Author name: Vidfin

What is Book Value in Stock Market
Stock Market Fundamentals

What is Book Value in Stock Market?

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If you are a beginner investor, then understanding book value is crucial for you. By knowing the book value, you can make a smarter investment decision. Book value in the stock market refers to the net asset value of a company. To understand in simple terms, book value represents the total value that the existing shareholders will get if the company were to be liquidated today. What is Book Value in Stock Market? From a fundamental analysis point of view, book value represents the net worth of the company. To calculate book value, simply subtract the total liabilities of a company from its total assets. For example, if a company has total assets worth ₹100 Crore and total liabilities worth ₹60 Crore. Then the book value of the company is said to be ₹60 Crore. Investors use book value to identify whether a stock is undervalued or overvalued. If a stock is trading lower than its book value, it may be a good opportunity to invest, given the company stands strong on other financial parameters. How is Book Value Calculated To calculate the book value, use the following  formula: Book Value = Total Assets – Total Liabilities This gives the total net worth of the company in its balance sheet. To calculate the book value per share (BVPS), use this formula instead: Book Value = (Total Assets – Total Liabilities) / Total Outstanding Shares Example: Let us consider a listed company ABC having: Total Assets = ₹500 crore   Total Liabilities = ₹200 crore   Total Outstanding Shares = 10 crore   Now the Book Value = ₹500 crore – ₹200 crore = ₹300 crore And, Book Value Per Share = ₹300 crore / 10 crore = ₹30 per share Use of Book Value Book value is an important financial metric that can be used in multiple ways by investors as well as analysts. The most common uses of book value are listed in the table given below. Assessing a Company’s Net Worth Book value helps to understand the actual net asset value of a company. Investors use book value to know a company’s financial health and stability. Identifying Undervalued Stocks A stock can be considered undervalued if its market price (trading price) is below the book price. In that case, it can be a good investment option, given that other metrics hold up. Calculating Price-to-Book (P/B) Ratio Book value is needed to calculate the price-to-book (P/B) ratio of a stock. Comparing Companies Within the Same Industry Book value helps in comparing peers within the same or across similar industries. It is very useful for asset-heavy sectors like manufacturing, banking, and real estate. Making Informed Buy/Sell Decisions Investors look at the book value to decide if the growth of the company is rightly aligned with its asset base. Price to Book Ratio The price-to-book ratio is an important financial ratio that is used to compare the current market price of the stock to the company’s book value per share. The formula for calculating the price-to-book ratio is given below. Price to book ratio = Market Price / Book Value per share For Example: If a company has: Market Price per Share = ₹100   Book Value per Share = ₹50   Then its P/B Ratio = 100/50 = 2 It can be inferred that the stock is currently trading at two times its book value. How to interpret the Price to Book Ratio The price-to-book ratio can be interpreted in one of the following ways: P/B < 1: Stock may be undervalued (trading below net asset value)   P/B = 1: The stock is fairly valued  P/B > 1: Stock may be overvalued (investors are paying a premium) The price-to-book ratio is used especially for analyzing asset-heavy sectors such as banking and real estate. For companies in the tech and service sectors, price-to-book ratio might not present the complete picture. It is best to use the price-to-book ratio alongside other financial ratios like price to earnings, return on equity, etc. This would imply a better conclusion as to whether the stock is favorable for investment or not. Final Thoughts Both book value and ratios (price to book) derived using it are helpful to investors who want to thoroughly analyze the company from an investment point of view. Book value represents the total net worth of a company. The price-to-book ratio, on the other hand, compares the stock price with its book value per share. Combining both can offer valuable insights. However, it will be better if they are used alongside other quantitative and qualitative factors to make any final decision.

What Are Different Types of Value of Shares
Stock Market Fundamentals

What Are Different Types of Value of Shares?

