Cash Flow Problem and Solution

>> May 31, 2011

Our company has to purchase 22.2 Million Rupees Vehicles for project of five year. Please tell, how much annual cash flow and how it will calculate?

Awais from Pakistan

Awais ! It is very simple. You know that vehicles will be used for your business. Before buying vehicles, see your transport cost. These transport cost, you can find from your previous year financial statement. Add outstanding transport cost in it. Deduct annual petrol and repair cost from your balance transport cost. No need to deduct depreciation of your vehicles because there is no any cash outflow in depreciation. Now this will be the net annual cash inflow which your vehicles will provide to you. Your company need not to pay transport charge.

If you want to calculate present value of annual cash flow. Estimate your current return on investment. Suppose, if your Rs. 22.2 million in your govt. bank what will you receive interest. But cut off rate will little high from this bank interest rate. Now, calculate one rupee's present value of this rate or see present value from table which you can buy from market. Now multiply your original cash inflow with factor value of cut off rate. After this, you can calculate the annual cash flow's present value. You can use this figure for calculating the net present value of your vehicle's investment. Good luck for good deal !
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We Acquired New Inverter and Battery

Power cut in summer is normal thing in India. That is the reason, we have acquired new inverter and battery for our this organization. It is product of Luminous Power Technologies Pvt. Ltd. and its cost is Rs.13600 ( $ 302). There are lots of brand in the market relating to inverter. But we saw many factors before choosing this company's product. This product is an long term investment for us. Even, we did not use NPV on it but we compare its life with our cost.

Suppose, its life is 4 years. After 4 years battery will be sold at Rs. 2500. Net cost will be Rs. 11100. Per year cost will be Rs. 2775. Per month cost is Rs. 231.25. Per day cost is Rs. 7.70. But this, I can operate my one computer, one fan and one tube light for 8 hours. That is good. We also take care of   warranty time. Company is providing two years replacement warranty. Exide battery has goodwill but there is no warranty of it. Moreover, its manual is showing other good qualities like charging in short period in case regular high cut and  higher energy efficiency, super fast charging, charging even on low voltage inputs, self diagnostic features to keep a check on the various operations, and more. Luminous inverters offer a complete package of a quality product. We are also evaluating of return on our investment in new inverter and battery with following points.

   
1. Need of  Electricity Power for Our Work 

In last 4 years, I saw many days when my lights and computer were off due to power cut. You know, my work is of creation. I try to make different design of content with my knowledge. Sometime, my all creation went to vanish due to not saving my files before power cut. I think our acquired new inverter and battery will solve this problem. This will be the good return on our investment.

2. Rest After Day Work

I am also human being of 21st century. As a human being, it is my right to take rest after day work. But at the time of power cut, there is no air with fan. It means that it disturb my night. I can see return of this investment in the form of my night rest.

3. To Create Extra Reserve of Electricity

As accounting teacher, I know reserves and its importance.This inverter and battery will be helpful to reserve of electricity.

4. To Take the Benefits of Computer UPS from Inverter

a) With operating regulated ups mode, we can use our inverter as computer UPS. That alone is well worth the investment of a new inverter and battery.

5. Sharing the Bathroom and Kitchen Lights with Our Inverter and Battery


I also give one point in my bathroom and one point in kitchen. With this, I can take its extra-benefit.

6. Effective Use for Reducing Noise pollution

I buy generator. It creates both noise and air pollution. But with buying inverter and battery, I am reducing noise pollution. Company is saying, it is zero polluted product. But, I am not sure because battery has lead acid which is toxic and hazardous substances that can damage the environment if we empty the battery container of its electrolyte. In future, if there is any alternative which is zero polluted, I will acquire also. If my pocket will allow me for this type of investment. I have contact of one person who provides solar energy whose cost of project is Rs. 30,000 ($666)  life time but inverter is also necessary for this.   

Related : We Acquired New Computer
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True Education (Part 2 ) - Solution of the Problem of My Follower

Dear sir

First sorry for asking personal question. you have any reason for still not married. Because you are one of  my hero.  I am always trying to imitate and follow your life. Please sir If you don't mind.

by Harikrishnan

Dear Harikrishnan,


          Not sorry, you are welcome for asking any question. Yes, it is true that still I did not marry. There is not any reason behind this. Actually, I think, this type of holy partnership is made by God. We only follow the order of God. When, where and how will  God give order? I do not know. But, I know that God will give order to get married for removing filth of my mind. These filth of my mind may be of fantasy, lust,  emotional attachment or other.  When God will give me order to get married for cleaning my mind's filth, I will surely accept. God wants to make me pure. God has millions of tricks to erase the filth of the dirty mind of  any human being. Marriage is one of these.   

My life is very simple and I enjoy its every movement in every day. My married and unmarried life is not important but my work and my duty may effect on other. I am very serious on my duty not on my marriage. Birth, eating,  marriage and death are done by  God's order. There is nothing human effort in it. If anybody thinks that he gave birth to other. He gave food to other. He has  succeeded to get married. He has power to kill other. I think, he is fool. He is very  far from true education.

True education provides us knowledge that God has created pro-system for birth, marriage and death of any body.

  I think, God is doing best. What is best for me. He will decide. I just have to follow God.

Related : True Education (Part 1)
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Balance Sheet Analysis

>> May 30, 2011

Balance Sheet of RBI on 30th June 2010
Balance sheet analysis is good tool to simplify balance sheet. There are lots of parties who are interested in company. They trust on the financial data. Balance sheets provide lots of financial data to all such parties. But, there are lots of facts in the balance sheet which can not be understood by some of interested parties. So, they take the help of their CA or professional accounting association for analysis the balance sheet.

Today, you will learn how to analyze the balance sheet. For this, we are taking the balance sheet of Reserve Bank of India on 30th June 2010 as example. You know that RBI is the central bank of India. It controls banking policy of India.  It also issues the currency of India. Due to double duty, its balance sheet is made into two parts. First balance sheet is of its Issue department and other balance sheet of its banking department.

Analysis of RBI's Balance Sheet 

Right side, I have showed the balance sheet of RBI on 30th June 2010. Balance sheet shows assets and liabilities on any specific day. Next day, it may be possible that the figures of balance sheet may be different.

1st : Point of Analysis of Balance Sheet : Assets 


On 30th June 2010, total assets of RBI ( Issue department) are Rs. 842409791 thousand. But we are interested to know what is in it? I can explain it in following presentation. In this presentation, I show that total assets' 94% in the form of gold coin right and I have not mentioned separately because all other assets like rupee coin, rupee securities because all other assets are just 6% of total asset. One of interesting thing in the balance sheet of banking department that our total assets' 47% is in the form of balance held abroad. If we compare reserves bank of India's total asset with Federal Reserve bank of USA. In FED, we will find that US treasury rights are the big part of total assets.



