Author name: Vidfin

Introduction Interest, which is one of the most commonly used financial terms is nothing but the cost of borrowing money. When one borrows money from a financial institution, they pay an annual interest in lieu of the money that is borrowed. Interest is generally expressed in percentages and it can either be simple or compounded. One of the major differences between simple and compound interest is the way in which interest builds up. Before diving into the details, let us first understand the meaning of simple and compound interests. What is a Simple Interest? Simple interest is the percentage that is charged on the principal sum of money that is lent or borrowed. Similar to this, when you deposit a particular amount in a bank, you can also earn interest. The concept of simple interest is widely used in many industries, including banking, mortgages, autos, and other financial institutions.  The formula used for calculating simple interest is as follows: SI = (P * R * T) / 100 Where,  SI = Simple Interest  P = Principal R = Rate of interest (expressed in percentage) T = Time duration (in months or years) If time, rate of interest and the principal amount is known, the simple interest can be calculated using this formula. To calculate the total amount (A): Total Amount (A) = Principal (P) + Interest (I) Where, Principal (P) – The amount that was first put in a bank or borrowed is known as the principle.  Rate of interest (R) – The interest that is charged on the principal amount. Time (T) – This is the time frame during which money is deposited or borrowed. Typically, time is described in terms of months or years.  Amount (A) – The total interest and principal for a specific time period are added to determine the amount. For Example,  If my friend deposited 100,000 rupees in a bank for 3 years and it accrued interest at a rate of 4% annually. Then,  Principal (P) = 100,000 Time (T) = 3 years Rate (R) = 4% p.a. The values in the simple interest formula should be substituted; SI  = (P * R * T) / 100        = (100000 * 4 * 3) / 100        = 12000 She earned an interest of 12000 rupees The total amount received by her would be  A = P + I     = 100,000 + 12,000     = 112,000 What is a Compound Interest? The interest that is calculated on both principal and previous interest and is compounded on a regular basis is known as compound interest. The interest is computed on a new principal every time. This principle is the cumulation of the accrued interest and the original principal. The formula for calculating the amount:  Compound interest can be calculated annually, semi-annually, quarterly, or even monthly. This is similar to how reinvested interest in an investment accelerates the growth of the principal over time. It is exactly what money does due to compound interest. Banks and other financial institutions only calculate the amount using compound interest. The total amount at the conclusion of the time period, which includes the principle and compound interest, is represented by the formula above. Moreover, by deducting the principal from this sum, we can get the compound interest. To compute compound interest: In the above expression, P is the principal amount r is the rate of interest(decimal) n is frequency or no. of  times the interest is compounded annually t is the overall tenure. For example,  If an investment yields a monthly compounded return of 4%. Let’s calculate the value after 5 years, on rupees 7,000 initial investment. Earnings of 4 percent compounded monthly are calculated using the formulas (r) = 0.04 and (n) = 12. The first investment or (P)=7000 and the time period or (t) = 5 Let us first calculate the value of A (the value after 5 years). Apply the formula now using the values that are known: A = P (1 + r / m)mt     = 7000 ( 1 + 0.04 / 12) 12 * 5     ~ 8547 Now, the compound interest can be calculated by subtracting the principal from the final amount CI= A – P CI= 8547 – 7000 CI= 1547 What is the power of compounding? The power of compounding is the process through which interest accrued and is added back to the principal amount over time, increasing the value of an investment. Investors use the concept of compound interest to leverage the power of compounding. Compound interest raises the potential interest for the subsequent cycle by earning interest on your principal amount and adding it back to the principal. The advantages of the ability of compounding are as follows: It assists in significantly increasing the principal amount over time. It enables investors to generate returns while also raising the return potential for the following cycle. When compared to simple interest, the power of compounding accelerates the rate of return on investments. Any financial instrument can use the power of compounding to boost its return potential. In-depth financial understanding is not necessary for successful implementation. Difference Between Simple Interest and Compound Interest? If put in the simplest way, simple interest is beneficial if you are borrowing money, whereas compound interest is helpful if you are investing. For borrowers like us, simple interest is preferred because you aren’t paying interest on interest. Simple interest makes paying off debt easier. Compound interest, on the other hand, can help you build wealth over time as the earnings retained here produce income. Another important point of distinction is that while the principal remains constant when computing simple interest, it varies for the calculation of compound interest. Conclusion Both simple and compound interests are widely used for interest calculations and are important to understand. While simple interest is common for taking short-term debts which last for less than a year, compound interest is mostly applied on loans having longer time periods. 

