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UNIT X : STUDY OF FINANCIAL STATEMENTS

1. The long term goal of the business entity is to achieve maximizing the share holders
value of the firm.
2. According to classical theory maximization of wealth of share holder is foremost
objective of Financial management.
3. Maximization of value of company is the result of good investment decisions, prudent
financing decisions and well thought out financial planning and control.
4.Maximization of value of company is known as maximization of owners wealth.
5. Deciding the capital structure and dividend are financing decisions.
7. The Best available mix of financing and to fund companys activities is dividend
decision. Dividend decision is a compromise decision.
8. Capital budgeting is derived from Net Present Value of inward flows.
9. Investment decisions also include merger or amalgamation decisions.
10. The retained profits and reserves are available for investment.
12. Current Asset Management is maintaining balance between CA and CL.
13. The goal of Financial Management is to maximize the value of the company.
14. Maximizing the companys share price is called value maximization.
15. Consideration of social responsibility is another important goal of any Co.
16. Profit maximization is a short term concept where as wealth maximization is a long
term view point.
17. It is Managements task to find that consideration of profit & risk which maximizes
share holders wealth.
18. Management Finance or Managerial Finance is concerned mostly with funds
management or treasury function.
19. Management Finance & Management Accounting are complementary functions.
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20. To achieve the maximization of owners wealth a Finance Manager has to take careful
decisions in acquiring and allocating resources.
21. Earnings after Tax divided by number of Equity Shares is called EPS.
22. Process of providing roadmaps for checking a firms long term and sort term
objectives through various plans is Financial Planning.
UNIT XI : CAPITAL EXPENDITURE DECISIONS & PROFITABILITY STUDY

1. Current Capital Expenditure provide frame work for future activities.

2. The Market for used capital equipment is ill-organized.
3. Once an equipment is acquired reversal of decision may mean scrapping the capital
equipment in some types of capital goods.
4. Capital expenditure decisions also pose difficulties as such measurement problems,
uncertainty and temporal spread.
5. Identifying and measuring the costs and benefits of a capital expenditure proposal
tends to be difficult, this is called Measurement Problem.
6. The Costs & benefits of capital expenditure will have its effect in future & predicting
exactly what will happen in future is impossible.
7. Costs & benefits associated with a capital expenditure are spread out over a long
period of time, it creates some problems in estimating discount rates and establishing
equivalence.
8. The planning provides framework.
9. If the project is prima-facie worth while a detailed analysis of the marketing, technical,
financial, economic and ecological aspects are undertaken.
10. The stream of costs and benefits associated with the project can be defined based on
analysis.
11. The criteria to judge the worthwhile-ness of a project is divided into two parts Nondiscounting criteria and Discounting criteria.
12. Key discounting area are the NPV method, IRR method and benefit cost ratio
13. If Payback period is less than target period it can be accepted.
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14. If accounting rate of return is greater than target rate of return then accept.
15. If NPV is greater than Zero then accept the project.
16. If IRR is greater than cost of capital then accept the project.
17. If benefit cost ratio is greater than one then accept the project.
18. Sensitivity analysis, scenario analysis, Montecarlo simulation, decision tree analysis,
portfolio theory, Capital Asset pricing etc. are tools & techniques for risk analysis.
19. Implementation phase involves setting up of manufacturing facilities.
20. Delays in implementation can lead to substantial cost over run.
21. For project planning & control 2 basis methods are available. They are PERT
(Programme Evaluation Review Techniques) & CPM (Critical Path Method)
22. Performance review should be done periodically to compare actual performance with
projected performance.

23. There are three levels of decision making.

Administrative decisions and Strategic decisions.