2nd : Point of Analysis of Balance Sheet : Liabilities 


For analysis of balance sheet, we should also learn about the liabilities of any organization. If we talk about RBI's balance sheet. RBI has printed and issued Rs. 8420409791 thousand notes. This is also total liability of RBI's issue department. This notes are used as currency, so it is 100% of total liabilities of RBI's issue department.



3rd : Point of Analysis of Balance Sheet : Equity Capital 


Understanding of Equity capital of any organization is also necessary for dealing that organization. When any organization starts it invested first of all equity capital in different projects. So, equity capital is the main source of fund of company. But when company liquidates, at that time we sell our assets and pays to our liabilities and equity capital. It means at the end of company, our assets become our source of fund.

In RBI's balance sheet, we see just Rs. 5,00,000 thousand paid up capital of its Banking department. It is calculated by deducting all other liabilities from total asset of RBI. RBI has taken loan from banks and it has also some big proportion of Government liabilities. All govt. expenditures are fulfilled from RBI fund. RBI has also reserve fund.  Every commercial bank has to keep certain minimum cash reserves with RBI.So, it is the part of liability of RBI and it is deducted for calculating the paid up capital of RBI.
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Prof. Vinod Kumar - Life in a Day

Prof. Vinod Kumar
It may be FAQ for you, "How do I spend my life in a day?" On this FAQ, my answer is very clear. Both my life and my way of spending life are simple. I know God has given very less time to enjoy. So, I enjoy every second of my life in a day. Every day is a challenge for me. I accept this. I want to improve myself everyday. I also follow some great Indian Saint's life style for spending my day. Following may be common in any day of my life.

1st : Morning Time - Pray Time of God, Yog and Exercise


When, I get up early in the morning, I pray to god by thanking him hundreds of thousand times because he gave me 36 types taste, 5 knowledge organs, 5 act organs, one mind and one brain. By thanking him, I feel happy. God is not taking from us anything but he is giving everything. So, we all should be thankful to God. I do also yog and exercise for making my body and mind healthy.

2nd : Breakfast Time - One Glass of Cow Milk, Banana and Chane 


I  am  totally vegetarian. Breakfast time is special for me. I drink one glass of cow milk. Eat some banana and Chane (Chickpeas). I love to live Vegetarianism because with this, we can protect animals. If you are my student, you should also follow me. Leave non-vegetarianism and start to use vegetarian food.
 



3nd : Working Time - Online Lecture, Reading, Watching, Writing and Researching 


Now, it is the time of online lecture. As a YouTube Guru, I have lots of online students. I give online lecture through my digital camera and upload it to my svtuition channel in YouTube. Just giving 5 minute online lecture, I spend one hour. Now more than 210 my educational videos available on YouTube.

This website is also educational content based. For writing educational content,  I have to study lots of books, google reader's updates, watching youtube edu. I also have to spend my time to understand the new accounting problems for providing good solution.


4rd : Fun and Enjoy Time - On Bicycle and Byke and by Doing Social Work

After completing my work, I start my life's fourth part. In this part, I laugh, enjoy and create fun for me. I travel on cycle and byke. I go for plantation and teaching to the children of slums. These activities are the part of my social activities.

.
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Provision for Depreciation (Simplify)

>> May 28, 2011

Provision for depreciation account is the liability of business. We accumulate all the depreciation in a reserve and its name is provision for depreciation. By making  provision for depreciation account, we need not to credit depreciation in fixed asset's account. At the end of each accounting year, we show fixed asset at their original purchase value in the balance sheet.

When we sell the asset, we transfer its accumulated provision for depreciation in that asset's credit side from provision for depreciation account. After this, that asset will come on the current book value and then we compare it with the sale value of asset. If sale value of asset is more than current book value of asset after adjusting from provision for depreciation, it will be profit on sale of asset and profit and loss account will be the debit in that asset's account.

If we do not sell the asset, we have to transfer all year's depreciation to provision for depreciation account and provision for depreciation account will show in the liability side. When any asset crosses to its working life, its total provision will transfer to that asset's credit side. Original cost of asset will equal to the total amount of provision of depreciation which we accumulate in provision for depreciation account. Now, when we compare original cost of asset with the provision value, our asset will become zero. Because deduction of profit is just in books but there is no outflow cash, it means we have all provision for depreciation in cash form in our wallet. So, take all the amount from provision for depreciation account and buy new machine.


Provision for Depreciation Account's Proforma

 Amount in $  Amount in $
To balance C/d  XXXX By Depreciation Account (
End of First year )
XXXX
To balance C/d XXXX By Balance B/d
By
Depreciation Account (End of second year )
XXXX
To Asset Account ( 1/2
Machine Sold and total balance of PFD's 1/2 transfer to asset account )
To balance C/d (1/2 accumulated depreciation )
 XXXX
XXXX
By Balance b/d (Beginning
of the year)
By Depreciation (End of year)
XXXX
XXXX
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Which is Better Accounting or Economics

>> May 27, 2011

Prof. Vinod Kumar
One debate always goes on, "which is better accounting or economics?" Which field should students choose? A student can become accountant or chartered accountant after getting the degree of accounting or CA or CPA. A student can become economist after post graduation in economics. But students  may ask above question as , " How can they compare  Accounting and Economics Degree?

My answer on this debate is that both are important. Every company should have both accounting and economics (finance) department.

With accounting, we can know the amount of profit and amount of our assets and liabilities. Other side, with economics, we can know to use of our fund. How to use our fund or money? It tells use the way of use of fund. But how? Fund should be used with effective ways. So that our wants should satisfy. Suppose we have one want ( for the consumption of food), second want (for wearing clothes), third want ( for living in own home) and like this, we may have 1,00,000 wants. We have to satisfy all these wants with our limited money. Accounting shows use the amount of profit or loss,amount of our assets and our liabilities. There is big relationship between accounting and economics. I starts from accounting.

Suppose, your accounting statement shows your net profit $ 100000 and you have invested $ 10,00,000. Your accounting is showing that your return on investment is just 10%. Why is this 10%? Because you had used the money of investment in any project and only economics tells you in which project, you have to use your fund. If you know economics and learned the effective use of fund. At that time, you can achieved your profit $200,000 on the same investment of $10,00,000.That will be the 20% return on your same investment. So, it is very necessary to understand the rules and regulations of economics.