If you’re considering getting into the commercial real estate market, it’s a good idea to get familiarized with CMBSs. This post will give you a better understanding of what they are and how they can help you. Commercial mortgage-backed securities, or CMBS as they are popularly called, are fixed income securities with an underlying commercial real estate as a mortgage for the payment of coupons and principal invested. Unlike the traditional mortgage-backed securities, which have residential real estate as underlying mortgages, CMBS have commercial properties as the mortgage. Purpose The major purpose of CMBS, like MBS, is to provide liquidity options to commercial lenders. They allow the lenders to reduce the risk of their financing by allowing them to create derivatives of the loans into financial instruments and sell them out in the commercial market as investment opportunities. Meanwhile, it also gives investors the ability and risk appetite to invest in these instruments and generate regular cash flows through coupon payments. Retail investors can invest in these instruments through third-party products such as mutual funds and exchange-traded funds (ETFs) that specialize in investing in such products. Direct investments in such products are limited to ultra-high net worth individuals and family offices due to the large ticket size in these products. Structure The structure of CMBS works on the pooling of loans given by lenders for commercial properties. These loans are pooled together on the basis of their cash flow to create fixed-income securities that they can sell to investors. The securities are divided into multiple layers basis the risk that they carry in terms of credit and loss. The major classification of these securities include: Investment grade bonds – These are securities that carry lower risk in terms of credit and loss and thus have better credit ratings such as AAA, AA, and other higher ratings from credit rating agencies. These are considered safer investment opportunities for investors. Non-investment grade bonds – These are pooled commercial loan accounts that carry a higher risk of credit and loss compared with investment graded and thus are lower by credit rating agencies such as BB, B, etc. Since these carry higher risk, they are suitable for investors with a risk appetite. They will, however, have a higher coupon to compensate for the larger risk.  Unrated bonds – These bonds carry the highest risk in terms of credit and loss probability and thus are unrated by credit risk due to this potent danger. Investors only with the highest risk appetite and ability to bear the loss should invest in such bonds. Diagrammatic representation of CMBS   Benefits CMBS have multiple benefits across the value chain for borrowers, lenders and investors. Borrowers – Since the borrower is mortgaging their property for the loan, they can procure a lower interest on the monies. Further, they can also generate a higher value of loan basis the valuation of the underlying property. Further, in many cases, the upfront fees are also lower than traditional loans lowering the overall cost to the borrower. Lenders – The most significant benefit to the lender is that they can securitize the loan portfolio, thus improving the overall cash flow in their financial portfolio. They can also enhance their loan portfolio, thus improving their overall balance sheet size and revenue opportunities. Investors – It provides investors with an opportunity to invest in a fixed income portfolio of securities basis their risk-return appetite considering the wide type of bond tranches available in this segment. Drawbacks While CMBS loans are a suitable conduit for all parties in the CMBS ecosystem, there are also some drawbacks to these securities. High valuation – Since these bonds are pooled loan accounts, these are of high value, which is beyond the reach of individual investors who want to take exposure to these securities. Only ultra-high net worth individuals or family offices tend to have the monies to directly invest in these securities, limiting the investment opportunities for investors. Investors need to route their investments through ETFs or mutual funds that invest in these securities. Complex – These CMBS loans have a complex structure compared with traditional loans since they need to be collateralized before they are securitized. Further, since the underlying securities are commercial properties, the valuation is relatively complicated compared with residential properties. Because of the complexity of the products, these instruments require multiple participants in the value chain, which includes various types of servicers, trustees, custodians and credit rating agencies, to finally be put up these instruments in the market for investment purposes. Summing up CMBS are an excellent conduit to convert commercial lending into collateralized fixed income securities for investment purposes. However, unlike traditional mortgage-backed securities (MBS), CMBS loans are mortgaged on commercial properties and thus are more complex than the former. Investors should look at the underlying tranche of CMBS, such as investment grade, non-investment grade and unrated bonds, to identify the risk of credit and loss before making any investment decision basis their risk-return profile. Individual investors can route their investments in these instruments through mutual funds or ETFs that invest in such securities. In contrast, ultra-high net worth individuals and family offices can afford to invest directly in these instruments.