They are Operating decisions,

24. Operative decisions are routine and short term decisions with minor responsible
commitment and taken at lower level.
25. Administrative decisions are semi structured for a medium term with moderate
resources commitment and taken at middle level.
26. Strategic decisions are unstructured and long term with major resource commitment
and taken at top level.
27. All the three levels decision making can be readily applied to capital expenditure
budgeting.
28. Marketing analysis, technical analysis, Financial analysis, Economic analysis and
Ecological analysis are important facts of project analysis.
29. Economic analysis also referred to as Social Cost Benefit Analysis.
30. Key issues considered in Market analysis are potential markets & market shares.
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31. Key issues considered in Technical analysis are Technical viability and sensible
choice.
32. Key issues considered in Financial analysis are Risk and Return.
33. Key issues considered in Economic analysis are benefits and costs in shadow price
and other impacts.
34. Key issues considered in Ecological analysis are environmental advantage and
restoration measures.
35. The Payback method ignores the time value of money and cash flow beyond the
payback period.
UNIT XII : SOURCES OF FINANCE AND COST OF CAPITAL LONG TERM
AND SHORT TERM
1. Financial management is also known as Corporate Finance or Management Finance.
2. Financial Management is primarily concerned with acquiring and allocating resources
and anticipating the financial needs of accompany.
3. Share capital and retained profits are permanent source of company finance.
4. Debentures, Seed Capital and Redeemable preferential shares are long term sources of
finance.
5. WCTL, Public Fixed Deposits, Deferred Credits are Medium term source of finance.
6. CC, OD, CP, Bill Discounting and lease are short term sources of finance.

7. The Long Term finance remains with company for 5 20 years.

8. Short term finance is repayable with in one year.
9. Medium term finance is used for vehicles, plant and fittings.
10. Ordinary share holders exercise their ultimate control over the firm through their
voting rights.
11. Marketability of the share will be major factor in deciding their face value.
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12. The subsequent issue of ordinary shares will normally priced by reference to market
prices.
13. The decision of nominal value ( Face Value ) is not irrevocable.
subsequently split or consolidate nominal value of shares.

Firms may

14. Many firms give voting rights to preferential share holders only where their dividends
are in arrears.
15. Returns in the form of Capital Appreciation and dividends which Equity share holders
expect are relatively high and called servicing cost of equity capital.
16. Retaining profits or a part of them is a way of effectively raising the finance.
17. Retaining one portion of profits will have some effect on the sum of the dividends paid
and the ex-dividend price of the share.
18.Retaining profits does not dilute control (voting strength of any share holder.)
19. Preferential shares form the risk bearing ownership of the firm.
20. Most loan stocks are secured either on specified assets of the borrowing firm or on
the general assets.
21. Loan stocks attract all types of investors who seek relatively low risk returns.
22. Loan stocks can be transferred from person to person but Term Loans are not
transferable.
23. Term Loans are not traded in Capital Market.
24. Term Loans tend to be cheap in comparison with
25. Maturity of loan is u years whereas maturity of bonds from 7 30 years.
26. Maturity of Medium term bonds is 7 10 years and maturity of Long Term bonds is 10
30 years.
27. Term Loans may be secured by or Unsecured but bonds are always secured and
debentures are Unsecured.
28. Interest rate is fixed incase of bonds .