Every country can classify on the basis of its economy. It has its own GDP. After seeing the GDP of any country, we can estimate the progress of that country. So, we should have to learn the rules of economics. On the other side, if we do not find, how much have we obtained profit. Is it $ 1,00,000 or $ 2,00,000? How can we use this profit for increasing next year profit. It means without accounting, economics is also useless. So, accounting is also very necessary for every company. If we do not maintain accounts, we can not find the amount of our investment and our profit. We can show total investment of $ 10,00,000, if we have maintain our accounts which is showing that our total investment is $ 10,00,000 which we have invested in different projects. Only after this, we can take different decisions on the basis of economics rules.

Modern economics has now converted in finance. Now, I think, you need not to do comparison between accounting and economics for knowing which is better. You should have to study both accounting and economics.

If you want to get one degree out of accounting and economics. Your choice should not be based on the comparison but it is based on your interest. If you are interested to maintain the records of company, you can choose accounting degree and if you want to take your innovative decisions for using company's limited resources you can choose either economics or finance degree.

Related : Which is Better MBA Finance or MBA Marketing?

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Video Solution of Accounting Problems

>> May 25, 2011

Sorry for not providing solution for your accounting problems for many days due to shortage of time and my busy schedule. Today, I have made a video in which I have tried to provide the solution of all your written questions in my data base. Please watch it and following questions are discussed in it.

Q:- 1 What are the different in  trading and non trading a/c? and what the uses of single entry system and Double entry system? sir i request you to  please explain to me by example.

Ganesh Mule from India

Answer : Trading account is used in buying and selling business and not trading account is used in service sector where we make profit and loss account only.

Q:- 2. Can tally be used for business made for hire of inventory on days base where unit shall be rs/day/unit please guide how can be the entry made in for different godown renting the inventories to different  parties getting material on hire for different days 

S.G.  Patel from India

Answer : I think we can give godown for renting not inventory. Are you sure inventory is on renting. Please tell me first. If godown for renting, you can pass the voucher entry of receipt in tally.

Q:- 3. How would I be able to locate practically where is the amount of Reserves shown in balance sheet?

Kanchan from India

Answer : Reserves will go to the liability side in balance sheet.

Q:- 4. How does one account for provision for depreciation?

Brian from Zimbabwe

Answer : If we are interested not to deduct depreciation from asset every year, we transfer every year's depreciation of fixed asset to a account that account is called provision for depreciation account and when we will sell that particular fixed asset we will deduct all the total amount of provision for depreciation from that asset for calculating profit or loss on that asset.

Q:- 5. What is the relationship between required rate of return and coupon rate on the value of a bond.

Vaidesh from India

Answer : I think coupon rate on the value of a bond is the interest rate for bearer bond but rate of return is market rate. Not sure, soon, I will update exact.

Q:- 6. How to make entry in tally A/Cs for goods lost  by rain in trading A/c?

H.K.K.  from India

Answer : Just pass the voucher entry in journal voucher Dr. will lost by rain and credit either stock or purchase account.

Q:- 7. My Company is Labour Contractor we supply labour to other companies. we provide advance salary in cash so i would like to know which group should be given to Advance Salary? & after payment of monthly salary how advance should be deducted from salary account

Amit from India

Answer : No need to create any group, just pass the voucher of payment when you pay and receipt when you receive money from party. Ok

Q:- 8. Please help me by answering this, in Internet from where i can get videos related to company accounts, costing and management accounting. general law videos. Please some1 help me with answer thanks u

Prasad from India

Answer : Visit my svtuition channel on youtube and search law videos on youtube and choose the option playlist and you will surely find good videos.

Q:- 9. How to take confirmation of balance letter in Tally 9 without printing date on the letter.[In tally we are getting confirmation of account]

Mala from India

Answer : I could not understand, what you want to ask. Please explain clearly.

Q:- 10. Hello Sir, I saw this website through google search engine. This is very helpful to every those person who want to know to have about additional knowledge in account. My question is i face my interview on 24th May-2011 there they asked me question- do you know how to make financial report, budgeting,& company reconciliation whether it has its own branches or not And also how to make E-Return filing of TDS TCS ST EXCISE or VAT? Which documents are required for return filing if it make manually or online? And how can i face my Interview if I want job in MNC's ?

KRISHNA KANT from India

Answer: Thanks dear for your words. Do regular study of all these topics and one day, you will surely perfect in these topics. My best wishes are always with you.

Q:- 11. Sir, I am working as an accountant in a construction Co.I want to purchase simple & easy Taxation book including TDS,VAT,Income Tax etc.Pls suggest a book

Thanking You
Sheeba T.J. from India

Answer : You can buy any book. But study more than one author's book. 

Q:- 12. What is the difference between bonds, shares and stock?

Sam from Ghana

Answer : If you buy bond, it means you give loan to company. If you buy shares, you give capital to company. If you buy stock, it means you have given capital in some groups of shares.

Q:- 13. Discuss the objectives of costing?

Prasun from India

Answer : Costing is useful for calculating correct cost. 

Q:- 14. when a new partner enters in the firm and brings a part of cash of his actual goodwill then whether we have to debit new  partners capital account or  current account according to the recent amendments in goodwill??????????? and why???????

Anchal Bansal  from India

Answer : I will soon answer your question in your email after taking some reference, please wait. Thanks for your patience. 

Q:- 15. can u let me know the treatment of normal loss and abnormal loss of stock in the HO, branch and combined income statement..i would appreciate if u could provide the formal of the income statement as well..thanks for ur help^^

Yat Kunt from Malaysia

Answer : Normal loss can increase the cost of stock in HO, branch and stock mention in combined income statement. But we treat abnormal loss as the loss of business and will show it in income statement's operating expenses side.

Q:- 16.  I hv no que. Regarding the topic.......but i just want to take permission for using the content ..May i use ?

Abhi from India

Answer: Of course, you can use any content for reading and printing.  


( Important Note : Video solution can be seen at here)
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Employer's Contribution - Payroll Accounting's Elaboration

Today, I will little elaborate the payroll accounting system by explaining about the employer's contribution in different funds of employees. According to different laws, it is the duty of employer to contribute some money in the different funds of employee. That is the reason, we say these contribution as Employer’s Statutory Contribution. All these contributions are not indirect expenses but also the current liabilities of employer. Now, I explain these contributions one by one.

1st : Employer's Contribution in Employee's Pension Scheme (EPS)


It is duty of employer to contribute in EPS. This will be the 8.33% of Basic Pay. This is indirect expenses and it is shown in the profit and loss account.


2nd : Employer's Contribution in Employee's Provident Fund (EPF)


It is duty of employer to contribute in EPF. This will be the 3.67% of Basic Pay or on specific formula amount ( Employee's deduction @12% - employer's deduction in EPS @ 8.33%). This is indirect expenses and it is shown in the profit and loss account.