Imagine you are at an airport. Try looking closely at the aerodrome area where your aircraft is parked for departure. Those airlines must spend millions to maintain such large aircraft, upgrade technologies and buy passenger buses with growing demand every year. Depending on the model, even an outdated commercial aeroplane can easily cost a few million in maintenance. The investments put into these long-term assets by the airline companies for purchase and upgradation to improve the efficiency of the airline company is basically what we call capital expenditure. Let’s look into more details. What are Capital Expenditures? By definition, capital expenditures (also known as CapEx or capital expenses) are large investments in long-term assets that businesses undertake to sustain or grow their operations, such as buildings, machinery, pieces of equipment, land, furnishings and fittings. Capital expenditures significantly impact the financial position of an organization both in the short and long term. Making informed CapEx decisions is therefore crucial for a company’s financial stability.  Types of Capital Expenditures A capital expense might be either tangible such as a machine—or intangible—like a patent.  The expenditure made by the company in either of the below 4 areas is generally categorized as a capital expenditure.  Expenditure on Diversification Some expenses are made in order to expand the company’s offerings and attain multiple goals. Expenditure on Expansion The completion of new projects or the expansion of the existing asset base that aids in boosting production capacity Expenditure on Replacement Outdated machinery and equipment that needs to be replaced due to deterioration, ageing, and technological advancement. Making Strategic Investments Decisions about strategic investments lead to the purchase of assets like land, property, etc. That will assist the company in the long run. Importance of Capital Expenditures For instance, you operate a local food cafe and you want to start a delivery system with the profits you gained in a year. Would you buy a new van, rent out one or hire a contract delivery service? Your decision should be smart enough to make your business grow, develop reach to a greater number of potential customers and generate profit.   Smart capital investments support business expansion. From the standpoint of long-term financial planning, CapEx analysis helps decision-makers in determining if an asset will deliver a good rate of return.  Some other important considerations are: Long-term effects Effects of CapEx continue for an ample amount of time. A business’s ease of operation now could be due to previous CapEx.  High fixed cost While spending on fixed assets may be costly at first, there are significant potential long-term benefits for businesses or organizations. Depreciation  CapEx leads to an increase in the asset account. This result is a rise in depreciation once the capital assets are used. Hence, the value of the capital asset decreases and the company gains tax advantages as well. Business Valuation CapEx is a significant factor in business valuation and evaluating the new worth of the entity. The valuation of the existing capital assets is crucial in cases of business sales, merger and acquisition agreements, etc. Challenges with Capital Expenditures Despite the importance of capital expenditure decisions, some capital expenses may add to the complexity. Here are some challenges: Unpredictability Large capital asset investments by businesses with the aim to increase profitability may sometimes result in losses, as some outcomes aren’t always assured. Even though it is impossible to completely remove risk, companies must account for it during financial planning to reduce the possibility of losses. Temporal Expansion Both industrial undertakings and infrastructure projects often spread out the expenses and benefits of capital expenditure over a considerable amount of time. A temporal gap of this magnitude makes it difficult to estimate the discount rate and establish equivalence. Issues with measurement Identifying, quantifying, and predicting the expenses associated with capital expenditures can be a challenging accounting process. Efficient Capital Expenditure Budgeting Practices Budgeting for capital expenditures is a key management task. Making the right choices might help the firm reach new heights. However, given the sum of money at stake and the length of these initiatives, one bad decision might push the company to close down. Here are a few techniques: Create a Plan Before You Begin Finding the project’s scope, setting reasonable timelines, and making sure the entire plan has been reviewed and authorized are necessary before beginning a project. You should consider how many internal resources, such as labor, supplies, money, and services, the project will need. Think long-term You must decide whether you will borrow money to buy the capital asset or set aside cash reserves to make a purchase. Typically, saving money for a purchase means that you will have to wait a while before receiving the asset you want. However, taking on debt and risking future borrowing issues are both consequences of borrowing money. Both options may benefit your business in the long run. You just need to decide which option is better for which project. Gather Accurate Data You need to obtain credible information in order to develop the budget and produce reports. Use effective budgeting tools The kind of budgeting software you choose