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You might wonder why a share/stock is trading at a particular price. This is a common question, especially if you are a beginner investor. You might know only about one type of value of share. But in reality, there are different types of values of shares. By understanding the different types of value of shares, you can identify if a stock is fairly priced, overpriced, or underpriced. This article will guide you to learning the types of values a share and the different methods used for share price valuation. What is the valuation of Shares? The valuation of shares can be understood as the process of determining the right value of a share. It’s like considering all the parameters of a business and then placing a price for each equity share. It generally involves using financial indicators to assess the share value. Different Types of Value of Shares Different methods, such as financial metrics, investment analysis, and market sentiment, can be used to obtain different types of value of shares. The table below contains the primary ones S No. Type of Value of Shares 1. Face Value 2. Market Value 3. Book Value 4. Intrinsic Value 5. Liquidation Value Face Value: It is the initial value assigned to the share by the respective company at the time of issuing it. It is used in accounting and for legal purposes. For example, If a share is assigned a face value of ₹10, it remains unchanged. Market Value: The price at which the share is currently being traded in the market. It shows the supply and demand pressure along with the investor sentiment. Example: A share trading at ₹500 has a market value of ₹500. Book Value: It is the net asset value per share. It is calculated as: (Total Assets – Total Liabilities)/ Total number of shares outstanding. It indicates the financial stability of a company. For example, A company with total assets worth ₹100 Crores, liabilities worth ₹40 Crores, and 10 Crores total outstanding shares has a book value of ₹6. Intrinsic Value: It is the perceived value of stock, often determined through fundamental analysis. It helps in identifying if a share is overvalued or undervalued. Example: A stock trading at ₹200 with an intrinsic value of ₹250 may be a fair investment.  Liquidation Value: It is the amount that every shareholder would receive if the company were to be liquidated today. It is used to determine the downside risk. Example: If a company’s liquidation value per share is ₹50, but its market price is ₹200, it indicates strong growth potential. Valuation Method of Shares The valuation methods can be broadly divided into categories, given below: Intrinsic (Absolue) Valuation Methods: Based on a company’s financials and fundamental analysis. Relative Valuation Methods: Based on comparisons with similar companies. Intrinsic Valuation Methods: The major used intrinsic valuation methods are mentioned in the table below Intrinsic (Absolute) Valuation Method Formula DCF (Discounted Cash Flow) Method ∑CF/(1+r)​​^2Where CF = Cash Flow, r = Discount Rate, t = Time Period NAV (Net Asset Value) Method Assets – Liabilities Dividend Discount Model Dividends/(r – g)D = Dividend, r = Required Rate of Return, g = Growth Rate Earnings Capitalization Net Earnings/Capitalization Rate DCF (Discounted Cash Flow) Method: This method estimates the intrinsic value of a company by calculating the present value of all the future cash flows, using a discount rate. This methos works best for growth companies. It accounts for future potential but also requires accurate projections. NAV (Net Asset Value) Method: It calculates the value of a share by subtracting the company’s total assets from its total liabilities. Its best applicable to asset heavy industries. It is easy to calculate but ignores future earnings. Dividend Discount Model: This method values a share by estimating the present values of all the future dividends. It primarily focuses on income and is not applicable for non-dividend paying companies. Earnings Capitalization: It valuates a business by dividing its expected annual earnings by a capitalization rate (a required rate of return). This method emphasizes earnings but is sensitive to assumptions. Relative Valuation Methods: The widely used valuation methods are listed in the table below Relative Valuation Method Formula Price to Earning Ratio Market Price/EPS(Earnings per Share) Price to Book Ratio Market Price/Book Value EV by EBITDA EV/EBITDA Price to Sales ratio Market Capitalization/Annual Sales Price to Earning Ratio: It compares the company’s current share price to its EPS (earnings per share). It works best on mature companies and is easy for comparing but it can also be misleading at times. Price to Book Ratio: It compares the current stock price to the company’s book value per share. It is ideal for banking and financial stocks. Also identifies undervalued stocks. But it does not works well on asset-light firms. EV by EBITDA: This ratio compares the EV (Enterprise Value) to EBITDA (Earnings before Interese, Taxes, Depreciation and Amortization). Its great for analysing companies at an early phase not having any profit. It helps in mergers and acquisitions of companies. Factors Affecting the Valuation of Shares  Different factors that affect the valuation of shares are given below Financial Performance: The financial performance of the company over all the quarters impacts the valuation of shares. A good overall performance can have a positive effect on the valuation of shares and vice versa. Company Fundamentals: The change in the fundamentals of a company also impacts the valuation of shares. Debt levels, cash follows, return on equity, etc all tend to have effect on the valuation of shares. Economic Conditions: Economy effects the valuation of shares all over the stock market. A growing economy positively affects the valuation of shares. Growth Potential: Companies with a strong growth potential in the future tend to have share valuations at a premium. Factors Impact on Share Valuation Dividend Payout Higher dividends = Higher demand Inflation High inflation = Lower valuation Interest Rates High rates = Lower valuation, Low rates = Higher valuation GDP Growth High GDP

Role Of Angel Investor
Stock Market Fundamentals

Role Of Angel Investor In India

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For most people, the key role of an angel investor seems to be providing capital in exchange for significant equity to start-ups at an early stage. But the role of an angel investor is much more than that. Indian start-ups have emerged drastically due to the widening scope of angel investing. This article sheds light on the world of angel investors. From investing methodology to functioning covers all the key aspects related to angel investing in India. Different Roles of Angel Investors The major key roles of an Angel Investor involve: Early Stage Funding It is often the angel investors that provide the initial seed capital that is required. It takes care of major start-up operations like product development, hiring talent, and marketing products/services to end consumers. Risk Taking Support Angel Investors are prone to risk as they often invest in a highly unstable unproven business model. The risk involved is very high but the returns can be multifold. They are driven by the conviction of the founders. Mentorship and Guidance Angel Investors carry the experience of building big companies. Their mentorship, guidance, and advice can be of high value to the new founders to turn their ideas into profitable business models. Bridge to Future Funding If backed by an angel investor the credibility of the start-up increases. It makes future capital raises easier. Flexible Terms Unlike regular debt issued by banks or other financial institutions angel investors provide flexible terms. These terms can involve lucrative interest rates, royalty from sales, or a piece of profits incurred. Functioning of an Angel Investor The functioning of investment by an angel investor involves more or less the following steps: Identifying Investment Opportunities They look for new-age investment opportunities through ideas that can change the way our world operates. They can identify an opportunity throughPitch events for foundersNetworks/Personal connectionsOnline platforms for angel investors Due Diligence Angel investors conduct due diligence before investing. It involves:Evaluating the potentialAnalyzing projectionsAssessing the founder’s visionReviewing the risks involved Structuring Investment Once checked the investment is made in exchange of:EquityConvertible DebtAll negotiations are made through legal agreements. Post Investment Involvement Angel investors have major roles post the investment like:Advising founders and managementIntroduction to networksStrategy to growTaking a seat on the board of directors Exit Strategy Angel investors tend to take an exit in one of the following manner:Acquisition by a bigger playerIPO (Initial Public Offer)Sale of stake to other onboarding investors Therefore, it can be inferred that the role of an angel investor is way more than just giving out money to a start-up. It’s their experience, network, and business advice that can play a huge role in the success of any emerging venture. Indian Angel Investors and Their Investments India has witnessed a surge in startup activity over the past decade. Indian angel investors have played a significant role in the success of Indian start-ups. Here are some of the most prominent Indian angel investors and their notable investments: Angel Investor Major Investments Sanjay Mehta OYO Rooms, Block.one, Box8, FabAlley Rajan Anandan Unacademy, Innov8, BlueStone, Instamojo Anupam Mittal Ola, Shaadi.com, Big Basket, Druva Kunal Bahl & Rohit Bansal Razorpay, Shadowfax, Unacademy, GoMechanic Nithin Kamath Smallcase, Finshots, Stoa School Deep Kalra Zomato, Ixigo, Goibibo Girish Mathrubootham Dunzo, Airmeet, Rocketlane Harsh Jain & Bhavit Seth HalaPlay, Rooter, Elevar Sports The key focus areas of Indian Angel Investors have been fintech & financial services, edtech, D2C Brands, health tech, and gaming.  How to Find an Angel Investor in India Finding the right angel investor is a challenge but can be a game-changer given the competitive landscape of start-ups.  Here’s a step-by-step guide on how to find an angel investor in India: 1 Start with Angel Investment Networks Several platforms connect founders to ideal angel investors.Indian Angel Network (IAN)Mumbai AngelsChennai Angels100XVCLead Angels 2 Use Online Platforms Online platforms can provide access to multiple angel investors. Some of them are:LetsVenture AngelList IndiaStartupIndia HubVenture Catalysts 3 Leverage Your Network Leverage network and professional circle for reaching out to potential angel investors who might be interested. 4 Reach Out with a Strong Pitch A strong pitch is important for an impact that lasts long. It must contain the vision that you aspire your idea towards. 5 Join an Accelerator or Incubator Programs like Y Combinator, Techstars India, GSVlabs, or IIT/IIM incubators offer access to mentors and angel networks as part of their ecosystem. Final Thoughts Angel investors have become a driving force in India’s startup ecosystem, helping innovative ideas turn into successful businesses. Their involvement early in the journey can be the difference between a startup’s success and failure. FAQ

