1. What is Simple Interest?
Simple Interest is the extra money you earn or pay on a loan or investment over
time. It is calculated only on the original amount (principal) and does not change.
If you deposit ₹10,000 in a bank at an interest rate of 5% per year for 3 years, the
interest will be:
(10000*5*3)/100=1500
So, after 3 years, you will have ₹11,500 (₹10,000 + ₹1,500).
Unlike compound interest, simple interest does not grow on previously earned
interest—only on the original amount!
2. What is Compound Interest?
Compound Interest is the extra money you earn or pay on a loan or investment, but
unlike simple interest, it is calculated on both the original amount (principal) and
the interest that has already been added over time. This means your money grows
faster because you earn interest on interest!
A=P(1+R/100)T
Where:
● A = Final amount
● P = Principal (original amount)
● R = Interest rate per period
● T = Time (number of periods)
If you invest ₹10,000 at 5% annual interest, compounded yearly for 3 years, your
final amount will be:
A=10000*(1+5/100)^3
A=10000*(1.157)
A=11,576
● You earned ₹1,576 in interest, which is more than the ₹1,500 you would get with
simple interest.
Simple Interest = Earns interest only on the original amount.
● Compound Interest = Earns interest on the original amount + previous interest, so
it grows faster!
3. What is meant by the Time Value of Money?
The Time Value of Money (TVM) means that money today is worth more than the
same amount in the future because it can be invested and earn interest over
time.
Why is ₹100 today worth more than ₹100 next year?
● If you have ₹100 today, you can invest it and earn interest, making it worth more in
the future.
● Due to inflation, prices of goods and services generally rise over time, meaning
₹100 today will buy more than ₹100 in the future.
● There is always a risk of not receiving money in the future, so having it now is
more secure.
Example:
If you have ₹1,000 today and invest it at 5% interest per year, in one year, it will grow to:
₹1,000×(1.05)=₹1,050₹1,000 \times (1.05) = ₹1,050₹1,000×(1.05)=₹1,050
So, ₹1,000 today is worth more than ₹1,000 next year because it can grow in value!
This concept is used in investing, loans, and financial planning to make better decisions
about money.
4. How is time value of money computed?
The Time Value of Money (TVM) means that money today is worth more than the
same amount in the future. It helps in calculating how money grows over time (future
value) or what future money is worth today (present value).
Below are four important ways to compute TVM:
1. Future Value of a Single Cash Flow
This tells us how much a single amount of money today will grow in the future with interest.
Formula:
FV=PV×(1+r)tFV = PV \times (1 + r)^tFV=PV×(1+r)t
Where:
● FV = Future Value
● PV = Present Value (today’s money)
● r = Interest rate per period
● t = Number of periods (years)
Example:
You invest ₹1,000 at 5% annual interest for 3 years:
FV=1,000×(1.05)3=1,157.63FV = 1,000 \times (1.05)^3 =
1,157.63FV=1,000×(1.05)3=1,157.63
So, your ₹1,000 will grow to ₹1,157.63 in 3 years.
2. Future Value of an Annuity
An annuity means a series of equal payments made over time (like monthly savings). This
formula calculates how much those payments will be worth in the future.
Formula:
FV=P×(1+r)t−1rFV = P \times \frac{(1 + r)^t - 1}{r}FV=P×r(1+r)t−1
Where:
● P = Regular payment
● r = Interest rate per period
● t = Number of periods
Example:
You save ₹1,000 every year at 5% interest for 3 years:
FV=1,000×(1.05)3−10.05=3,152.50FV = 1,000 \times \frac{(1.05)^3 - 1}{0.05} =
3,152.50FV=1,000×0.05(1.05)3−1=3,152.50
So, after 3 years, your savings will grow to ₹3,152.50.
3. Present Value of a Single Cash Flow
This tells us how much a future amount of money is worth today.
Formula:
PV=FV(1+r)tPV = \frac{FV}{(1 + r)^t}PV=(1+r)tFV
Example:
You will receive ₹1,157.63 after 3 years at 5% interest. What is its value today?
PV=1,157.63(1.05)3=1,000PV = \frac{1,157.63}{(1.05)^3} =
1,000PV=(1.05)31,157.63=1,000
So, ₹1,157.63 in 3 years is worth ₹1,000 today.