29. Seed Capital Scheme is of two types Seed Capital Scheme &Special Seed Capital
Scheme.
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30. In certain cases State Government also provide funds for Seed Capital.
31. The period of Medium Term Loans is 3 7 years whereas Term Loans may vary from 7
20 years.
32. The Bills Rediscounting Scheme was introduced in APR 1965 by IDBI under Sec
19(b) of its structure.
33. The objective of Bills Rediscounting Scheme is two fold.
34. Sec 58A of Companies Act regulates the Fixed Deposits from public.
35. Deposits from public can be accepted for a period of --- months to 36 months.
36. Maximum deposits from public should be restricted to 25% of companys Net Worth as
per latest audited Balance Sheet. And if share holders acceptance is available further
10% can be raised.
37. Maximum interest payable on Fixed Deposits from public is 14%.
38. As per Tandon Committee the Bank can sanction a WCTL ,Where borrower fails to
bring in the borrowers margin. And it is payable within 5 years.
39. The concept of WCTL has been introduced by Chore Committee.
40. Short term finance should be invested in short term & self liquidating assets.
41. Normal uses of short term finance include buying stocks of raw materials and
financing production cycle.
42. Incase of Bank Loans company will have to provide security for the loan in the form of
fixed and floating charges on assets.
43 Some times the banks want personal guarantee from the owners or directors in the
form of pledge or mortgage of their personal properties.
44. Banks may impose restrictions such as limits on other borrowings and regular
inquiries into the companys financial position and working etc.
45. Over Drafts are sanctioned by looking at the financial status of the borrower.
46. Generally hypothecation of CA or pledge of stocks is not involved in OD.
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47. Generally bill discounting extends credit for a period between 30 90 days.
48. Commercial Papers are short term Usance promissory notes with fixed maturity
period.
49. Bank loans, Trade credit, CC & OD, Bill Discounting, Commercial Paper and Lease are
various forms of short term finance.

50. The tax system does not distinguish between ordinary dividends and preferential
dividends.
UNIT XIII : STUDY OF FINANCIAL STATEMENT
1. Trade creditors & short term lenders are interested in Short-term liquidity.
2. Financial statements are prepared according to generally accepted principles.
3. Financial statements reflect past and current effects of decisions made by the
Management.
4. Changes in purchasing power of money are not considered, this is known as Stable
monetary unit concept.
5. Anticipate no profits but provide for all possible losses is Concept of Conservatism.
6. Current Assets are valued at cost or market value which ever is lower, this is called
Concept of Conservatism.
7. When goods are shipped or delivered to the customer, then only it is deemed to be
realized.
8. An increase in owners equity arising from the business operations is called revenue.
9. A decrease in owners equity arising out of the business operations is called expense.
10. Income is measured by changes in owners equity arising from the operations is
known as accrual concept.
11. If revenue exceeds expense it is called income but if expense exceeds revenue it is
called loss,
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12. Showing the Fixed Assets at cost less depreciation is called Cost Concept.
13. Revenue Reserve represent accumulated retained earnings from the profits of normal
business operations.
14. General Reserve, Investment Allowance Reserve, Capital Redemption Reserve,
Dividend Equalization Reserve etc are Revenue Reserves.
15. Capital Reserves are not related to normal business operations.
16. Premium on issue of shares and revaluation Reserves are Capital Reserves.
17. The balance in P&L Account which has not been appropriated to any particular
reserve is called Surplus.
18. Debenture, Loans from Financial Institutions and loans from Commercial banks are
Secured Loans.

19. Fixed deposits from public, Loans & advances from promoters, inter corporate
borrowings are unsecured loans.
20. Loans payable within one year from the date of Balance Sheet are CL.
21. The assets acquired for use over relatively long period for carrying on the operations
of firm and they are ordinarily not meant for sale are Fixed Assets.
22. Current Assets are the assets which gets converted into cash during the operating
cycle of the firm.
23. Loans & Advances on the assets side of BS represent loans to employees, advances
to suppliers and deposits made with Government and other agencies.
24. The Companys Act prescribed standard format for Balance Sheet.
25. The Companies Act has specified that the profit and loss account must show specific
information as required by Schedule IV.
26. Sales are the sum of the invoice price of goods sold and services rendered during the
period.
27. Gross profit is the difference between net sales and cost of goods sold.
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28.
Operating expenses consists of general administrative expenses selling and
distribution expenses and depreciation.
29. Operating profit is the difference between gross profit and operating expenses.
30. Non-operating surplus represents gains arising from sources other than normal
operations of the business.
31. Major components of non-operating income are income from investments and gains
from disposal assets.
32. Interest is the expenses incurred for borrowed funds.
33. The motive for creative accounting is to artificially boost the reported income.
34. Investments fall under Security Analysis.
35. Deciding employment of funds in Fixed Assets falls under Capital Budgeting.
36. Net Sales comes under Revenue Risk.
37. The sources and uses statement is also called the statement of changes in financial
position.
38. Funds flow statement provides insights into the movement of funds & helps in
understanding changes in the structure of assets, Liabilities & Owners equity.
39. The sources and uses of funds statement on WC basis presents 1) The sources of WC
2) Uses of WC and 3) The net changes in WC.