What is Market Capitalization In Stocks
Fundamental Analysis

What is Market Capitalization In Stocks

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Market capitalisation generally called the market cap of a company can be understood as the total market value of the company. Market capitalization is used by investors all over the world to evaluate companies before buying their shares. There are three major types of market capitalization which are large cap, small cap, and mid cap. How Market Capitalization is Calculated? The formula for calculating the market capitalization of a company is given below Market capitalization = Current Share Price * Total outstanding shares For example, if a company has 10 crore outstanding shares, and each share is priced at ₹50, the market cap would be: 10,00,00,000 × 50 = ₹500 Crore (Market cap) The figure obtained represents the market value of a company. It helps in comparing companies with their peers and identifying potential investment opportunities. Categories of Market Capitalization Companies in the stock market are often classified based on their market cap into three categories: Market Capitalization Category Market Capitalization Range Characteristics Large Cap Above ₹28,000 Cr Very Stable, Bluechip Companies, Safe to invest Mid Cap Between 8,500 and 28,000 Cr Emerging companies, riskier than large-cap, the potential for growth Small Cap Less than ₹8,500 Cr Highly risky, high growth potential, small and relatively newer companies  1. Large-Cap Stocks Large-cap companies are often the market leaders in their sector or industry segment. Examples of large caps include blue-chip stocks like Reliance, HDFC Bank, and Infosys. Investors who are looking for stable returns and long-term growth often prefer to invest their money in large-cap stocks. 2. Mid-Cap Stocks Mid-cap stocks are the companies that have a market cap somewhere between 8,500 and 28,000 Crore. These have generally shown significant growth but still have enough room for expansion. They come with slightly more risk factors. Example: Castrol and Jubilant Food. 3. Small-Cap Stocks Small-cap stocks include companies having a market capitalization lesser than ₹8,500 Crore. They are the riskiest of the lot. But they also tend to have the highest growth potential shortly. Example: Bombay Dyeing and Godavari Power. Importance of Market Capitalization Market capitalization plays a significant role in shaping investment strategies. Here are some reasons: Risk Assessment From a risk point of view, market cap becomes important. It tells which companies are less or more prone to risk based on their market cap. Large-cap companies are the least risky followed by mid-cap and small-cap. Diversification Strategy A diversified and balanced portfolio containing stocks of companies with different market caps allows one to take advantage of each market cap category. Liquidity Consideration Market capitalization is an important factor when it comes to assessing liquidity. Often low market cap companies or penny stocks do not offer the required liquidity for investing confidently without the fear of being stuck. Growth Potential Market cap can very well tell the growth potential of companies. Large-cap companies have already seen the maximum expansion phase while mid-cap and small-cap companies offer a high growth potential and therefore returns. Limitations of Market Capitalization While market cap is handsome down a very useful indicator, it comes with certain limitations: Does Not Reflect Debt Levels: Market capitalization ignores the debt level of a company. It poses a limitation as a company with high market capitalization can also be under a high debt level. This would make it an unfavorable investment despite having good market capitalization. Ignore Profitability: Market capitalization does not take into consideration the profitability factor. Often companies with a very high market cap can have none to very low profit as in the case of some modern startups. Market Fluctuations Impact Valuation: Due to sudden fluctuations in the share price the market cap can take a severe hit. The market cap can drop significantly while the company tends to do well. Financial Metrics to Consider Alongside Market Cap To make well-informed investment decisions, investors should also analyze other financial metrics along with market capitalization: Price-to-Earnings (P/E) Ratio: It tells whether the market is ready to pay a higher or a lower price for a stock. Earnings Per Share (EPS): It is a measure of the company’s profitability. A higher EPS indicates the growth of the company. Debt-to-Equity Ratio: It helps in understanding how much debt a company has compared to its assets. A good debt-to-equity ratio is considered to be between 1 and 1.5. Revenue and Profit Margins: Analysing the revenue and profit margins is important as it can provide insight into the growth potential possible for a particular business. Final Thoughts Market capitalization is an essential tool to understand the market size and project the future growth potential of a company. But it has its limits. It therefore requires a combination of other financial metrics to get a crystal clear picture. If utilized in the right manner it can point out great investment opportunities that can prove to be even multi-baggers in the near to long term future. FAQ

