You need not cover all, but know at least 6-8 points from this As per SA 570, Events or Conditions That May Cast Significant Doubt on the Entity’s Ability to Continue as a Going Concern The following are examples of events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability …
What are the indicators of and whether company is going concern or not? Read More »
A reverse merger (also known as a reverse takeover or reverse IPO) is a way for private companies to go public, typically through a simpler, shorter, and less expensive process. A conventional initial public offering (IPO) is more complicated and expensive, as private companies hire an investment bank to underwrite and issue shares of the …
Leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to …
▪ Synergy ▪ Diversification ▪ Growth ▪ Eliminating competition Favorite
Horizontal merger is when two companies which belong to the same industry merge – for example the Vodafone and Idea merger. They belong to the same industry i.e. telecommunications. A vertical merger is a merger between two companies that operate at separate stages of the production process for a specific finished product. A vertical merger …
A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. Favorite
A merger occurs when two separate entities combine forces to create a new, joint organization. An acquisition refers to the takeover of one entity by another. A new company does not emerge from an acquisition; rather, the smaller company is often consumed and ceases to exist, and its assets become part of the larger company. …
▪ Competition Commission of India ▪ Reserve Bank of India ▪ Depositories ▪ Stock exchanges ▪ Registrar of Companies ▪ Regional Director ▪ Official liquidator ▪ NCLT – replaced High Courts Favorite
Incremental budgeting adds an allowance for changes in revenues and costs for the upcoming year by taking the current year’s budget/actual performance. Zero-based budgeting considers revenues and costs from scratch by estimating all results disregarding the current performance. Favorite
Generally, a good budget is considered to be the one that ● has buy-in from all departments in the company (if possible) ● is realistic, yet strives for improvement ● has been risk-adjusted to allow for a margin of error ● is tied into the company’s overall strategic plan. Note: The answer to this question …
Advantages of mergers ▪ Economies of scale – bigger firms more efficient ▪ More profit enables more research and development. ▪ Struggling firms can benefit from new management. Disadvantages of mergers ▪ Increased market share can lead to monopoly power and higher prices for consumers ▪ A larger firm may experience diseconomies of scale – …
The following are the types of budget: Incremental budgeting. Activity-based budgeting Value proposition budgeting Zero-based budgeting Imposed budgeting Negotiated budgeting Participative budgeting Favorite
DEFINITION OF ASSERTION: It refers to the representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. In preparing financial statements, Company’s management makes implicit or explicit claims (i.e. assertions) regarding: A. Completeness; B. Existence/ occurrence; …
Audit risk means the risk that the auditor might give an inappropriate audit opinion that Financial Statements are free from material misstatements when in fact the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. Risk of material misstatement may be defined as the risk …
RETURN ON INVESTMENT ROI compares the profits of an investment compared to the cost of the investment to determine gains. RETURN ON CAPITAL EMPLOYED ROCE looks at earnings before interest and taxes (EBIT) compared to capital employed to determine how efficiently a firm uses capital to generate earnings. RETURN ON EQUITY Return on equity (ROE) …
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As per IND AS 115, the transaction price i.e. ₹1,20,000 will be divided in the proportion of relative standalone prices. ₹120,000 will be divided in proportion of 100,000: 50,000 Price of scooter = 80,000 Price of general maintenance = 40,000 REVENUE RECOGNITION CRITERIA SCOOTER – ₹80,000 for the scooter will be recognised immediately on the …
This is one of the most commonly asked questions of all time, and irrespective of domain. It is as important as the “Tell me something about yourself question”. You must use all technical terms prescribed here and answer in the correct order 1. Identify the contract with the customer- • A contract is an agreement …
What is the 5 step model of recognizing Revenue as per IND AS 115? Read More »
Unsystematic risk, also known as “specific risk,” “diversifiable risk” or “residual risk,” is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of …
The required rate of return is the minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The RRR is used in both equity valuation and in corporate finance. Investors use the RRR to decide where to put their money, and corporations use …
In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate. Usually the government bond rate is used as the Risk free Rate. This raises several questions – which government, …
