1. How can a Company Show Positive Net Income but go Bankrupt?
Ans: A company can show positive net income while facing bankruptcy
by deteriorating working capital (by enhancing accounts receivable and
reducing accounts payable) and financial tactics.
2. Working Capital
Ans: Working capital is the amount you get after deducting current
liabilities from current assets. It tells you how much cash is tied up in the
business through inventories and receivable and how much cash you need
to pay off the business’s short-term obligations (in the coming 12
months).
3. Why do Capital Expenditures Increase Assets When other Cash
Outflows don’t and Instead Create Expenses?
Ans: Capital expenditures are capitalized because they give benefits to the
firm for a substantial amount of time. For example, a new branch would
make a lot of money for the firm for a long while but an employee’s work
will only benefit until the time of paying the wages and that’s why they
create an expense. This is the primary difference between an asset and an
expense.
4. Explain a Cash Flow Statement.
Ans: First we start with net income, proceed line by line while making
adjustments to arrive at cash flows from operations. Now, you will have to
mention capital expenditures, purchase of intangible assets, purchase or
sale of investment securities, and asset sales to arrive at cash flow from
investments. After getting the cash flow from investments, you’ll need to
mention issuance or repurchase of equity and debt and paying out
dividends to arrive at finances.
Then, you need to add cash flows from investments, operations, and
financing to get the total change in cash. Finally, the cash balance at the
beginning of the period and the change in cash lets you arrive at the cash
balance of the period’s end. This is essentially what a cash flow statement
looks like.
5. Can a Company Show Positive Cash Flows While Facing Financial
Problems?
Ans: Yes, a company can show positive cash flows even while facing
financial trouble through impractical enhancements in working capital
(delaying payables and selling inventory) or by not letting revenue go
forward in the pipeline.
6. Preference Capital?
Ans: In simple words, preference capital refers to the amount raised by
issuing preference shares. This is a hybrid method of financing the firm as
it offers some features of debentures and some features of equity. It is the
capital that has preference over equity capital at the time of dividend
payment.
7. Hedging?
Ans: Hedging is a risk management strategy we implement to offset losses
in investments. We do so by taking an opposite position in a related asset.
However, the amount of risk hedging reduces results in a similar reduction
in the potential profit. You can say that hedging is similar to having
insurance where you pay a certain premium and get assured compensation.
With hedging, if the asset in question causes you a loss, the opposite
position in the related asset will make up for this loss. This is why a
hedger is quite different from speculators as a hedger doesn’t focus on
maximizing profits but on minimizing risks.
1. What is RAROC?
Ans: RAROC stands for Risk-Adjusted Return On Capital and is a risk-
based profitability measurement framework we use to analyze risk-
adjusted financial performance. It gives a proper view of profitability
across organizations. It is one of the best tools to measure a bank’s
profitability. By combining it with the risk exposure and the ascertained
economic capital, you can calculate the expected returns more accurately
with RAROC.
2. Fair Value?
Ans: Fair value refers to the unbiased and rational estimate of the potential
market price of an asset, good, or service. The fair value of an asset is the
amount at which you can buy or sell the asset in a current transaction
between willing parties other than a liquidation. Similarly, the fair value of
liability refers to the amount at which you can incur or settle in a current
transaction between two willing parties other than a liquidation.
3.Secondary Market?
Ans: Secondary market is where people trade securities that have been
offered to the public in the primary market beforehand and are listed on
the stock exchange. The secondary market is also known as the
aftermarket and some of the prominent examples of them include
NASDAQ, Bombay Stock Exchange (BSE), and New York Stock
Exchange (NYSE).
4.Difference Between Cost Accounting and Costing?
Ans: Costing is the process of identifying a product’s or service’s cost
while cost accounting is the mechanism of analyzing a business’s
expenditure. Cost accounting is a branch of accounting that determines the
expenses incurred from a venture through examining, analyzing, and
predicting the cost data.
On the other hand, costing is the process of asserting the costs and prices
of products. Costing is a technique while cost accounting is a branch of
accountancy. The former has very little impact on a business’s decision-
making while the latter is crucial for informed decision-making.
5. Cost Accountancy? Objectives of Cost Accountancy
Ans: Cost accountancy is the combination of costing and cost
accounting where you classify, record, and allocate expenditure to
determine a product’s or service’s cost. It records and analyses the
related data and presents them appropriately to help in guiding
the decision-making process.
Following are the objectives of cost accountancy:
To get correct analysis of cost (by process and different elements of
cost).
To ascertain the cost per unit of various products.
To ascertain the profitability of every product.
To advise the management on how they can maximize their profits.
To disclose the sources of wastage (time, resources, or money).
1.Adjustment Entries? Why do We Pass Them?
Ans: The entries we pass at the end of every accounting period to the
nominal and related accounts so we can indicate the correct profit and loss
in the profits and loss accounts and keep the balance sheet accurate, are
called adjustment entries.
It is crucial to passing adjustment before we prepare the final financial
statements as in their absence the final statements would reflect incorrect
information resulting in error and confusion. Moreover, the balance sheet
wouldn’t show the accurate position of the business if we don’t pass the
adjustment entries.
2.Put Option?
Ans: Put option is a financial market derivative instrument that allows the
holder to sell an asset at a specific price by a specific date to the writer of
the put. The purchase of a put option sends a negative message about the
future of the stock in question.
3.Deferred Tax Liability?
Ans: Deferred tax liability is the amount the company hasn’t paid yet to
the tax department but is expecting to pay it in the future. It happens when
a company’s tax expenses are lesser than the amount they reflect in their
tax reports or financial statement.
4.Goodwill?
Ans: Goodwill is an asset that contains the excess of the purchase price
over the fair market value of an acquired business.
5.Difference Between a Journal Entry and a Ledger?
Ans: The journal is the book of prime entry and all the transactions are
recorded in it to show which account got debited and which one got
credited. However, the ledger is the book for keeping separate accounts.
You’d have to classify the recorded transactions in a journal and add them
to the dedicated accounts present in the ledger. The ledger is also known
as the book of final entry.