4. Present Value of an Annuity
This calculates how much a series of future payments (like pension) is worth today.
Formula:
PV=P×1−(1+r)−trPV = P \times \frac{1 - (1 + r)^{-t}}{r}PV=P×r1−(1+r)−t
Example:
You will receive ₹1,000 per year for 3 years at 5% interest.
PV=1,000×1−(1.05)−30.05=2,723.25PV = 1,000 \times \frac{1 - (1.05)^{-3}}{0.05} =
2,723.25PV=1,000×0.051−(1.05)−3=2,723.25
So, those future payments are worth ₹2,723.25 today.
The Effective Annual Return (EAR) is the actual interest earned on an investment in a
year, considering how often the interest is compounded.
When you see an investment offering 10% interest per year, it may not be the exact return
you get. If interest is compounded multiple times within a year (quarterly, monthly, or
daily), the real return will be higher than the stated rate.
Example:
● You invest Rs. 1,000 in a savings account that offers 10% annual interest, but it
compounds quarterly (every 3 months).
● Instead of getting a flat 10% (Rs. 1,100), your money grows faster because you
earn interest on previously earned interest.
● At the end of the year, your total balance becomes Rs. 1,103.80 (not just Rs. 1,100).
● This means your Effective Annual Return is 10.38%, not just 10%.
✔ More frequent compounding = Higher actual return.
✔ Quarterly, monthly, or daily compounding increases returns.
✔ Even a small difference matters in big investments!
In simple words, EAR is the true return on your investment after considering the power
of compounding!
5. How to go about systematically analyzing a company?
To make a good investment decision, you need to analyze a company in three main
ways:
1. Industry Analysis (Understanding the Business Sector)
● A company is part of an industry or sector that produces similar products.
Example: NHPC, NTPC, and Tata Power belong to the Power Sector in India.
● You need to check how the overall industry is performing.
● Look at things like:
○ Government policies affecting the sector
○ Future demand for the industry’s products
○ Global and economic changes (e.g., if the rupee’s value drops, export
companies may benefit).
This step helps you understand whether the industry has good growth potential or is facing
challenges.
2. Corporate Analysis (Checking the Company’s Performance)
● Once the industry looks promising, analyze the company itself.
● Key things to check:
○ How has the company performed in the past few years?
○ How does it compare to competitors?
○ What are its future growth plans?
○ Does it have strong leadership and management?
This helps you determine if the company is well-run and has potential for future growth.
3. Financial Analysis (Checking the Numbers)
● If both the industry and company performance look good, you must check if the
stock price is worth buying.
● Key financial numbers to look at:
○ Earnings Per Share (EPS): Shows how much profit the company makes per
share.
○ Price-to-Earnings (P/E) Ratio: Tells if the stock is expensive or cheap
compared to its earnings.
○ Company’s Balance Sheet & Profit and Loss Statement: These show the
company’s financial health.
By looking at these financial details, you can decide if the stock is a good investment at its
current price.
Summary:
1️⃣ Check the Industry – Is the overall sector doing well?
2️⃣ Check the Company – Is the company growing and managed well?
3️⃣ Check the Finances – Is the stock worth buying based on its financial health?
By following this step-by-step process, you can make an informed investment decision!
6. What is an Annual Report?
An annual report is a document that a company publishes once a year to show how
it performed financially and operationally. It contains important details about the
company's assets, liabilities, profits, expenses, and earnings for that year.
1️⃣ Financial Health – It shows how much money the company made (revenues) and spent
(expenses).
2️⃣ Profit or Loss – It explains whether the company made a profit or faced losses during the
year.
3️⃣ Assets & Liabilities – It details what the company owns (assets) and what it owes
(liabilities).
4️⃣ Future Plans & Key Developments – It may include information on business growth,
challenges, or future goals.
● Companies send an abridged (short version) of the report for free to shareholders.
● A detailed version is available on request.
● It is the best source of information to check a company's financial health.
● Investors use it to decide whether to buy, hold, or sell a company’s shares.
In simple words, an annual report is like a health check-up report for a company, helping
investors understand how well it is doing.