Unlevered beta compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the effect of debt on beta. It is a purer form of beta because it indicates the risk arising from the operations of the …
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio incomparison to the market. A security’s beta is calculated by dividing the covariance the security’s returns and the benchmark’s returns by the variance of the benchmark’s returns over a specified period. A beta of 1 indicates that the security’s …
Beta: Beta represents the sensitivity of a stock with respect to market. Examples: Stock with 1.1 of beta means if market is up by 10% over a period, stock will be up by 11% = (1.1*10) Alpha: Excess Return earned over the benchmark market rate of return (like Nifty, Sensex) Favorite
The formula for calculating beta is the covariance of the return of an asset with the return of the Market, divided by the variance of the return of the benchmark over a certain period. Note that this is a “regression beta”. Generally, regression beta is not the ideal way of calculating the beta required for …
The Cost of Equity is always higher than Cost of Debt. Note that we have used the word ALWAYS not USUALLY. This is because for any given company, equity will always be riskier than debt, and hence costlier. Risk is the main reason why equity is more expensive – the equity investor faces an uncertainty …
CAPM = Rf + B (Rm-Rf) Rf = Risk Free rate B = Beta Rm = Market risk The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of risky securities, generating expected …
The main objectives of FP&A department include measuring historical performance, evaluating future business needs, highlighting issues and strengths in the business, clearly communicating the most relevant financial information to management, and instilling confidence in the quality of information presented. A good financial model must address all of these and be simple enough for anyone to …
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Private equity firms mostly buy mature companies that are already established. The companies may be deteriorating or are not making the profits they should be making, due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Usually the objective is to buy a badly managed mature firm, turn it around …
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Financial modelling is a quantitative analysis which is used to decide or a forecast about a project generally in asset pricing model or corporate finance. Different hypothetical variables are used in a formula to ascertain what future holds for a particular industry or for a particular project. In simple terms financial modelling means forecasting companies’ …
The most popular credit indicators are – For long term debt: Leverage ratios: Debt / Equity, Debt / Total Capital, Debt / EBITDA, Coverage ratios: Interest Coverage (very important), fixed charge coverage, Debt Service Coverage Ratio (also called DSCR – very important) Others: Loan to Value Ratio Debt to equity, Debt to Total Assets, Debt …
Working capital is the amount of a company’s current assets minus the amount of its current liabilities. The adequacy of a company’s working capital depends on the industry in which it operates, its relationship with its customers and suppliers, its inventory levels and more. Working Capital and Net Working Capital are usually interchangeable – Current …
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An asset acquisition strategy is the purchase of a company by buying its assets instead of its stock. An asset acquisition strategy may be used for a takeover or buyout if the target is bankrupt – this will enable the buyer to takeover the assets without taking over the debt. Usually, this needs to be …
Goodwill arises when a company acquires another entire business. The amount of goodwill is the purchase consideration of the business minus the fair market value of the net assets that can be identified, and the liabilities obtained in the purchase. Goodwill does not mean any of the following – company’s brand name, solid customer base, …
Suppose you see goodwill in the balance sheet. What does it mean? Read More »
It means that the company has acquired other entities for a consideration higher than Fair Market Value of Net Assets. Goodwill does not measure synergy, it measures how much I overpaid. So I will have to go into the specifics to know whether my Goodwill is justified. Goodwill ends up being impaired very frequently so …
An operating lease is treated like renting – payments are considered operational expenses and the asset being leased stays off the balance sheet. At the end of the operational lease the asset is returned to the lessor. In contrast, a financial lease or capital lease is more like a loan; the asset is treated as …
Difference between operating lease and financial lease? Read More »
Goodwill is an intangible asset that arises because of the acquisition of one company by another for a premium value. It is thought to represent the value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill (even though this is not true). …
