxable income in certain reporting periods due to accrued
revenues. Using the accrual method of financial accounting, companies report revenues when
earned in the reporting period even though customers have not paid for the revenue-related
sales. Consequently, such revenue recognition increases the accounting profit. On the other
hand, using the cash method of tax accounting, companies dont report any revenues unless
they have collected cash from customers for the sales. As a result, the taxable income in the
same period is potentially lower than the accounting profit.
Accounting profit may also exceed taxable income in certain reporting periods due to prepaid
expenses. Prepaid expenses are cash expenditures for future expenses but paid in the current
reporting period. Using the accrual method of financial accounting, companies report

expenses when incurred. As a result, only a portion of the prepaid expenses is reported as the
expense incurred in the current period. Thus, the less expense reported in financial reporting,
the higher the accounting profit. Using the cash method of tax accounting, companies report
the full amount of cash expenditures as the expense in the current period, lowering taxable
income.
Accounting profit may be lower than taxable income in certain reporting periods due to
unearned revenues. Unearned revenues are cash receipts from customers for receiving goods
or services over time through multiple periods. Using the accrual method of financial
accounting, companies report only a portion of the total unearned revenues as the revenue
earned in the current period, potentially having a lower accounting profit. Using the cash
method of tax accounting, companies report the full amount of cash receipts as the revenue in
the current period, increasing taxable income.
Accounting profit may also be lower than taxable income in certain reporting periods due to
accrued expenses. Using the accrual method of financial accounting, companies accrue and
report expenses when incurred rather than when paid. As a result, the more accrued expenses,
the lower the accounting profit. Using the cash method of tax accounting, companies dont
report any expenses for tax filing in a period unless cash has been paid for related expense
items. Thus, with less expenses reported, the taxable income is potentially higher than the
accounting profit in the same period.
GAAP principle, used in book accounting, ensures that the income generated by an output
and the expense incurred for that output are recognized in the same period.
Depreciation is technically defined as "a method of allocating the cost of a tangible asset over
its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.