7. What is a Balance Sheet and a Profit and Loss Account Statement? What is the
difference between Balance Sheet and Profit and Loss Account Statements of a
company?
Both the Balance Sheet and Profit & Loss (P&L) Account Statement are
important financial reports of a company, but they show different types of
information.
1. What is a Balance Sheet?
A Balance Sheet is a snapshot of a company’s financial position at a specific point
in time (e.g., as of March 31, 2024).
✅
It shows:
✅
Assets → What the company owns (cash, buildings, machinery, inventory, etc.).
Liabilities → What the company owes (loans, debts, payments to suppliers,
✅
etc.).
👉
Equity → The owner's share in the business (share capital + retained earnings).
Think of it like a financial report card that tells you how strong a company is
financially.
2. What is a Profit & Loss (P&L) Statement?
A Profit & Loss Statement (also called an Income Statement) shows how much
profit or loss a company made over a period (e.g., 1 year).
✅
It shows:
✅
Revenue → Total money earned from sales.
✅
Expenses → Money spent on salaries, rent, raw materials, etc.
Profit or Loss → Revenue - Expenses = Net Profit (if positive) or Net Loss (if
👉
negative).
Think of it like a monthly salary statement that shows how much money came
in and how much went out.
8. What do these sources of funds represent?
A company's money comes from two main sources:
1. Shareholders' Fund (Net Worth) – This is money that comes from the owners
(shareholders) of the company. It includes:
○ Share Capital: The money shareholders invest in the company. This can be:
■ Equity Capital: Owners share profits but don’t get a fixed dividend.
■ Preference Capital: Investors get a fixed dividend before equity
shareholders.
○ Reserves and Surplus: Profits the company keeps instead of distributing as
dividends. These savings help the company grow.
2. Loan Fund – This is money borrowed from banks or other lenders, which the
company must repay with interest.
So, a company uses a mix of owners' money (shareholders' fund) and borrowed money
(loan fund) to run and grow its business.
9. What is the difference between Equity shareholders and Preferential shareholders?
The main difference between Equity Shareholders and Preference Shareholders
is:
1. Equity Shareholders:
○ They are the real owners of the company.
○ They get a share of the profits as dividends, but the amount is not fixed.
○ They have voting rights, meaning they can help make important company
decisions.
○ Their shares can be bought and sold in the stock market.
2. Preference Shareholders:
○ They get priority when it comes to receiving dividends, but at a fixed rate.
○ If the company shuts down, they get their money back before equity
shareholders.
○ They do not have voting rights, so they can't take part in company
decisions.
○ Their shares cannot be traded like equity shares and are returned to them
after a fixed period.
In short, equity shareholders have more control and risk, while preference
shareholders get a stable return but no control.
10.What do terms like authorized, issued, subscribed, called up and paid up capital
mean?
Authorized Capital – This is the maximum amount of money a company is allowed
to raise by selling shares.
Issued Capital – This is the portion of the authorized capital that the company
actually offers to investors (the public or private investors).
Subscribed Capital – This is the part of the issued capital that people agree to buy
(subscribe to).
Called-up Capital – The company does not always ask for the full price of shares
immediately. Called-up capital is the amount that the company has asked
shareholders to pay so far.
a. Example: If a company issues 10,000 shares at Rs. 100 each and asks
shareholders to pay Rs. 50 per share first, the called-up capital is Rs. 50 ×
10,000 = Rs. 5,00,000.
Paid-up Capital – This is the amount that shareholders have actually paid
from the called-up capital.
b. If some shareholders don’t pay, the unpaid amount is called in arrears, and it
is deducted from the called-up capital to get the paid-up capital.
● Authorized Capital = Maximum company can raise.
● Issued Capital = Shares the company offers for sale.
● Subscribed Capital = Shares people agree to buy.
● Called-up Capital = Amount the company asks to be paid.
● Paid-up Capital = Amount actually paid by shareholders.
11.What is the difference between secured and unsecured loans under Loan Funds?
The difference between secured loans and unsecured loans is:
1. Secured Loans:
○ These loans are taken against a security, meaning the company gives
some asset (like land, buildings, or machinery) as a guarantee.
○ If the company fails to repay, the lender can take ownership of the asset to
recover the money.