Working of Stock Market In India
Fundamental Analysis

Working of Stock Market In India

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You keep hearing about “start investing in the stock market”. Your friend’s portfolio is growing, instagram reels claim you can double your money if invested in the stock market and people around you seem to be talking about stocks. But pause for a moment and ask yourself — what really is the stock market and how does it work? If you have ever googled how stock market works in India or wanted to know who controls the stock market in India then this blog is for you. Let’s understand how stock market works step by step.   How Stock Market works in India   The working of the stock market might sound complicated but it is just like an online marketplace — example Amazon or Flipkart. So here, instead of buying clothes or gadgets, you are buying ownership in companies.  In the stock market you buy and sell shares of a company. When you buy a share of a company like Infosys or Reliance, you’re buying a small piece of that company. These shares are traded on stock exchanges like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange), where thousands of buyers and sellers like you come together, just like in an auction. The price of a share goes up when more people want to buy it and drops when more want to sell. All of this is driven by the law of demand and supply.   Key Participants of Stock Market When you place a trade in the stock market, there are several key players who work behind the scenes to make everything function smoothly. So let’s take a look: Investors: These are everyday people — students, salaried professionals, homemakers, or anyone with a Demat account who invest directly in the stock market or through mutual funds. If you’ve ever bought a stock through Zerodha or Groww, you are also a retail investor. Companies: Businesses list their shares on the stock exchange so that they can raise money from the public and for this they issue an IPO (Initial Public Offering). For example, when Zomato or LIC launched their IPOs, they were essentially inviting investors to become part-owners in their company in exchange for funds. Stock Exchanges: These are the official marketplaces where all the buying and selling of shares happen. In India, the two biggest stock exchanges are the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). But ​India hosts several other stock exchanges also, each serving distinct functions in the financial ecosystem:- National Commodity & Derivatives Exchange Ltd.  Multi Commodity Exchange of India Ltd. Metropolitan Stock Exchange of India Ltd Calcutta Stock Exchange Ltd.   SEBI (Securities and Exchange Board of India): SEBI acts like the traffic police of the Indian stock market. SEBI’s work involves regulating and monitoring all activities of the stock market to make sure no one is manipulating prices, cheating investors or breaking any rules. Brokers: You can not buy shares directly from the exchange. You need a broker — like Zerodha, Upstox, or Groww — who provides the platform to place your buy/sell orders. Before the rise of these online brokers people used traditional stockbrokers to invest in the stock market. Think of brokers as the bridge between you and the stock exchange. Types of Stock Markets   Understanding the different types of stock markets is crucial for gaining a deeper insight into how the stock market works.   1. Primary Market  This is where the shares of a company are issued for the first time to the public through IPOs (Initial Public Offerings). The money raised goes directly to the company, which is then used for expansion, debt repayment or new projects undertaken by the company.   2. Secondary Market  After the shares are listed on stock exchanges like NSE or BSE they enter the secondary market. Here, investors buy and sell shares among themselves — the company doesn’t receive money anymore. Both markets are key parts in the working of the stock market in India. They play an important role in how companies raise money and how investors do trading.   Trading in Stock Market  Secondary Market is the place where trading in the stock market happens. Here investors buy and sell the listed stocks. Below is the step by step procedure:  Open a Demat & Trading Account: You need these accounts with a broker (like Zerodha or Upstox) to start with your trading journey. Select a Stock: Choose the stock of your choice that you want to buy or sell. Place a Buy/Sell Order: Buy Order: You set the price at which you want to purchase the stock. Sell Order: You set the price at which you are willing to sell your stock. Order Matching: When your buy and sell orders match, the trade is executed automatically. Shares Reflect in Your Demat Account: After the trade is done, the shares you have bought will show up in your Demat account. While trading, here are some of the fees you will pay: Brokerage Fee: Charged by the broker for every trade. STT (Securities Transaction Tax): A government tax on buying/selling of stocks. Exchange Transaction Charges: Charged by the stock exchange NSE/BSE. GST: On the brokerage + transaction charges. Stamp Duty: Small tax charged by the state government. SEBI Charges: A small fee charged by the Securities and Exchange Board of India.   What influences a Stock’s Price   A stock price is the current value of a share at which it is being bought or sold in the market. Demand and supply primarily determines the price of a stock in the market. When more investors are willing to buy a stock than selling it, the price of the stock rises. Similarly, when more investors are willing to sell than buying, the price of the stock falls. This continuous buying and selling happens in the secondary market and prices adjust themselves instantly based on new information. But do you really know what drives this demand and supply?