40. Analysis of financial statements focuses on evaluation of past operations.

41. Past performance is a good indicator of future performance.
43. Analysis of CA position indicates where the business stands to day.
44. Ratios can give early signals of corporate failure.
45. Horizontal analysis, Vertical analysis and Ratio analysis are different techniques of
analysis of financial statements.
46. Horizontal analysis involves computation of amount of changes and percentage
changes from the previous to current year item wise.
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47. Vertical analysis shows the relationship of the different parts to the total in a single
statement .
48. In Trend analysis percentages are calculated for several successive years instead of
between two years.
49. Trend analysis uses an index number over a period of time.
50. Ratio analysis expresses the relationship between two numbers.
51. The primary purpose of ratios is to point out areas for future investigations.
51. Common size financial statements contain the percentage of key figure alone without
the corresponding amount figures.
52. The use of common size statement can make comparisons of business enterprises of
different sizes much more meaningful since the numbers are brought to common base.
53. Common size statements can be prepared in vertical& horizontal analysis formats.

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UNIT X : STUDY OF FINANCIAL STATEMENTS SHORT NOTES:
1. The scope of Financial Management covers 1) Designing and implementing business
plans 2) Ensuring effective funds utilization 3) Serving as a necessary tool and technique
for resource allocation 4) Attending to investment decision.
4. the Companys Act has not prescribed any form for P&L but requires that the
information provided should be adequate to reflect true and fair picture of the operations
of the firm for the accounting period.
5. As per requirements of Company Law share capital can not be reduced even loss
occurs, therefore losses are shown in asset side to keep share capital in tact
6. The Finance topics that relate to BS are 1) Capital Structure 2) Cost of Capital 3) WC
finance policy 4) Capital budgeting 5) Security analysis 6) Cash Management 7) Receivable
Management 8) Inventory policy.
7. The Finance topics that relate to P&L are 1) Revenue risk of the firm 2) Gross profit
margin 3) Depreciation policy 4) Operating leverage 5) Business Risk of the firm 6)
Financial Risk 7) Tax planning 8) Return on equity 9) Dividend.
8. Generally the analysis made while making financial statement analysis are
1) Liquidity or short term solvency analysis 2) Profitability analysis 3) Capital structure or
Gearing analysis 4) Market strength or investor analysis 5) Growth and stability analysis.
9. The accounting income diverges from economic income due to Use of accrual
principle, omission of changes in value of depreciation, inflation and creative accounting.
10.. Accounting values often deviate from economic values due to use of historical cost
principle, exclusion of tangible assets, under statement or omission of certain liabilities.

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UNIT XI : CAPITAL EXPENDITURE DECISIONS & PROFITABILITY STUDY
SHORT NOTES:
1. The Capital Expenditure decisions are important for three interrelated reasons. They
are 1) Long term effects 2) Irreversibility 3) Substantial outlay.
2. Capital Budgeting may be divided into five broad phases 1) Planning 2) Analysis 3)
Selection 4) Implementation and 5) Review.