should be based on factors including the project’s scope, the program’s speed, and the likelihood of mistakes. Form Clear Policies A big firm may have a significant number of people and departments involved in managing capital expenditures, thus it is important to establish clear policies that everyone can adhere to in order to keep the budget on track. Levels of Details Should Be Optimal A budget that is made with too much detail may take too long to create and, by the time it is finished, it may contain information that is no longer relevant. So, an ideal balance is necessary. Capital Expenditures Example Before looking into the example, let’s check out the formula to calculate CapEx: CapEx = PPE (current period) – PPE (prior period) + Depreciation (current period) where, PPE is Property, Plant & Equipment. You own a coffee shop, and you recently purchased a

Business is nothing but a chain of activities involving capital, labor, and innovation to produce goods and services. One such vital aspect of holistic business operation is – the movement of goods to the intended stakeholders.  There are different stages of business operations that rely on diverse sources of input and output resources. So, in accounting, the cost of shipping or handling goods is categorized into two segments: carriage inwards and carriage outwards. Today, we will talk about the carriage inward meaning, its accounting application, and the basic differences between carriage inwards and carriage outwards.  What is Carriage Inward? Carriage Inward is the cost incurred during transit of the goods or assets purchased. It constitutes all the expenses obtained while transporting goods. When the buyer makes purchases of capital assets, raw materials, or inventory, they need to be consigned to the intended locations, such as warehouses or business areas, for further operations. Let’s see an example of a carriage inwards journal record. A company purchases goods worth ₹10,000 and pays an additional ₹1,000 as freight inwards, i.e., cost of transportation. (Being carriage inwards paid while purchasing goods) Accounting Treatment of Carriage Inwards In the books of account, freight inward is treated as a direct expense and included in the cost of purchased goods. We display it on the debit side of the trading account. The buyer is liable to pay all such expenses related to transit. Journal Entry: Purchasing Goods Carriage inwards in trading account shown on the debit side, while purchasing inventory or goods. (Being carriage inwards paid while purchasing inventory) The next step is transferring freight inwards to the trading account. The buyer may add value to the COGS (Cost of goods sold). (Transferring of carriage inwards to the trading account) Journal Entry When Purchasing Fixed Assets When purchasing a fixed asset, carriage inwards is treated as a part of capital expenditure. Here, the shipment costs are added to the overall cost of the fixed asset.  (Carriage inwards is paid inclusively with the purchase of a fixed asset) Differences between Carriage Inwards and Carriage Outwards Popularly, there are two types of transit expenses – carriage inwards and carriage outwards. One represents the expense of procuring goods or assets from the supplier, whereas, the other denotes the transportation charges of selling goods to the customers.  We have learned about freight inward meaning and its accounting treatment. Let’s find out the meaning and its accounting application. Carriage Inwards vs. Carriage Outwards Carriage outward and carriage inward in trial balance are shown on the debit side, as both are recorded as expenses. There are some fundamental differences as well. We will look into these distinctions and their application in the books of accounts. Here is a comprehensive table detailing the differences between carriage inwards and carriage outwards: Basis Carriage Inwards Carriage Outwards Meaning Expenses incurred for transit/freight while purchasing goods. Charges incurred for transportation/freight while selling or delivering the goods. Borne By The buyer bears it most of the time while purchasing the goods. The seller or buyer of the goods bears the expense, as per the terms of the sale. Type of cost It is a direct expense and forms part of total goods costs for the purchaser or buyer. It is an indirect expense and forms the part of selling and distribution costs for the seller. Accounting Treatment Carriage inward is shown on the debit side in the books of trading accounts. Carriage outwards comes under the debit side in the books of the profit-and-loss account. Capitalization Capitalized only when a fixed asset is purchased. It is a revenue cost and is never capitalized. Other Names Freight inward, freight in or transportation inward Freight inward, freight in or transportation inward Conclusion Transportation of goods is a vital aspect of business operation. Carriage inwards is a transit cost paid by the buyer of the goods. It is associated with the process of buying goods or raw materials and making finished products. Hence, all the expenses are included in the calculation cost of goods sold.  If a business is purchasing a fixed asset, it will include the expenses in the overall cost of the acquisition. Mostly, buyers are liable for the cost of carriage inwards. However, in rare cases, the transportation cost is split between buyer and seller as per the sale agreement. It is essential to record transportation costs appropriately in the books of buyers and sellers for better understanding.