○ Examples: Debentures, bank loans, loans from financial institutions.
2. Unsecured Loans:
○ These loans are taken without any security, meaning there is no asset
pledged as a guarantee.
○ Lenders rely only on the company’s promise to repay.
○ Since there is no asset backing, these loans are riskier for the lender.
○ Examples: Fixed deposits, loans from promoters, inter-company loans,
and unsecured bank loans.
Key Difference:
● Secured loans are safe for lenders because they can claim company assets if the
loan isn’t repaid.
● Unsecured loans have no security, so lenders take a bigger risk
12.What is meant by application of funds?
The money a company collects from owners (shareholders) and lenders is used in
different ways to run and grow the business. This is called the application of funds
and includes:
1. Fixed Assets – Things the company buys for long-term use in the business, not for
selling.
○ Examples: Land, buildings, machinery, patents, copyrights.
○ These help the company operate but are not meant to be sold.
2. Investments – Money that is not used in the main business but is invested
elsewhere to earn extra income.
○ Example: A company buys shares or bonds of another company.
○ These investments can be short-term or long-term.
3. Current Assets, Loans, and Advances – These are things that can be quickly
turned into cash and are used for daily expenses.
○ Examples: Raw materials, finished goods, cash, money owed by
customers (debtors), inventories, and prepaid expenses.
○ These help the company run day-to-day operations.
4. Miscellaneous Expenditures and Losses – These include special costs or
losses that the company has but are not directly part of its operations.
○ Example: Preliminary expenses (costs before starting the business) or
pre-operative expenses (costs before the company starts earning revenue).
○ Even if the company loses money, it doesn’t reduce its share capital
directly. Instead, losses are shown separately in financial records.
The company uses its funds to buy long-term assets (fixed assets), make extra
investments, manage daily expenses (current assets), and cover special costs or
losses.
13.What do the sub-headings under the Fixed Assets like ‘Gross block’ ‘Depreciation’,
‘Net Block’ and Capital-Work in Progress mean?
Gross Block (Gross Fixed Assets) – This is the total cost of all the fixed assets
the company has bought over time.
a. Example: If a company buys machinery, buildings, and equipment, their
combined original price is the Gross Block.
14.Depreciation – Over time, assets lose value due to usage, wear and tear, or aging.
This loss in value is called depreciation.
a. Example: A machine worth ₹1,00,000 today may only be worth ₹80,000 next
year because of use.
b. Methods of calculating depreciation:
i. Straight Line Method – A fixed amount is deducted every year.
ii. Written Down Value Method – The depreciation amount reduces
over time.
15.Net Block – This is the actual worth of the asset after depreciation is deducted.
a. Formula: Gross Block – Depreciation = Net Block
b. Example: If a company's total fixed assets (Gross Block) are ₹946.84 crore,
and depreciation is ₹482.19 crore, the Net Block is ₹464.65 crore.
16.Capital Work in Progress (CWIP) – This includes money spent on assets that are
not yet ready for use, like a new factory under construction or a machine yet to be
installed.
a. Once completed, it will be added to the Gross Block.
● Gross Block = Total cost of fixed assets.
● Depreciation = Reduction in asset value over time.
● Net Block = Asset value after depreciation.
● Capital Work in Progress = Assets under construction, which will soon become part
of Gross Block.
17.What are Current Liabilities and Provisions and Net Current Assets in the balance
sheet?
Current Liabilities:
a. These are amounts the company owes to others but doesn’t have to pay
immediately.
b. Examples: If a company buys goods on credit or receives advances from
customers, it owes money but doesn’t need to pay right away.
Provisions:
c. These are amounts the company sets aside to prepare for future expenses,
even if they don’t need to be paid immediately.
d. Examples: The company might set aside money for future taxes, dividends
for shareholders, or employee pensions.
So, Current Liabilities and Provisions are amounts the company owes, either for
goods and services already received or to cover future expenses, but not yet due.
Net Current Assets (or Net Working Capital):
e. This represents the money the company needs for its day-to-day
operations.
f. To find it, you subtract Current Liabilities and Provisions from Current
Assets (things the company can quickly turn into cash like cash, raw
materials, and finished goods).
g. Example: If a company has ₹1,165.20 crore in Current Assets, owes
₹595.22 crore in Current Liabilities, and has ₹139 crore in Provisions,
then the Net Current Assets would be ₹430.98 crore.