Personal Finance, banking

Audit Materiality 

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The auditor uses the idea of Materiality to assess the risks of material misstatement and determine the nature, timing, and scope of risk assessment methods. This approach is crucial to the audit process as a whole. Thus, Materiality is an essential aspect of auditing.  This article will cover everything about the materiality concept in audit, its types, why it is necessary, and what factors are responsible for affecting Materiality. What is Audit Materiality? Choosing a benchmark that has been utilized to effectively ensure that if the auditor does not discover any accounting error, it won’t materially mislead the clients of the financial statements is known as “audit materiality.  International Financial Reporting Standards (IFRS) asserts that any transaction can be regarded as substantial if its exclusion or misstatement from the financial statements can potentially affect the decision of the various stakeholders. Materiality in audit refers to quantitative and non-quantitative disclosures and amounts in financial statements. For instance, the user of financial information may be influenced economically by the lack of or insufficient exposure to accounting policy for a significant portion of the financial statement. Factors Affecting Materiality Following the firm’s guidelines or a general rule of thumb is not sufficient for calculating Materiality. For reference, a team of engagement experts determines Materiality as 10% of adjusted earnings before tax after eliminating extraordinary items. The choice of Materiality would still need a great deal of professional judgment, even if the firm had materiality standards restricting the engagement team’s selections. How did the engagement team determine, for instance, that 10% was suitable and that net income was a convenient base? To Ascertain the overall Materiality: The auditor’s decisions are influenced by the degree, nature, or combination of the misstatement and the company’s circumstances. The general financial data needs for users as a group, rather than the particular requirements of each user, are considered when making decisions about items that are material to users of the financial statements. How to Determine the Audit Materiality? There is no concrete structure for determining the audit materiality of any transaction within the financial statements, as was already indicated above. However, auditors frequently depend on their professional judgment or specific rules (described under “Audit Materiality guidelines). Since the concept of Materiality is relative and greatly influenced by size and external factors, the auditor must have a solid understanding of how to apply it. The degree and kind of error are considered when determining whether it is substantial. Example of Audit Materiality Let’s take the case of the company Aayush Bhaskar Pvt Ltd. as an example, which requested a ₹5,00,000 loan from the bank. The bank provided the loan, but only under the condition that the business’s current ratio does not drop below 1.0. The business accepted this, and a contract with the bank was created. The company’s auditor learned about this arrangement while carrying out the audit. The company’s current ratio is only a little bit higher than 1.0. For the company’s auditor, a slight error of ₹12000 can now be significant. It can result in a breach of the contract between the business and the bank. The company’s current ratio would drop below 1.0 with the ₹12,000 error added on. As a result, given that it may result in an agreement violation, this would be considered material to the audit. It may legitimately affect how the users of the company’s financial statements make economic decisions. Why Is Audit Materiality Important? The crucial idea of audit materiality considers both quantitative and qualitative factors. Both factors affect how the company’s financial statement users make financial decisions.  Their economic decisions are greatly influenced by qualitative factors, including the company’s sufficient disclosure of contingent liabilities, related party transactions, changes in accounting rules, etc. It serves as the foundation for the auditor’s view of the company since it gives the auditor the assurance needed to determine whether or not the company’s financial statements are free of serious misstatements. Relevance of Audit Materiality The financial statements as a whole, including their content and type of testing, must be considered by the auditor when determining the Materiality level. The auditor’s conclusion is based on their assessment of the amount, nature, context, and effect on users of the financial statements due to the misrepresentation. Limitations of Audit Materiality The objective of the Materiality may be hampered if the auditor cannot set it at the appropriate level. The company’s auditor may miss the misrepresentation that impacts the company’s compliance with regulatory standards. Comparatively to the quantitative technique, the qualitative approach is typically fairly challenging to measure. Types of Materiality Materiality meaning in audit, can be divided into four types. All four types are mentioned below: Overall Materiality The auditor establishes Materiality for the entire financial statements while designing the overall audit plan. Above that point, the financial statements would be significantly misstated. This is considered overall Materiality or “materiality for the financial statements as a whole.” Performance Materiality As a “safety net,” performance in audit materiality is set below overall Materiality to reduce the possibility that all unrepaired and undiscovered misstatements will have a material impact on the financial statements. Performance materiality permits the auditor to react to specific risk evaluation (without affecting overall Materiality) and to bring the possibility that the total of unrepaired and undiscovered misstatements surpasses overall Materiality to an adequately low level. Specific Materiality The materiality level chosen to identify potential errors is known as specific Materiality. These could exist across several departments within an organization for specific types of transactions and for account balances that could influence the users of the company’s financial statements’ economic choices. Specific performance materiality Performance materiality and specific performance materiality are identical concepts; however, specific performance materiality is measured based on specific Materiality rather than overall Materiality. Some Important Points In the context of audit materiality, both the quantitative and qualitative factors are taken into account.  The quantitative factors include putting up a preliminary judgment for the Materiality, evaluating the performance materiality, calculating the number