Introduction Business assets usually cost a fortune and have a limited lifespan. Hence, it is necessary that this cost be expensed proportionately across their functional life. Depreciation and amortization are two such accounting processes that involve spreading out the cost of these assets throughout their useful life.  Before understanding how these two methods work, let us understand what business assets are.  What are Business Assets? Business assets refer to items of value owned by firms/companies, etc. Assets play a vital role in increasing productivity, revenue and efficiency.  Based on physical characteristics, the assets of a business are of two types:  Tangible Assets: Tangible assets refer to those resources that have a physical form. Examples of tangible assets include plant, building, machinery, etc.   Intangible Assets: Intangible assets are resources without any physical form. Trademarks, patents, goodwill are examples of intangible assets.   Now let’s find out how depreciation and amortization works. Understanding the Meaning of Depreciation and Amortization In simple terms, depreciation refers to the reduction in a tangible asset’s monetary value due to prolonged usage. This accounting technique enables businesses to spread the cost of their fixed assets over the span of their useful life. This allocation is reflected in the business’s profit and loss account for the particular financial year. On the flip side, amortization refers to the reduction in the monetary value of intangible assets over time. It involves prorating the cost of intangible assets over the course of their useful life. Similar to depreciation, amortization appears as an expense in the income statement or profit and loss account of a business. Why are depreciation and amortization shown in the income statement? As per Indian Accounting Standard 6, “The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset.” This is because the annual depreciation of an asset is an expense, and hence, is a charge on profits. Similar rules are applicable on amortization as well, as mentioned in Indian Accounting Standard 38.  Common Methods of Computing Depreciation and Amortization Here are some popular methods that businesses use to calculate depreciation and amortization: Straight Line Method When a business opts for the straight-line method, the depreciation is spread out evenly over a period until the salvage value is reached. In other words, if a company computes depreciation using this process, the depreciation expense will be the same in each year over an asset’s lifespan. Note that salvage value refers to the estimated book value of tangible long-term assets at the end of their useful life. The straight-line method is the most straightforward process of distributing the cost of business assets over their useful life. Example 1: Amortization Using Straight Line Method Suppose Company XYZ has a patent worth ₹15,00,000 expiring in 30 years. But since the patent’s estimated useful life is 15 years, note that the amortization interval must be 15 years.  To compute the amortization of the patent, the company has to divide the patent’s cost price by its estimated useful life.  Therefore, the amortization of XYZ Company’s Patent will be ₹15,00,000/ 15 = Rs. 1,00,000  Example 2: Depreciation Using Straight Line Method Let’s say ABC Company purchased a machine worth ₹50,00,000 to manufacture garments. The estimated lifespan of this machine is 10 years, and its salvage value is 10% of the cost price.  ABC can compute the value of depreciation using this formula:  Depreciated Value = Machine’s Purchase Price – Salvage Value                                    = ₹(50,00,000 – 5,00,000)                                    = ₹45,00,000 Now, considering that the useful life of the machine is 10 years, the calculation of depreciation per year will be as follows: Annual Depreciation = ₹45,00,000/10                                        = ₹4,50,000 Reducing Balance Method The reducing balance (or written down value) method involves charging depreciation based on the previous year’s closing balance of an asset. Closing balance refers to the credit/debit balance of an account at the end of an accounting period. To calculate closing balance, businesses have to deduct the previous year’s depreciation from the asset value. Under this method, the profit for a financial year will be lower in the first few years. But in the later years, it will be higher. Generally, a company uses the same method for computing amortization as well as depreciation. That said, note that amortization schedule is used in the case of loans. Example 3: Depreciation Using Reducing Balance Method Some companies use the reducing balance method to compute depreciation instead of the straight-line method. Here’s an example to explain this method: Let’s say ABC purchased new machinery worth ₹5,00,000 to increase production and strengthen its