3rd : Employer's Contribution in Employee's State Insurance (ESI)


It is duty of employer to contribute in EPF. This will be the 4.75% on ( Basic Pay + HRA + Overtime). This is indirect expenses and it is shown in the profit and loss account.

4th : Employer's Contribution in Employee's Deposit Linked Insurance Scheme (EDLIS)


It is duty of employer to contribute in EPF. This will be the 0.5% of Gross provident fund. This is current liability and it is shown in the liabilities side of balance sheet.

5th : EPF's Administration Charges



It is duty of employer to contribute in EPF. This will be the 1.10% of Gross provident fund. This is current liability and it is shown in the liabilities side of balance sheet.


6th : EDLIS's Administration Charges 

It is duty of employer to contribute in EPF. This will be the 0.01% of Gross provident fund. This is current liability and it is shown in the liabilities side of balance sheet.

{Important Note GPF = Employer's Contribution in EPF + Employee's Contribution in EPF)

Related : Payroll Accounting System 

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Pivot Table Video Tutorial

>> May 24, 2011

In this video tutorial, I have explained the use of pivot table for analysis of accounting data. With video tutorial will clarify steps for using pivot tables of Google docs for accounting.


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How to Use Pivot Tables of Google Docs for Accounting

As accountant, you want to analyze your data more fastly in different ways. If you have data in excel sheet, it may spend  more time to summarize all accounting data for the purpose of accounting. Pivot tables are now available in Google Docs for your use. With  Pivot table, you can analyze all your accounting data more fastly. This tutorial will explain all these things.

1st Step : Import all your accounting data in google docs:

It is the first step in which you have to import all your accounting data in google docs. It may be the list of debtors, creditors, your investments, sales, purchase or any other thing like list of 10 years profit list etc.

2nd Step : Select All your Accounting Data in Google Docs

With second step, you have to select all your accounting data in google docs.

3rd Step : Reach to Pivot Tables Report Option

Just click data in it and then click pivot table report option.

4th Step : Analyze your accounting data


You can analyze your accounting data. I can explain it with a simple example

Suppose, I have following data.


Now, I want to get total of USA's profit from 1980 to 2011. For, this, I just add data country in rows through right side report editor and then I will add more data of years and profit. Now, I filter this data by choosing just USA and with the help of value, I will get the sum of USA's profit from 1980 to 2011.


Within second, I will get this required data from this pivot table. You can use this pivot table for your own purpose.

Related : How to Use Spreadsheet of Google Docs in Mobile

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Payroll Accounting System

Payroll accounting system is not so easy as you think. Just passing the voucher entry of salary in payment voucher is sufficient accounting treatment of this in a small business. But in a very large business, we have to think many things. All these things, we can include in its two parts.   

Ist Part of Payroll Accounting System 

In first part, we calculate total salary of every employee. We can include basic pay, house rent allowance, bonus, incentives and other benefits.  All these are the indirect expenses of company.



2nd Part of Payroll Accounting System 

In second part of payroll accounting system, we calculate employee's contribution in EPF @ 12% of basic pay, employee's contribution in employee's state insurance (ESI) @ 1.75% of formula salary.  We also calculate  canteen deduction., income tax deduction and professional tax deduction.


Now we pass the journal entries 

1
Debit

Credit
(A)
Basic Pay
HRA
Overtime
Incentives
Bonus
(B)
 Income Tax Deduction (TDS)
Canteen Deduction
Employee's contribution in EPS @12% of
Basic Pay
Employee's contribution in ESI @ 1.75%
Advance Salary Deduction
(A) - ( B)  Net Salary
Payable Account

XXXXXX


2. Net Salary Payable Account Dr XXXXXX


Bank Account Cr. XXXXXX

Now, net salary account will be shown in profit and loss account and all the deduction except canteen deduction and advance salary deduction  will be shown in liabilities side of balance sheet. 
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Accounting Test Online ( Part 5)

>> May 23, 2011

We are taking our Dec. 2010's accounting tutorials for writing multiple choice questions in accounting (part 5) and taking your accounting test online. If you are not able to choose correct answer out of 4 options of any accounting question, you have facility to read the accounting tutorials in which that correct answer has been mentioned.

Questions 1. When there is impairment loss of goodwill ?

If fair market value of net assets is more than carrying value or book value of net assets

If fair market value of net assets is less than carrying value or book value of net assets

If fair market value of net assets is equal to carrying value or book value of net assets

All of above

Reference for correct answer this multiple choice question in accounting : How to Test for Impairment of Goodwill?

Questions 2.Which will the entry of drawee dishonours the bill on due date?


Drawee account Dr.

To B/R account

B/R account Dr.

To Drawee account

Drawee account Dr.

To Bank account

Bank account Dr.

To Drawee account


Reference for correct answer this multiple choice question in accounting : Bill of Exchange Accounting


Questions 3. We bought Grade 1 product from dealer B instead dealer A. We will classify it in..


Stock items

Stock Group

Stock Category

Non of above

Reference for correct answer this multiple choice question in accounting : Stock Group Vs Stock Category


Questions 4. Which formula is correct?

Source of Fund = Application of Fund - Contingent Liabilities

Shareholder’s fund + Long term liabilities = Final Assets + Current Liabilities – Current Assets

Shareholder’s fund + Long term liabilities = Fixed Assets + Current Assets + Current Liabilities

Shareholder’s fund + Long term liabilities = Fixed Assets + Current Assets – Current Liabilities


Reference for correct answer this multiple choice question in accounting : Vertical Form of Balance Sheet


Questions 5.Which function is not of management accountant?


  Budget Making

Pass the Voucher Entries

Reporting
 
Administration of Corporate Tax

Reference for correct answer this multiple choice question in accounting : Management Accountant


Questions 6.Which of following is the best way to get correct profit and loss account if forget any paid expenses?



  Not to show that expenses in profit and loss account.

Show the estimated amount of that forgotten expenses.

Try to find that forgotten expenses by different ways like check your all old vouchers, see all the asset physically and others etc.

Go to police station and enter your FIR.

Reference for correct answer this multiple choice question in accounting : How to Get Accurate Profit and Loss Account


Questions 7.Can company give dividend, if it suffers loss?


Yes

No

Yes, but only to those who have more than 25% of total shares. 

Yes, but only to those who have more than 51% of total shares.

Reference for correct answer this multiple choice question in accounting : Accounting Problem from Ryde, New South Wales, Australia


Questions 8. Is Decision Support System (DSS) part of ...

Structure of MIS

Typology of MIS

Executive Support System

Business Expert System

Reference for correct answer this multiple choice question in accounting : Typology of MIS


Questions 9.How to access in central database?


With password

With user id

With correct validation

With email confirmation



Reference for correct answer this multiple choice question in accounting : Characteristics of MIS


Questions 10. Is MIS a flexible system?