Cash Budget
Personal Finance, savings

Cash Budget – Method of Preparation 

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A precise statement that shows projected forecasts of the cash revenues and payments for a given period is known as a cash budget. It is an operating budget that is helpful for an organization’s financial management.  A cash budget, often known as the “Nervous System of Budgetary Control,” is crucial for businesses. Additionally, it goes by the name “Cash Flow Plans.” It primarily relies on cash receipts and payments to function. These elements are determined by examining the flow of funds within and beyond the company. What is Cash Budget? A cash budget forecasts a business’s cash flows over a specific period. The budget could cover a week, month, quarter, or year. The entity’s ability to maintain operations for the given period is assessed using this budget. It also helps determine an optimal cash allocation (and any surplus) by providing a company with information about its financial requirements. Cash budgets are typically evaluated in either the short or long term. Short-term cash budgets concentrate on cash requirements for the next week or months, while long-term cash budgets concentrate on cash requirements for the next year to several years. Objectives of the Cash Budget The main goal of the cash budget is to forecast a company’s future cash position so that management can determine when additional funding will be needed to ensure smooth business operations. It is also prepared to assess whether there is any available surplus cash; if so, it must invest it wisely to maximize its benefits to the business. Moreover, they are equipped to forecast the cash surplus and deficit for the given time frame. Cash Budget Format There are four sections in the cash budget format: It lists all cash inflows, excluding money received for financing, under “Cash Receipts.” All cash payments, excluding principal and interest payments, are referred to as cash disbursements. It determines whether the company will need to borrow money or whether it will be able to return money that has already been borrowed. The financing section describes the estimated borrowings and repayments throughout the budget period. budget period. Details and particulars Month 1 Month 2 Month 3 Opening Balance Receipts Cash Sales Collection from Debtors Call money on Shares Loan Received Sale of Capital Assets Other Receipts ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. Total (A) xxxx xxxx xxxx         (B) Payments: Cash Purchases Payment to creditors Salaries and Wages. Payable & Interest Capital Expenditure Loan Repaid Taxes Dividends ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. ….. Total (B) ….. ….. ….. Closing Balance( A-B) …. ….. ….. A cash budget example Consider XYZ Clothing, a shoe manufacturer, which projects $200,000 in sales for June, July, and August. The company predicts monthly sales of 5,000 pairs of shoes at a retail price of $60 per pair. According to XYZ, 70% of the money from these sales will be paid out in the month that follows the sale, while the remaining 20% will be paid out two months later. The beginning cash balance for July is anticipated to be $20,000, and the cash budget anticipates collecting $140,000 (70% of $200,000), or 70% of the sales from June. XYZ also anticipates receiving $200,000 in cash from earlier-year sales. XYZ also needs to figure out the production expenses necessary to make the shoes and satisfy client demand on the expense side. Five thousand pairs of shoes must be produced in July to meet the company’s expectations. If the manufacturing cost is $50 per pair, XYZ will incur $250,000 ($50 x 5,000) in July. In addition, the company anticipates spending $60,000 on expenses like insurance that is not directly connected to manufacturing. XYZ calculates the cash inflows by adding the receivables collected in July to the starting amount, which is $360,000 ($20,000 for the beginning of July plus $140,000 from June sales collected in July plus $200,000 from previous sales). The business then subtracts the money required to cover production costs and other outlays. $310,000 is the total ($250,000 for the cost of goods sold and $60,000 for additional expenses). The final cash balance for XYZ for July was $50,000, meaning $360,000 in cash inflows less $310,000 in cash outflows. The Method of Preparing Cash Budgeting A cash budget is prepared in three ways. Cash budget methods are explained below: Receipts and Payment Method Utilizing receipts and payments is the most popular and simple method for developing a cash budget, particularly a short-term budget. The receipts and payment mechanism add all anticipated receipts to the opening cash sum. After completing the preceding computations, the expected receipts and any balance represent the closing cash balance. All projected cash payments then reduce the total opening cash balance. Adjusted Profit & Loss Method The basis for preparation under this system is the profit and loss account. This model assumes that each gain and reduction in the cash balance represents a profit or loss for the company. When creating a profit and loss statement, losses on asset sales, depreciation,  goodwill write-offs, and other costs that don’t involve actual cash transfers are subtracted from the business’s income. It is added to other earnings, such as the profit from the sale of fixed assets, to arrive at the company’s net profit. Moreover, to create a cash budget using this method, all non-cash expenses are added to the net profit, and all non-cash incomes are subtracted. The sum is multiplied by the opening cash balance to arrive at the cash balance. Then adjustments are made to capital receipts and payments, working capital changes, and financing-related flow changes. Balance Sheet Method A budgeted balance sheet is prepared under this method, which includes all assets and obligations except the cash balance. The balancing figure is thought to reflect the monetary balance. If the liabilities exceed the assets, the balance is a conventional

Cash Flow Statement vs Income Statement
Insurance, Personal Finance

Cash Flow Statement Vs Income Statement: Meaning and Differences

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 Finances are an important part of any organization, big or small. When running an organization, it is vital to keep track of them to estimate the performance and the future growth. There are many ways to determine a company’s progress.  But income and cash flow statements are the two most used methods in finance. Investors also use these two metrics while making investment decisions. After reading this blog, you will get familiar with these two financial statements and how to use them.  Cash Flow Statement Vs Income Statement What is a cash flow statement? Running an organization is impossible without knowing the amount of business a company is making or spending. And the cash flow statement helps you with this exactly. With this, you can find the amount of cash coming in and out of the organization and from where.  It helps calculate the overall liquidity in the business, which helps in estimating the current and future state of cash flows. Three components come into the picture while noting the cash flow statement. They are operational, financial, and investing activities.  Below is the complete structure of a cash flow statement –  Operating It includes all a company’s cash from its products and services. They incorporate receipts from sales of goods and services, interest & income tax payments, inventory transactions, interest payments, tax payments, wages to employees, payments for rent, etc. In gist, this compromises all the transactions done because of operational activities.  Investing Investing activities cover resources and uses of cash from a company’s investments. This category includes activities like: The purchase or sales of assets Loans given to vendors or received from clients Payments pertaining to Mergers & Acquisitions (M&A) Financing It includes cash utilized in business financing: money that goes in and out between a company and its owners & creditors. It covers transactions involving dividends, stock repurchases payments, and the corporation’s principal debt repayment (loans). Learn Fundamental Analysis From Top 1% How is cash flow calculated? There are two ways of calculating cash flow statements – direct and indirect.  Direct  The direct method totals all cash payments and revenues, including cash paid to suppliers, cash received from consumers, and salary payments. This way of calculating cash flow is more suitable for companies that use accrual accounting.  Indirect  The indirect technique calculates cash flow by altering net income by adding or removing differences deriving from non-cash transactions. What is an income statement? An income statement’s purpose is to determine a business’s profitability. In short, it tells how much profit/losses a company makes for a given period of time.  Also referred to as a Profit & Loss (P&L) statement, statement of operations, and statement of revenues & expenses, an income statement depicts a company’s financial position by calculating the income statement for a particular month, quarter, or year. How to find out net income with an income statement? Calculating an income statement is a straightforward method. To find out, we add all the revenues from operations and subtract all costs. These operations include both operating and non-operating costs.  Operating activities include all the activities related to running a business, such as purchasing, manufacturing, selling, and distributing goods and services. On the other hand, non-operational activities refer to those that are related to the sales and purchase of investments and assets. They also include payment of dividends, takes, and interest & FX gains/losses.  An income statement gives us the net come. If it is positive, then the company is in profit. However, the negative value indicates the net loss.  Cash flow statement vs. income statement Purpose  Cash flow monitors money that goes in and out of business. At the same time, the income statement determines how much profit or loss a company is in.   Format difference  We need both the income statement and the company’s balance sheet to make the cash flow statement format. In contrast, the income statement format requires various ledger accounts & records of a company. Activities   We use two activities – operations and non-operation, in finding out the income statement. On the other hand, the trio of operational, financial, and investing activities helps determine the cash flow.   The Derived System   The income statement is generated on an accrual basis, which means that the income and costs of a certain period are regarded. The cash basis is used to construct the Cash Flow Statement – how much money goes back and forth in a business.  Depreciation Depreciation is not reported in cash flow since it is a non-cash item. Still, it is recorded in the income statement. What statement should you go for? Both the financial statements are important determinants that serve a purpose in a company.  Suppose you want to measure how well the business is performing – what profits and losses are occurring. In that case, you should consider an income statement.  On the other, If you want to know anything about your business, such as how much debt your company may safely take on or how to create more cash, you should look at cash flow figures. Final Thoughts Financial statements are crucial components of any business because they help understand a company’s performance and growth. The cash flow and income statements are the two financial statements we discussed in the blog.  Cash flow helps you understand the flow of money in your business, whereas an income statement gets you an idea about the profitability of your business. FAQs How to calculate cash flow and income statement? To calculate net income, sum all operations revenues and deduct operations. These costs include both running and non-operating expenses. You can calculate cash in two ways – direct and indirect. However, a common method is to deduct your taxes from the amount of depreciation, working capital change, and operating income. What are cash and non-cash items? Any transaction involving a company giving or receiving cash is a cash item. Unlike cash items, non-cash items refer to some expenses & revenue without cash transactions.  Examples of