top line. As per the manager, this machine’s estimated useful life is 10 years, and salvage value is ₹10,000. The depreciation rate is 20%  ABC can use the following calculation to ascertain the amount of depreciation resulting from regular usage:  Depreciation Percentage x Annual Depreciation Amount  Year Depreciation Calculation Amount of Depreciation (₹) Value at the End of the Year (₹) 1 20% of ₹(5,00,000 – 10,000) 98,000 4,02,000 2 20% of 4,02,000 80,400 3,21,600 3 20% of ₹3,21,600 64,320 2,57,280 4 20% of ₹2,57,280 51,456 2,05,824 5 20% of ₹2,05,824 41,164.8 1,64,659.2 6 20% of ₹1,64,659.2 32,931.84 1,31,727.36 7 20% of ₹1,31,727.36 26,345.47 1,05,381.89 8 20% of ₹1,05,381.888 21,076.38 84,305.51 9 20% of ₹84,305.5104 16,861.10 67,444.41 10 20% of ₹67,444.40832 13,488.88 53,955.53 Key Differences between Depreciation and Amortization This table represents a head-to-head comparison of depreciation and amortization:  Basis of Comparison Depreciation Amortization Definition Depreciation is an accounting technique for computing the reduced net worth of tangible fixed assets. The reduction in cost price over an asset’s life is proportional to its usage in a particular year. Amortization is an accounting technique that measures the reduction in the value of intangible assets. Implementation Method Accountants can use the straight-line method or the declining/reducing balance method to compute depreciation. Note that there are other methods of calculating depreciation as well. In most cases, one can use the straight-line method for computing amortization. Businesses

Introduction ‘Cash is king’ is a popular saying that you might’ve heard. This is particularly true for all types of businesses, as cash is a measure of their financial standing in the long run. Hence, cash management is an essential skill to sustain the ongoing activities of a business, mobilize funds where needed and optimize its liquidity. A company’s liquidity can accordingly be measured adequately via its financial statements – income statement, balance sheet and cash flow statement. Statement of Profit & Loss or Income Statement: An account of all the revenues and expenses of a firm during an accounting period, which then ascertains the net profit (or loss). Balance Sheet: A summary of a firm’s total assets, liabilities, and capital. As a result, it evaluates the firm’s financial standing at the end of an accounting period. Cash Flow Statement: A report of all cash inflows and cash outflows incurred by a firm in an accounting year. That is, it determines the net cash utilized/generated by the business. Let us take a closer look at what is cash flow statement, its examples, and the cash flow statement format. Cash Flow Statement Meaning In general, a cash flow statement is a financial statement that details a company’s inflows and outflows of its cash and cash equivalents. Cash equivalents simply refer to those assets that can be converted into cash immediately, like bank accounts and marketable securities. A key objective of the cash flow statement is to lay out how much cash is moving and in which direction. Furthermore, it helps a business understand how much net cash they are generating from their operating, financing, and investing activities. Thus, the cash flow statement acts as a bridge between the income statement and the balance sheet. For instance, we can infer from the balance sheet a change in the cash position of a company from Rs 1,00,000 to Rs 2,00,000 in a particular year. On the other hand, the cash flow statement highlights the activities which have resulted in this net cash inflow of Rs 1,00,000. It also evaluates the financial performance of a company, just like the income statement. However, CFS gives an entirely different result, as it is not affected by non-cash transactions. Basically, the income statement reflects a company’s performance via its revenues, expenses by determining its net profit/loss for a given period; whereas, a cash flow statement shows how that profit or loss moves across the company. Cash vs Non-Cash Transactions Cash transactions are those transactions directly involving the inflow and outflow of cash and cash equivalents. For example, cash sales, interest paid or received, cash purchases, sale/purchase of fixed assets using cash or bank balance. Non-cash transactions are those transactions that do not have an actual cash flow associated with them. One major example of such a transaction is depreciation. Depreciation is the distribution of the cost of an asset over its useful life. For example, a company buys a machine for Rs, 10,00,000 and estimates its useful life to be 5 years. So, the company decides to spread this expense equally over the years, instead of writing it down as a single, big expense. Dividing Rs 10,00,000 by 5, gives us depreciation of Rs 2,00,000 every year for the next 5 years. However, no cash was actually paid out when these expenses