Yes

No

Reference for correct answer this multiple choice question in accounting : Characteristics of MIS

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What is Success According to You

>> May 22, 2011

Success is to get more and more money according to you. If you got money and you feel this is your success. You are totally wrong. Money can provide you resources but it may not be the measure of your success. Only your happiness is your success. If you feel happiness and satisfaction  in your life, it means you have achieved success. This is not only my thinking but this is also thinking of Christopher Sacca who is social worker,  a venture investor, public speaker, private equity adviser, and former employee of Google Inc. Few days ago, he addressed the graduates of the University of Minnesota's Carlson School of Management at its commencement exercises on May 16, 2011 at Mariucci Arena.

In his video, he explained," On my experience, success is happiness. Because, if you are happy, you will create happy people, you will win the happy people."

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Cash Budget Example

>> May 21, 2011

I have already explained that cash budgeting is estimation of future receipts and payments of cash. It is helpful to analyze the flow of cash. It is also helpful to plan and control our expenses payment. With this, we can find future need of cash.

In cash budget, first of all, we estimates our all incomes like cash from sales, cash from interest, dividends and other receipts. After this, we estimates our all expenses. If our cash receipts are less than total cash payment, we may take decision to get cash through loan.

Today, we will focus on one cash budget example because we think, examples might be simplified to improve reading and basic understanding of any topic of accounting.

Example . From the following forecasts of income and expenditure, prepare a cash budget for the months Jan. to April 2011.


Months Sales (Credit) Purchase (Credit) Wages Manufacturing expenses Administrative expenses Selling expenses
2010 Nov. 30000 15000 3000 1150 1060 500
Dec. 35000 20000 3200 1225 1040 550
2011 Jan. 25000 15000 2500 990 1100 600
Feb. 30000 20000 3000 1050 1150 620
March 35000 22500 2400 1100 1220 570
April 40000 25000 2600 1200 1180 710

Additional information in follows :

1. The customers  are allowed a credit period of two months.

2. A dividend of $ 10000 in payable April.

3. Capital expenditure which has to be incurred  : 15th Jan. $ 5000, we will buy a plant and in march, we will buy a building on loan and its payment will be done with in monthly installments of $ 2000 each.

4. The creditor are allowing a credit of 2 months.

5. Wages are paid on the 1st of the next months.

6. Lag in payment of other expenses is one month.

7. Balance of cash in hand on 1st Jan. 2011 is $ 15000.

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5 Steps for Filing e-Return of Income Tax with No Trouble

E-Return of Income Tax is good facility which has been given by Income Tax Department to general public of India. Moreover e-return of income tax is compulsorily for companies. From 2005-2006, all companies have to file their return through electronic format. There are lots of online websites which help you to file your e-return of income tax but they take Rs. 500 to Rs. 2500 according to their service plans and expert consultation on tax Liability may be Rs. 2500 to Rs. 5000 per hour. All these things are so easy. As an accountant, you should learn all these things for filling e-return by yourself without  depending on another. Today, for your help, I am explaining its simple steps.

Before this, I want to tell about, "what is return of income tax?" for all those who did not study income tax law. According to Income tax law, it is duty of every individual and representatives of non-individual entities to fill the form of income tax for paying the income tax on the total income earned in previous year. This ITR form is filed  in assessment year. Your duty is to file the return if your total income is more than the exempted limit of total income. But every company has to file return of income tax because they have to pay income tax with flat rate of 30% (for Indian companies) and 40% (for private companies).E-return of income tax means electronic file of return of income tax. ITR1, ITR2, ITR3, ITR4, ITR4S,  ITR-6 is the form which different assesses have  to fill in electronic media.

5 Simple Steps for filling e-return of Income Tax 

1st Step: Register yourself at Directorate of Income Tax's Official Website

In first step, you have to register yourself in official site of Income Tax that is DIT. Just write e-return of income in Google and go to https://incometaxindiaefiling.gov.in site. This website is the income tax of Govt. Above, you can see login. Click it and just below the login, you see registration. After this, it demands PAN card from you. Write PAN Card and click it. A registration form will open. You have to write your password, confirm it. Fill your name, middle name and sir name in it and other information, you have to fill in it. After this, you have to click on registration button. After this, you will receive confirmation email. Just like, I have received one from DIT. You have to confirm by click the link in this email. Now, you have to use your pan card as user id and fill your password for going to your own account in DIT.






2nd Step: Logging in and Download the software tools from the download section

You have to download excel file utility software. If you are individual assessee, you have to download ITR 1 (You may also download other, according to your need). After this, you should save it. 



3rd Step: Fill Relevant Information in ITR Form of Software

In third step, you have to open your e drive and open excel utility file. Now, you have to fill your Indian income tax return. Fill all detail in it. You have to also fill your tds detail in second worksheet form and in third worksheet form, you have to fill your paid tax detail. It may be advance tax, tds or self assessment tax. After this, you have to generate XML file of this.



4th Step: Upload XML format of Software on Directorate of Income Tax’s Website

 In fourth step, you have to upload this XML file in DIT website. For this, just click the left side button submit return and choose a.y 11-12. Browse your XML file and select XML file from hard drive and upload it by click upload button.



5th Step: Get and Printout Provisional Acknowledgment


After this you will get provision acknowledgment. For future reference with local IT office, you can printout this provisional acknowledgment.



Continue reading »

How to Teach Deaf Students

>> May 20, 2011


To get education is right for every student whether he or she is mentally retarded, blind, dumb or deaf. But, it may be the problem of teacher to teach such students. I have already explained, "how to mentally retarded students and blind students". In this teaching content, I want to give some tips to teach deaf students better ways.

1st Tip : Teaching by Using of Hand Expression

We speak any language, it is just source of communication of our thoughts to other. But a deaf students can not understand due to lack of hearing. But, if you learn to express your views through hands, you can teach everything to deaf students.

There are lots YouTube educational videos, with this, you can learn good hand expression for teaching to deaf students.

(A) Reading Finger Spelling in Sign Language

These tips have been given by channel of youtube.

 i) Sound it out

ii) Watch for configurations

iii) Use context


2nd Tip : Teaching by Using of Eyes

It is true that God has taken one knowledge organ from deaf students under his hard accounting system but we should not forget that God has given more power to other organs of that students. For example, a deaf student can catch your eye impressions 10 times more than a student who hears everything. So, you can use your eyes expression for teaching deaf students.


3rd Tip :  Sign Language

ThroughChildsEyes has published a video inwhich, its experts have explained the importance of sign language for deaf students. Parent should learn this language for teaching their deaf children. As soon as they learn, they can teach basic things through sign.