Hurdle Rate Vs Internal Rate of Return
banking, Personal Finance

Hurdle Rate Vs Internal Rate of Return – Explained In Details

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Two essential measurements generally used in the investing and financial world are Hurdle Rate and Internal Rate of Return (IRR). Both of them are used for varying purposes. But there seems to be no end to the confusion they’ve caused among newcomers. So, if you cannot differentiate between hurdle rate and Internal Rate of Return (IRR), this post is meant to give you clarity. Let’s find out more about hurdle rate vs Internal Rate of Return here.  Know The Difference Between Hurdle Rate Vs Internal Rate Of Return What is Hurdle Rate? Also known as the minimum acceptable rate of return, the hurdle rate is the lowest rate of return that an investment or a project must earn to offset the investment’s costs. Projects are also assessed by discounting future cash flows to the current hurdle rate to calculate the Net Present Value (NPV).  This, in turn, showcases the difference between the current value of cash outflows and the current value of cash inflows. Usually, the hurdle rate is equal to a company’s capital costs, which is the amalgamation of the cost of debt and the cost of equity.  Typically, managers raise the hurdle rate either for such projects that are riskier or when the company is comparing several investment opportunities. Understanding Hurdle Rate This metric describes an adequate compensation for the current risk level. The hurdle rate lets companies make vital decisions on whether to pursue a specific project or not. If the anticipated rate of return goes above the hurdle rate, the investment is regarded as sound. If it goes below the hurdle rate, the investment is considered riskier.  To determine the hurdle rate, some of the essential areas that should be considered are: Associated risks Cost of capital Returns of other potential projects or investments Hurdle Rate Formula To calculate the hurdle rate, here is the hurdle rate formula that can be used: Hurdle rate = Cost of Capital + Risk Premium Hurdle Rate Example  Let’s consider an example to understand more about hurdle rate. Suppose you are looking forward to buying new machinery. As per the evaluation, with this new machine, you can increase the sales of your product, resulting in a return of almost 11% on the investment. The Weighted average cost of capital (WACC) for your company is 5%. The risk of not selling additional products is low. Thus, a low-risk premium got assigned at 3%.  Then, the hurdle rate will be: 5% (WACC) + 3% (Risk premium) = 8% Since the expected return on this investment is 11% and the hurdle rate is 8%, which is lower, buying the new machine will be a sound investment for you. Read About – Exponential Growth What is the Internal Rate of Return? The Internal Rate of Return (IRR) is the anticipated annual amount of money (expressed in percentage) that an investment is expected to generate for a company above and over the hurdle rate. The word “internal” denotes that the figure doesn’t account for possible external factors and risks, such as inflation. Also, IRR is used by financial experts and professionals to evaluate the expected returns on several stocks and investments, such as the yield to maturity on bonds. Learn Finance From Top 1% Understanding IRR (Internal Rate Of Return) Basically, the Internal Rate of Return (IRR) is one such discount rate that makes a project’s Net Present Value (NPV) zero. In simple words, it is the anticipated compound annual rate of return that will be earned on an investment or a project. You can only use IRR when looking at investments and projects with an initial cash outflow and one or more inflows. Moreover, this method doesn’t consider the possibility that various projects may have varying durations.  While it is comparatively straightforward to assess projects by comparing the IRR to the hurdle rate, this approach has specific limitations in the form of an investing strategy. For example, it considers only the rate of return, in contrast to the return’s size. A $10 investment returning $100 has a higher rate of return than a $10 million investment yielding $2 million.  Once you’ve determined the internal rate of return, it is generally compared to the cost of capital or a company’s hurdle rate. If the IRR equals or exceeds the cost of capital, the company will accept the project as a sound investment. And, if the IRR is lower than the hurdle rate, it will be rejected.  IRR Formula The IRR formula is as mentioned below:   Here,  NPV = Net Present Value N = Holding Period n = Each Period CF = Cash Flow IRR = Internal Rate of Return One can do the calculation of the internal rate of return in three varying methods: Using the XIRR or IRR function in a spreadsheet or Excel programs Through an iterative process where an analyst tries a variety of discount rates until the NPV is equal to zero Through a financial calculator IRR Example Before moving ahead with understanding IRR, you’ll first have to know Net Present Value (NPV). This is because the cash that you have today is far more valuable than the one you’ll get after five years, courtesy of inflation. Thus, when you think of investing money every year, you must first check its worth today.  So, let’s assume you invested Rs. 10 lakhs in a project X today. From the next year, this project will start making cash flows without the need for further investments. You can find more information on the money that you’ve invested today and the cash flows that it will generate in the future in the below-mentioned table. Time Period (Years) Cash Flow Today Rs. – 10 lakhs Year 1 Rs. 2 lakhs Year 2 Rs. 3 lakhs Year 3 Rs. 3 lakhs Year 4 Rs. 3.5 lakhs Year 5 Rs. 3.5 lakhs Total Cash flow Rs. 15 lakhs Now, to find out NPV of the cash flows mentioned above, suppose IRR is approximately 8% for the project