were recorded, so they appear on the income statement as a non-cash expense. Now that we have some idea as to what is cash flow statement, let us dive deeper into its intricacies and understand what constitutes a cash flow statement. Components of Cash Flow Statement Cash flow from Operating Activities Operating activities are the day-to-day business activities of a company. For example, a grocery shop’s business activities could be buying and selling groceries. Therefore, the cash spent or earned from operating activities is the cash flow from these operating activities. Examples of operating activities include income tax payments, payments made to suppliers, salary and wages to employees, rent payments, etc. Cash flow from Investing Activities The next component is cash flow from investing activities. Investing activities are integral to a business as, without these activities, the business cannot conduct its day-to-day operations.  As a result, the business would be unable to determine its cash flow from operating activities. For example, a manufacturing firm has to acquire relevant plant and machinery in order to produce finished goods. The cash spent or earned from buying or selling fixed assets refers to cash from investing activities. Put simply, any payment regarding a company’s changes in equipment, plant, long-term investments, etc., are included in this section. Some common investing activities include purchasing fixed assets, stocks, bonds, securities, selling off securities, etc. Cash flow from Financing Activities Lastly, to invest in assets, so that a firm can run its operations and generate profits, it needs funds – which can be raised via financing activities. Financing activities are those transactions that affect the capital or long-term borrowings of a company. These can be – positive cash flows, like capital raised from investors, issuing shares, debentures, etc. or negative cash flows, like repurchasing stock, paying dividends to shareholders, repayment of loans, etc. So, net cash generated or utilized in these activities is the cash flow from financing activities. How to prepare the Cash Flow Statement format? Calculate Cash Flow from Operating Activities Calculating the operating cash flow is the first and most important step of the process. This is because it reveals the cash flow generated by the day-to-day activities of the company, like sales, purchases, etc. There are two methods of determining operating cash flows: Direct Method and Indirect Method. It is important to note that the resultant cash flow will be the same through either method. The Direct Method The direct method is straightforward and simply adds all cash receipts and subtracts all the payments that the business incurs. This method is more favorable for small businesses as they have fewer transactions to evaluate. Refer to Table 1

Book building can also be called the process of price discovery. Under this, the company collects bids at various prices from the investors at the time when the IPO is open. The prices may be above or equal to the floor price. Once the bidding is closed, the price of the shares is determined. The book-building method was introduced by SEBI (Security And Exchange Board of India) in October 1995. It helps in the preparation and implementation of the IPO filing by providing detailed information about the company’s financial status, business strategies, and future plans. This blog explains the exact meaning of book-building and discusses the steps in the book-building process. What Do You Mean by Book Building? In most layman’s terms, we can define book building as the collection of information regarding how much the investors want and what they are willing to pay. And by using that information, a demand curve is built by the investment bankers or the underwriter. Based on this information alone, they are able to look at the X amount of shares that the company is going to offer, and, based on the amount of interest in this issue, they can price it at X rupees. So, by using this information available, they can accurately project what is a good price and what will be met in the market with strong demand. Book building is a part of a three-step process that is required to complete an Initial Public Offering. The other two processes are the auction and fixed price offering. An auction is a process in which the company sells its shares to the highest bidder. The company will not sell all of its shares at one time, but it can sell as many or as few shares as it wants. In order for an IPO to be successful, investors must bid on and purchase enough stock that would make them eligible for future dividends. Fixed price offerings: Fixed price offerings are a type of offering that is almost always used in the initial public offering (IPO) process. The fixed price offer is an option for companies to sell shares at a set price, which is usually higher than the