4th Tip : Youtube Transcription

If your student has learnt  language. It  means that he understand the meaning of cow in English language. He understand that it is animal. Now, it is very easy to teach him everything with the help of youtube transcription.

Make the video of your teaching  and upload it in youtube.  Write all things in a notebook and upload it in caption section of your video.



After this, your deaf student will learn what you wrote and understand what you want to teach to him. Following two videos are its examples.




5th Tip : Search Teachings Materials For Deaf Students in Youtube

Keywords may be helpful to you.

a) "deafvideo"
b) "deaf video"
c) teaching video intitle:deaf
b) deaf
c) teaching deaf students
d)teaching deaf students,hd
f) teaching deaf students to read
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Features of Exchange Rate

Features of exchange rate includes all the features of currency of any country  which is to be traded in foreign exchange market. If you are beginner in forex market, you should know first the meaning of exchange rate and then you should know its features.

What is exchange rate?

Exchange rate is a rate at which one currency will be exchanged into other currency. For example today rate of One USA dollar can be compared with Indian Rupees.


Exchange rate will be always conversion rate of stronger currency to your currency. For getting 1 US $, you will have to pay Rs. 44.89. So, this is exchange rate.


Features of Exchange Rate 

1. Exchange Rate always fluctuates Due to Stronger or Weaker of  Currency :

It is the main feature of exchange rate that it always fluctuates. If our currency will strong at that time, our exchange rate will differ from previous exchange rate. Suppose, today, one dollar's exchange rate is 44.89. If tomorrow, our currency strong, we have to pay less for buying one dollar. It may be Rs. 43 or Rs. 42 for one dollar. This shows also the appreciation of our currency. Weaker of our own currency means depreciate our currency. At that time, we have to give more money for buying one dollar. It may be Rs. 46 or Rs. 47.

2. Exchange rate always are affected from balance of payment and trade, interest rate (inflation rate), economic growth and fiscal and monetary policies and political issues:

Exchange rate of any currency are affected from balance of payment and trade. More negative balance of trade will depreciate our currency. In future, if our balance of payment will be surplus, at that time, we can compare Rs. 1 with number of dollars in exchange rate. There are also lots of other factors which affect any currency exchange rate like interest rate or inflation rate, economic growth, fiscal and monetary policies and political issues

3.  Exchange rate are two types, one is buying exchange rate and other is selling exchange rate:

If we talk about the feature of exchange rate mechanism, we should know that exchange rates are of two types. One is buying exchange rate and other is selling exchange rate. Both rate may or may not be equal. 


4. Bid Vs Offer  


 Prof. Tim Bennett  has explained about bid and offer feature of exchange rate in his video lecture "Beginner's guide to investing: the currency market" that bid and offer always will be different. He explained this with an example, "Suppose we compare BP with USD and its bid may be 1.61863 USA dollar for every  one British pound  and its offer may be 1.61867 USA dollar for every one British pound. One more interesting thing, he explained in his video that bank's  buy rate always will be your sell rate in bid and bank's sell rate will be your buy rate in offer.


Related : Hedging in Foreign Exchange Market
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Why can I not Disclose Youtube Partnership Program Agreement's Terms

>> May 19, 2011

Few weeks ago, YouTube has accepted my application of partnership. Now, I am the partner of YouTube. There are lots of benefits of becoming partners of world's top video site like showing my site's brand in it and many other things.


But this partnership is on the basis of its written agreement. It is just like partnership deed which you may read in basic accounting of partnership. We know the partnership agreement but when we do it, at that time, we can understand, what is it in real sense. Few weeks ago, I accepted it by just click on the accept button.

Today, I read it terms, rules and regulations  very seriously and one of its condition is "CONFIDENTIALITY".


According to this condition, "I can not disclose the terms of you tube partnership program." Now, it is good question, " Why can I not disclose terms of you tube partnership program agreement?" On this, I can say


1. For protecting the interest of advertisers.

2. On online, everything is on the basis of terms and conditions. It is not necessary to disclose everything to public.
 
3. The experts who wrote these terms and conditions may think that it is useful for both parties.

Related : Facebook Terms and Conditions ( Simplified) 
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Effective Interest Rate

>> May 18, 2011

Hello sir !

First of all, I want to appreciate you for you excellent way to teach the student and interested learner. You did a great website and I am one of you regular visitor. I am Bangladeshi student in Cyprus doing MBA program. I am doing my thesis on "Micro-finance Effects in Bangladesh" But it's difficult for me to find out the effective interest rate for the loan which Micro finance provide.

an example: If a borrower take loan which contains the following conditions:

Present value: 1000 TK
Interest rate 10% or 100 TK
Number of Payments: 44 weeks
Future value or total repaid 1100
Service charge : 2% or 20TK
What is the Effective annual interest rate?

MRA Bangladesh find out that Effective annual interest rate is 25.07% without service charge and 31.27% with service charge for above case.

Sir I am confused on this interest rate. Could you help me by solving this problem and explaining this. 

Effective interest rate is that interest rate which is different from simple interest rate and compound interest rate. It is calculated on the basis of nominal annual rate and number of compounding periods.

Its formula is

EIR = (1 + periodic interest rate) and its power number of periods in one year -1

Or

Effective Interest Rate = ( 1 + Annual nominal interest rate / Number of payments period )^ Number of payments period - 1

In your case, you can put above values in this formula

EIR = ( 1 + 10%/ 44) ^ 44 - 1

But if service charges are given, then effective interest rate will also increase.

We can write its formula

Effective Interest Rate = ( 1 + (Annual Nominal Interest Rate + Service charges Rate) / No. of payment period) ^ No. of payment period - 1

In your case,

EIR =  { [ 1 + ( 10% +2%)/44] ^ 44} - 1

Now, you can calculate answer by using of log. 
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Interview with M.D. Swatanter M.A., M.ED., Ph.D (Education)

>> May 17, 2011





Welcome in Accounting Education (website). Today, we will meet a great personality in the field of education. He is Dr. Mathura Dass Ji Swatanter who has more than 40 years experience in teaching to secondary and higher classes. So, today, we talk this personality.

Namste, Dr. Mathura Dass Ji,

Namste Ji,

Question: 1. Sir, what is the importance of education for a student?

Education is a light. So, it gives us clear understanding about the picture of the human being and also of the society which helps us move normal, ideal among our colleagues and society at the large.

Question : 2. Sir, you have the 41 years experience in the field of teaching, education, please give some message to our young teachers and students. How can they get this profession for their life?

Education means teaching is the noble profession. If I say, it is noblest of all the profession. So, my message for the future teachers and also in the present teachers is to work honestly, diligently. They have to present themselves as icons and model before the society. Children learn what they live. If they live among the ideal teacher, then they must be shaped into normal human beings who are well conversant with the social laws, how they have to live among other, how they have to deal with others?