banking, Personal Finance

Getting well-versed with the Metaverse

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Wouldn’t it be great if you could have dinner sitting next to a friend who lives miles away from you? And that too, in the streets of Paris – from the comfort of your home? Sounds kind of impossible, right? Well, this might not be the case anymore. Welcome to the Metaverse! A virtual world with endless possibilities. A 3D world of the internet that is available to you constantly. As someone who belongs to Generation Z, I have had access to the internet from a young age. And the metaverse is something that I could see my generation readily adopting. In fact, there are already such virtual platforms in place, and they have captured quite a number of users. But what is not clear is what all does the metaverse actually encompass? If I ask 10 people, “What is the metaverse?”, they would give me 10 different definitions. So, what exactly is the metaverse? Is it just a temporary buzz or is it here to stay? Let’s find out. What does metaverse actually mean? The metaverse is a three-dimensional virtual internet simulation. It will allow users to behave and carry out all functions that they do in reality. Users will be able to do so along with millions of other users, within the virtual world. The metaverse is an extension of the present-day internet, and that too, a revolutionary extension. It will inherently change the way we look at all aspects of life, literally and otherwise. The word metaverse was first coined by Neal Stephenson in his 1992 sci-fi novel Snow Crash. In the book, people use digital avatars of themselves to eat, work, play in the virtual world. They do so as a means to escape their dystopian reality. And now, Facebook, or shall we say, “Meta”, is building on this very idea, minus the dystopia, of course. The metaverse is going to drastically change the way we interact with technology in our day-to-day lives. It will be characterized by virtual worlds, combined with the features of the physical world. These virtual worlds will go on to exist, even when you are not “playing” or interacting with them. Alternatively, it could also translate into a digital economy. That is, it will be a virtual space that allows users to create, buy and sell products and/or services. It would allow users to buy cars, clothes, accessories, and move them from one platform to another. “Doesn’t this kind of technology already exist?” The above description of metaverse might prompt you to think so. We already have virtual worlds in place. One example is the game – World of Warcraft, wherein players can buy and sell goods. A similar experience is rendered by Fortnite. In the game, you can attend live concerts and exhibits, and be in your own personal virtual home. You just need to strap on a VR/AR headset and you are good to go. However, the metaverse is not just limited to this. Metaverse will be based upon Web 3.0. It is the newest internet iteration with advanced, data-driven, and open websites. Its aim will be to create a level of transparency. This will happen because individual data will not be controlled by centralized organizations, rather it will be powered and stored on blockchains. Meta CEO, Mark Zuckerberg, is betting big on the idea of the metaverse. As per his vision, the metaverse will bring enormous opportunity to individual creators and artists; to individuals who want to work and own homes far from today’s urban centers; and to people who live in places where opportunities for education or recreation are more limited. A realized metaverse could be the next best thing to a working teleportation device, he says. And not just Meta, other tech companies are also moving fast in this space. Both Microsoft and Google are not far behind in this race to crack the metaverse technology. In fact, consumer brands like Walmart, Nike, Ralph Lauren, and Gap have also expressed interest in the metaverse. They have already started working on virtual landscapes. The metaverse will be a blockchain world, built on the Web 3.0 network, cryptocurrencies, and NFTs. NFTs are unique units of data stored on the blockchain. They track a specific digital asset’s ownership and transfers. Challenges ahead The metaverse seems pretty awesome. And it has gained quite the hype amongst the newer generations. However, there are still some challenges to combat and confusions to clear. No one is really sure what are the possibilities of Metaverse. And that is my major concern here. Meta wants to use the metaverse to make virtual houses, where people can invite their friends to hang out.  On the other hand, Microsoft wants to use the metaverse to create immersive virtual meeting rooms. These rooms will allow “people in different physical locations to join collaborative and shared holographic experiences, with the productivity tools of Microsoft Teams, where people can join virtual meetings, send chats, collaborate on shared documents and more.” Another important thing is who will control what the metaverse looks like? Who will control the type of content it hosts? Because surely, an open web network is bound to attract scammers and frauds. And if this metaverse is used by the younger generation as well, we can’t very well control who they interact with, or the type of content they consume. On the face of it, virtual worlds promise liberation and escape from the real world and feel like a digital utopia. The inhibitions, hierarchies, and limitations of the real world do not restrict these virtual worlds. Users can project whatever they want to do onto their digital avatars.  But this does not necessarily mean that the virtual world is better than the real world. Existing gaming platforms with metaversal characteristics have problems like worker exploitations, gender biases, and homophobia. Unless companies make conscious efforts to take care of these prejudices and biases, how can we say that the virtual world is better than the one we

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