3. The Planning phase is concerned with the articulation of its broad investment
strategies and the generation and preliminary screening of projects.
4. The focus of analysis of capital budget expenditure is gathering, preparing and
summarizing relevant information about various project proposals.
5. The implementation stage consists of several stages 1) Project & Engineering designs
2) Negotiations and contracting 3) Constructions 4) Training and 5) Plant commissioning.
6. For expeditious implementation at a reasonable cost, adequate formulation of projects
use of the principle of responsibility accounting and use of network techniques are
helpful.
7. Capital Budget is the schedule of investment project selected to be undertaken over
some interval of time.
8. IRR is a selection method using the compounding rate of return on the cash flow of a
project.
9. Payback method is a selection method in which a firm sets a maximum Payback period
during which cash flow must be sufficient to recover the initial outlay.
UNIT XII : SOURCES OF FINANCE AND COST OF CAPITAL LONG TERM
AND SHORT TERM SHORT NOTES:
1. Factors to be considered on equity Financing are 1) Issue cost 2) Servicing Costs 3)
Obligation to pay dividends 4) Obligation to redeem investment 5) Tax deductibility of
dividends 6) Effect on control & freedom of action.
II. Advantages of Equity Capital are 1) No fixed annual payments 2) Share holders get
much of their return from increase in the share price 3) This is a permanent capital and not
redeemable 4) It reduces companys financial gearing 5) Ordinary share are more popular
because of prospects of high returns.
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III. Disadvantages of Equity Capital are 1) Existing share holders might be reluctant for a
public issue 2) EPS may get reduced 3) Cost involved in public issue 4) Proportionate
share holding of founders / directors may get reduced
5) Dividends paid are not tax deductible.
IV. Factors for the firm on preference share issue are 1) Issue costs 2) Servicing costs 3)
Obligation to pay dividends 4)Obligation to redeem 5) No Tax deductibility on dividends
paid 6) Effect on control and freedom.
V. Advantages of issuing preferential shares are 1) Dividends can be foregone if funds are
not available 2) Cost is less in comparison with Equity shares 3) Preference Shares can be
issued when debentures may not be raised because of a lack of asset security 4) It can act
as a buffer in the companys gearing.
VI. Disadvantages of Preferential Shares are 1) Cost is more in comparison with loan
capital generation 2) Dividends paid are not tax deductible.
VII. Preferential Shares can be made more attractive by issue of 1) Participative share 2)
Cumulative share 3) Redeemable shares 4) Convertible shares 5) By improved dividend
yields and 6) By offering discounts and fringe benefits to the preference share holders.

VIII. Factors for the firm to consider Loan stock finance are 1) Issue costs are low
( Estimated at about 2% of the cash raised ) 2) Servicing costs 3) Obligation to pay
interest 4) Obligation to redeem 5) Interest paid on loan stock is fully tax deductible 6)
Effect on control and freedom of action.
IX. SEED CAPITAL: Providing assistance to Technically qualified people for promoters
contribution. IDBI has launched this scheme. Special Seed Capital Scheme provides for
smaller projects where assistance is restricted to 20% of project cost or Rs.2.00 Lakhs
which ever is less. Under Seed Capital Assistance Scheme, IDBI may directly provide
financial assistance.
X. Medium Term sources can be classified as 1) MTL 2) Deferred Credit 3) Public Fixed
Deposits and 4) WCTL.
XI. Objectives of Rediscounting of Bills are 1) Manufacturers of Indigenous machinery i.e.
capital equipment can push up their sales by offering differed payment and get payment
by discounting the instruments. 2) The buyer or user of the machinery is enabled to utilize
the machinery and repay its cost over a number of years.

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XII. The Financial manager must also analyze the sources of finance in order to take a
decision that funds are invested wisely or economically within the business or return to
the owners.
UNIT XIII : STUDY OF FINANCIAL STATEMENT SHORT NOTES:
1. Basic concepts of accountancy are 1) Entity concept 2) Money measurement concept 3)
Stable monetary unit concept 4) Cost concept 5) Going concern concept 6) Conservation
concept 7) Dual aspect concept 8) Accounting period concept 9) Accrual concept 10)
Realization concept 11) Matching concept.
2. As per Companys Act liabilities are classified as 1) Share Capital 2) Reserves &
Surpluses 3) Secured Loans 4) Unsecured Loans 5) Current Liabilities & Provisions.
3. As per Companys Act Assets are classified as 1) Fixed Assets 2 Investments 3) Current
Assets, Loans & Advances 4) Miscellaneous Expenditures & Losses.