So, again I repeat that what our society needs today is an ideal person for the younger generation. They are parents, they are teachers, they are social leaders, because, after all these children are to become future citizen, future leaders and to work with various professions and occupations. So, teacher is not only teacher, he is also being auxiliary parent of the students. They are in their care to be shaped what is needed to be the ideal for the society.

Question: 3. Sir, these days, you are providing social activity to students who are poor and needy. Why did you choose this type of social activities in the form of welfare activities for orphan and poor students? There are lots other social activities. Why did you choose this?

My father expired when I was only three years. My poor widow mother reared with me painfully. She set before me the ideals of an ideal lady. Although she was an illiterate woman, but she was very conscious within and she gave me proper shaping when I was in 5th class, I fell into a bad company. I did not attend the school for 8 days. I took my bag and returned back when school was closed. On the 9th day, when I returned home, my class teacher Pundit Bhagvan Ji Sharma was at my home to enquire from my mother, why was I not going to school. He took me in his arms very lovingly and it was medical touch, parent touch, and fatherly touch that I attended school next day before the other students came to school and throughout my life as student, I never absented from my class and my school.

My teachers gave me proper love, care and protection and I started shining in the class. In 9th class, I did not have English Grammar (Book), so when I got the Grammar Book, I stood first in English in my class. So, when I passed my matriculation, the principal of my school asked me what for my future life. I immediately submitted that I will become teacher. I decided my unconscious mind. Pundit Bhagvan Das Ji who was teacher and as father gave me love, protection, care. So, my principal sent me my teacher training before the result was announced, I was appointed teacher in the same school where I had matriculated. So, during my study, I continued my academic studied with teaching and I studied privately up to M.A. English, I did my B.Ed. and then I joined Kurukshatra University for master education degree (M.Ed.) and then I got first class this degree. Then I registered for Ph.D in education. Then, I opted the topic the welfare of poor and destitute children. I was given the topic of study Juvenile Delinquents in all the district jails of Haryana.


Then, I studied 200 candidates both girl and boys and the title of study was "A Study of the Problem of Juvenile Delinquents with Regard to its Extend, Nature, Causes and the Provisions for Handling it in the State of Haryana." 
 
So, majority of my cases belonged to poor families. They were from broken home, they were denied love and care of the society, they were denied care from the head of teachers, they were beaten if they did not bring any book or note book with them. Most of them are from widows home. Majority of them, I found. Main reason of crime is poverty and other causes also. So, after completing my PhD, I was selected
Headmaster, 10 years continued there, then I had selected as principal grade one by the Kendriya Vidyalaya Sangathan New Delhi. I was posted at Baramula Kashmir, then in air force station Chandigarh, then army school in BD (division) Patiala. So, there are, I gave my services for 9 years. I retired at 60 in 1998. I was offered various assignments work as director of an institution, work principal but I preferred to be social guide of children who are the deprived out their fundamental right of love, security and recognition. So, in the company of noble friend of the mind Shri Satparkash Parbakar Ex- municipal President to work for the needy children for the needy children. In 1988, we started a student council named as Vidyarathi kalyan prishad and since then, I am engaged in that field. God-knowing,  who home we can be of help, last 22 years, I have come across students who have reached various responsible posts. They have become very responsible citizen of country, at large, working with me and 100s of students are benefited every year. We give them educational guidance, counselling. They have shine in their studies, some of them have become engineers, and some of them have become college lecturers.

It gives me consolation, it gives me solace that if am doing a bit for the society, so that the children at large they copy me in right whatever I can help them. I am very much proud the society helping me in the right direct to help the students. Thank you.

Question: 4. Sir, my best wishes are with you. One last question, I want to ask. Sir, Your subject is mainly English and tell me how can Indian students improve their English?

English is the language. It is communicative skill and we communicate our ideas through our speech, through listening, and through speaking. There are three skills of a language, reading, writing and speaking. So, in fact, a teacher who is teaching a language, should whole heartily, teach them through that particular language. Keeping in the view, all the 3 skills of learning of a language. So, we should first of all create the environment for learning a language. A student living among the people who speak English, write English and so have environment to develop our three skills of language.

One can learn speaking English only if a child listens properly spoken words from the other persons. There are various means of listening radio, TV. So, like spelling, one should learn through eyes, correct spellings of English are learnt through eyes and correct speech means pronunciation are learnt through ears.

So, we must be careful to attend all the three skills of language. Creating an atmosphere of a particular language around us of children. So that they can learn this language clearly and without any doubt. So, we should not take it as foreign language. We should take it as our own language.

Thank you.

Thank you Dr. Mathura Dass Ji Swatanter, today, you come on online Platform of Accounting Education and give us great knowledge and education to improve. I wish your happy life and may God give you peace! 

If you have any educational or teaching problem, you can also solve freely by contacting him at him mobile no. 09915522840 in India and +91-99155228840 outside India
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Alternate Banking Delivery Channels

Could u pl obliged me by providing literature on 'ALTERNATE BANKING DELIVERY CHANNELS ' for academic purpose only.
thnx  and rgds,

Deepak Saxena ( State Bank of India) from India
Deepak sharma, a simple advance search in google can give of lots of good literature relating to alternate banking delivery channels if you select file type as pdf or .doc. Almost all banks have published the literature on alternate banking delivery channels. Some of them, I have also studied. I am sharing what I have learnt:

What are alternate banking delivery channels?

Alternate banking delivery channels are new channels and methods for providing banking services directly to customers. We can include Internet banking channel, e-banking, intelligent electronic device, ATM, kiosk, or touch tone telephone credit cards, debit cards, net banking, home banking and  mobile banking.

A. Internet Banking Channel

Page of PNB Net Banking
There are lots of benefits of this type of banking delivery channels. One of best benefit is to transfer your money to other bank account. Suppose, I have bank account in PNB and I want to deposit money in other other trader's bank account. What will be the traditional system. I have to go bank. I have to make bank draft. I have to send it to the party. That party will bring it to his bank branch. That party will give it for collect. Only after clearing, I will be able to pay him through traditional banking channel. Now, system is totally changed. Now, I have my Internet banking id and password of PNB and I have to add the party to whom I have to pay. It will be 24 hours to accept my request. After this, I will be able to pay within second. Just click transfer and write the amount and his account. I can transfer money 24 hours to that party from my Internet banking.


B. Core Banking or Centralized Banking

Bank customers may reach their funds from any of the member branch offices. This channel has been made by joining  all servers with main and common server.

C. Automated Teller Machine (ATM)

Suppose, I need money at Mumbai at the night. I can withdraw it through ATM without taking tension. Now, I need not to carry all money in pocket. I need just an ATM and PIN of 4 digit. With this, I can withdraw money from any bank's ATM. This delivery channel of bank has saved customer's lots of time and risk.