● Current Liabilities = What the company owes now (like credit payments or customer
advances).
● Provisions = Money set aside for future expenses (like taxes or dividends).
● Net Current Assets = The money left for daily operations after subtracting what the
company owes from what it has in assets.
18.How is the balance sheet summarized?
A balance sheet shows where a company’s money comes from and how it is used.
The total amount of money the company has raised (called funds employed) is
equal to the value of what the company owns (called net assets).
1. Sources of Funds:
The company gets money from two main sources:
○ Shareholders' Funds (money from owners, like equity and preference
capital).
○ Loan Funds (money borrowed from others, like loans or debentures).
2. Application of Funds:
This money is then used to acquire assets (things the company owns), which
include:
○ Fixed Assets (long-term things like buildings, machinery, etc.).
○ Investments (money spent on buying shares, bonds, or other financial
assets).
○ Net Current Assets (money tied up in day-to-day operations like raw
materials, cash, or debts owed by customers).
● The Total Funds Employed (Rs. 1066.31 crore) comes from Shareholders' Funds
and Loan Funds.
● These funds are used to buy Fixed Assets, Investments, and Net Current Assets.
19.What does a Profit and Loss Account statement consists of?
A Profit and Loss Account (P&L statement) shows how much money a company
has earned and spent over a financial year, and whether it made a profit or loss. It
helps to understand the company’s financial performance. The main parts of the
Profit and Loss Account include:
1. Income (Item-1):
○ This is the money the company earned during the year, such as sales or
other sources of income.
2. Expenditures (Items 2-6):
○ These are the costs the company paid to run its business, such as raw
materials, salaries, rent, and other operating expenses.
3. Profit Available for Appropriation (Items 7-12):
○ This shows the profit after all expenses have been deducted from the
income. This is the remaining money after paying for everything.
4. Profit Appropriation (Items 13a, 13b, 13c):
○ This shows how the remaining profit is used, including:
■ Paying dividends to shareholders,
■ Setting aside money for a general reserve (a fund for future needs),
■ The balance carried forward to the next year (this becomes part of the
company’s retained earnings).
● The Profit and Loss Account shows how much money a company made, how
much it spent, and how much profit it has left after expenses. This profit is then used
for dividends and saving for future needs.
20.What should one look for in a Profit and Loss account?
When looking at a Profit and Loss (P&L) Account for a company, here’s what you
should pay attention to:
1. Sales and Profits Growth:
○ Look at how much the sales and profits (operating, gross, and net) have
grown compared to the previous year or previous half-year.
○ If there’s growth, it indicates good management and healthy business
operations.
2. Other Income:
○ Companies sometimes earn money from sources other than regular business
activities (called other income).
○ Steady income, like dividends from investments or interest from loans, is
good.
○ But be careful if the other income comes from selling assets or land, as this
isn’t regular income and could make the company look more profitable than it
actually is.
3. Expenditure Increases:
○ Check the increases in costs like raw materials, wages, and expenses
related to running the business (like administration and selling).
○ If costs increase faster than sales, it suggests the company is less
efficient and not making as much profit.
○ On the other hand, if costs are under control and sales are growing, the
company is operating efficiently.
4. Profit from Operations:
○ Look at the company’s profit from its core business (just from sales, ignoring
any other income).
○ If this profit is positive, it means the company is doing well in its main
operations.
5. Depreciation and Interest:
○ Check for changes in depreciation (the value of assets going down over
time). High depreciation could mean the company is buying new assets,
which is good for long-term growth.
○ But be cautious if interest costs are high because that means the company
is carrying a lot of debt, which could be a problem in the future.
6. Earnings Per Share (EPS):
○ EPS tells you how much profit the company is making for each share.
○ If the results are for half a year, you can double the EPS to get an estimate
of annual earnings.
● Check if sales and profits are growing and if costs are being controlled.
● Be cautious of non-regular income (like selling assets).
● Look at the profit from operations, the level of depreciation and interest, and the
earnings per share to understand how well the company is doing.