For partnerships, some traditional formulae are used 1. Calculating Goodwill Using Average Profits – Avg profits * no of years. 2. Goodwill using super profits (Actual profit – normal profit) 3. Goodwill by capitalization of profits However, for companies it is Purchase Consideration – FMV of Net Assets Favorite
A figure of 0.5 or less is ideal. In other words, no more than half of the company’s assets should be financed by debt. Alternatively, some suggest a 2:1 Debt to Equity structure. However, this strongly depends on case to case. Always try to seek more information before you answer this question. The capacity of …
There are three core components of working capital – accounts receivable, inventories, and accounts payable. These items are usually modeled to match what is happening with revenues and cost of sales by using “turns” or “days” ratios (e.g., inventory turns or inventory days). For example, historic relationship between revenues and accounts receivable can be evaluated …
▪ Cash flow resulting from operating activities.▪ Cash flow resulting from investing activities. ▪ Cash flow resulting from financing activities. Favorite
One of the most significant interview questions for credit analysts is this one. A business must pay interest when it takes on debt. The interest coverage ratio demonstrates to the business their ability to handle their interest costs. Interest Coverage Ratio = [EBIT / Interest Expense] The greater the ratio better would be the company’s …
Ind AS 17 classified leases as finance leases and operating leases. Ind AS 116 does not make this distinction. When compared to Ind AS 17, Ind AS 116 requires detailed disclosure for lessees. Unlike Ind AS 17, Ind AS 116 provides specific provision for lease modification, for the lessor and lessee. Similarly, Ind AS 116 …
Major difference between Ind As 116 vs As 17.( Just mention 2/3 points)? Read More »
A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet financial obligations. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The lower a …
The five criteria for credit analysis Character – This refers to a person’s subjective assessment of a company’s ability to repay a debt. The most crucial of the four characteristics. Capacity – This refers to the borrower’s ability to repay the loan with the money he makes from his investments. ` Collateral (or guarantees) – …
Lessee Accounting: 16 Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the …
Accumulated depreciation is the total depreciation for a fixed asset that has been charged to expense since that asset was acquired and made available for use. It is a contra asset account, i.e. a negative asset account that offsets the balance in the asset account with which it is usually linked. The accumulated balance of …
The Gordon growth model is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption the dividend grows at a constant rate in perpetuity, the model solves for the …
FCF is an assessment of the amount of cash a company generates after accounting for all capital expenditures, such as buildings or property, plant and equipment. The Free Cash Flow shows the amount of cash generated without any obligations attached. The excess cash can be used to expand production, develop new products, make acquisitions, pay …
A sin tax is an extra tax levied on certain goods or services deemed harmful to society, for example alcohol and tobacco, candies, drugs, soft drinks, fast foods, sugar, gambling etc. Two claimed purposes are usually used to argue for such taxes – raising revenue and discouraging consumption. In India, sin tax is levied on …
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. It is NOT to reduce the value of the asset due to wear and tear. It is an allocation of Historical Cost ONLY. Similarly it is not bringing down an asset to its market value. Similarly, obsolescence is …
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You can mention the names of any ERPs you have worked on (including Tally) since most have some features relevant to Budgeting and Forecasting. The feature of creating Cost Centres is meant for budgeting and tracking Some commonly used ERPs for : ● SAP ● Hyperion ● Adaptive Insights ● TM1 ● Horizon For most …
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Valuation is the process of determining “Value”. It ultimately answers the question “What should I pay” for any asset, instrument or a company. Valuation can be categorised based on Relative Valuation (using PE ratio of peers) and Intrinsic Valuation (using DCF) It can also be classified into Asset based Valuation and Earnings Based Valuation (This …
Past data is usually the best starting point for both forecasting and budgeting. An exception is zero based budgeting (where past data is not used). While building a budget, following steps can be followed: a) Reviewing and understanding all the required inputs for your budget. b) Analyzing previous budgets and other historical data. This will …
● Budgeting – Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance. It is setting a target. It is more relevant for items that are under your control such as costs ● Forecasting- Forecasting estimates a company’s future outcomes. Financial forecasting allows management teams to anticipate …