Related : Traditional Banking and E-banking
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Multiple Choice Questions in Accounting ( Part 4)

We are taking our Jan. 2011's accounting topics for writing multiple choice questions in accounting (part 4). If you are not able to choose correct answer out of 4 options of any accounting question, you have facility to read the accounting topic in which that correct answer has been mentioned.

Questions 1. Why are accounting standard important?

(a)  For making correct financial statements

(b) For correct valuation of inventories

(c) For correct treatment of depreciation and lease and investment

(d) All of above

Reference for correct answer this multiple choice question in accounting : Relevance and Significance of Accounting Standard
 

Question 2 What is the meaning of "Decrease the stock in revenue statement"?

(a) To consume the stock with buying new stock.

(b) To buy new stock

(c) Sale price of consumed stock

(d) To consume the stock (at cost) without buying new stock.

Reference for correct answer this multiple choice question in accounting :  Increase / Decrease in Stock in Trade in Financial Results of Co.





Question 3. Which part of preliminary expenses will show in profit and loss account?

(a) Not written off part

(b) Written off part

(c) Whole part of preliminary expenses

(d) It is the desire of accountant which part of preliminary expenses  will he add in profit and loss account.

Reference for correct answer this multiple choice question in accounting : Treatment of Preliminary Expenses


Question 4. What is Journal Entry for Purchase of Assets for Non Trading Concern?

(a) Purchase  Account Dr. XXXX

Cash or Name or Party Account ( In case purchase on credit ) Cr. XXXX

(b) Cash Account Dr. XXXX

Asset Account ( In case purchase on credit ) Cr. XXXX

(c) Particular Asset Account Dr. XXXX

Cash or Name or Party Account ( In case purchase on credit ) Cr. XXXX

(d) Particular Asset Account Dr. XXXX

Purchase Account ( In case purchase on credit ) Cr. XXXX

 Reference for correct answer this multiple choice question in accounting : What is Journal Entry for Purchase of Assets for Non Trading Concern?


Question 5. What does single entry accounting mean?

(a) It means to record cash  only.

(b) It means to record credit only.

(c) It means to record debit only.

(d) It means to record one side of entry only.


 Reference for correct answer this multiple choice question in accounting : Single Entry Accounting


Question 6. Why is debt-equity ratio important?

(a) Base of approve or reject any bank loan.

(b) Base of NPV.

(c) Base of making balance sheet.

(d) Base of all above.

 Reference for correct answer this multiple choice question in accounting : The Debt To Equity Ratio ( Simplified )

Question 7. How to increase the value of company in case of financial distress?

(a) Debt Restructuring

(b) To Sale all assets of company without any delay.

(c) To rob other companies.

(d) Not to give salary to employees.

Reference for correct answer this multiple choice question in accounting : Financial Distress ( Wikipedia )

Question 8.  What is financial forecasting?

(a) A financial forecasting  is  an estimate of level of losses of other companies in the market.

(b) A financial forecasting  is  an estimate of sales, purchase, earning and value of shares in the market.

(c) A financial forecasting  is  an estimate of salary  of all employees  in your company.

(d) A financial forecasting  is  an estimate of marginal cost curve.

Reference for correct answer this multiple choice question in accounting : Financial Forecasting

Question 9. Which is better investment?


(a) Investment in education is better than investment in share market

(b) Investment in share market is better than investment in education

(c) Investment in share market without any knowledge.

(d) Investment in online scam

Reference for correct answer this multiple choice question in accounting : Investment in Share Market without Knowledge

Question 10. Why is Accounting Difficult?

(a) I do the question of Accounting, but my answer comes wrong.

(b) My Balance sheet does not match when I try to make it.

(c) I think, Accounting is under only for intelligence guys.

(d) Not any of above.

Reference for correct answer this multiple choice question in accounting : Why is Accounting Difficult

Related : Accounting Test Online
Continue reading »

Hurdle Rate (Finance)

>> May 15, 2011

According to wikipedia, hurdle rate is  minimum acceptable rate of return for accepting any project. Generally, we know that hurdle means obstacle. These obstacle may be of risk of losses. So, you need return on your investment. Company leaves that project which is not providing you minimum rate of return or hurdle rate. It is just like cut off rate or IRR or cost of capital.

We can calculate hurdle rate with following formula:

= Interest for risk-free loans + Expected rate of inflation + Anticipated change in the rate of inflation + Risk of defaulting on a loan + Risk profile of a particular venture

Steps for calculating Hurdle Rate 



 
Continue reading »

Hedging in Foreign Exchange

Today, we will learn an important term of finance. Its name is hedging in foreign exchange market. It is totally different from hedge fund. Hedging in foreign exchange market means to reduce the risk of loss in forex market. I persuade this by taking a very simple examples.


Ist Example

Suppose, you have opened your online forex account in SBI. You are A and you buy one dollar when its price was Rs. 45 and you bought it on its future price Rs. 47. Suppose, if the value of $ will depreciate and value of Rupees appreciates. At that time, you will face loss Rs. 2  in this future contract of currency exchange. For reducing this loss, you can do an opposite contract in forex market. You do the contract of sale. You can agree to sell the 1 $ in Rs. 44 in future. If value of dollar moves to Rs. 44 instead of Rs. 47, you will loss Rs. 1 in buying contract but get profit of Rs. 1 in selling contact. Automatically, your overall loss will nil or be minimum.



2nd Example

For example, Rupee(USD/INR),one month is trading at Rs.47 and if one feels that Rupee would depreciate to Rs.49, he can enter into a ‘long’ position, by ‘buying’ a currency futures contract. If USD/INR for the same maturity period goes to Rs.49, he makes a gain of Rs.2 per dollar. So on a single contract of 10000$, he makes a gain of Rs.2000. But, if USD/ INR for the same maturity goes to Rs. 45, he loses Rs. 20000. So, it is big risk, if you have invested big amount. So, for reducing this risk of loss, he can also do hedging contract in foreign exchange market. He can do "selling" the contact with "buying" contract.

If the Rupee one month is trading at Rs.47 now and expects it to move to Rs.45, he can enter into a ‘short’ position by ‘selling’ a currency futures contract. If USD/INR rate for the same maturity period moves to Rs.46 he makes a gain of Rs.2 per dollar, on squaring off his position. He makes a gain of Rs.20000 on this contract. If we adjust his loss of Rs. 20000 of his buying contract with his profit of Rs. 20000 in selling contract, you will get nil loss. So, investors should use hedging for safeguarding his money from loss in forex market.

Related : List of Hedge Funds in India
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