current market value of the company. In this way, investors can buy shares at a lower cost and still make money on their investment as long as they hold onto them until after the IPO date. The book-building process includes all the steps that will help the company to build its book. They can also use some other strategies like selling shares, options, and other things that may help them to get listed on the stock exchange. The book-building process is a very important part of the IPO. If they are not able to build their book in the best possible way, then it will be difficult for them to get listed on the stock exchange. What Are Fixed Price Issues And Book Building Issues? Once the valuation is done by the investment bank, the next step that comes is to decide what type of issue is to be brought. So there are two types of issues. One is the Fixed Price Issue, and another is the Book Building Issue.  Fixed Price Issue: Fixed price issues are those in which the share price of a company is fixed for a period of time. In a fixed price issue, the price is fixed and no bidding is done. There is a situation of taking it or leaving it. That is, the offer price is given, and people who want to invest can, and whoever doesn’t want to can leave it. So the demand is not properly assessed, which is why the book-building issue is highly recommended. The issue will be listed on the stock exchange and traded as per the terms and conditions laid out by SEBI. This means that there will be no change in the share price during this period, unlike other issues where it is possible to see changes in its value depending on market forces. Book Building Issue: Under the Book Building Issue, the price is not fixed, rather the price band is kept. The maximum amount is known as the “cap price,” and the minimum amount is known as the “floor price.” And people who are willing to invest and want to subscribe to that issue can place their bids. The maximum difference between the floor price and the cap price can only be 20%. Under this method, the risk of the issuer or underwriter is reduced because he is assessing the demand for how much investment will be kept at what price. The most crucial reason why the book-building issue is recommended is that while making the decisions, the qualitative factors are also assessed. When a huge number of people bid on it, they will also analyze the qualitative factors, and collectively, market forces will also be an important factor in the pricing. What are the Major Steps in Book Building? In order to have a deeper understanding of Book Keeping, you need to learn about the steps involved in it. Appointment of Investment Banker: An investment banker is appointed by the company for the purpose of selling its shares in the public market. The appointment of an investment banker is a legal requirement under the Securities and Exchange Board of India (SEBI) rules. According to SEBI, it will be mandatory for all companies to appoint an independent investment banker before they can sell their shares in public markets. This means that when you are buying or selling your stock, there should be a third party involved who can help you with your transaction without any interference from the company itself. Filling Out Draft Draft Prospectus With SEBI: It is mandatory for every issuing company that is planning to issue shares in the market to prepare a draft and submit it to SEBI at least  21 days prior to filing the offer document with the Registrar of

There are multiple forms in which a business can be incorporated like proprietorship, partnership or joint stock company. A joint stock company, as the name suggests, is jointly owned by a large number of owners in the proportion of their contribution towards the total capital of the company. The total capital of the company is divided into smaller units called shares. This form of business is favourable  when huge amounts of funds are required as a single owner or a group of people can raise limited funds only as is the case of proprietorship and partnership. In words of Prof. L.H. Haney, “A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.”  Elaborating the definition above, a joint stock company is an association of members who are willing to share profits and losses and cohesively invest their funds in the company. The shares of a joint stock company are transferable, i.e., these shares can be bought and sold in the secondary market. In the case of a private company, there are certain restrictions but there are clauses for transfer of shares.  Features Joint Stock Company is one of the most popular and desired forms of business and following characteristics of company differentiate it from other traditional forms: Incorporation: A company gets incorporated after it is registered under the Companies Act, 2013. According to this act, it is mandatory for all the joint stock companies to get themselves registered with the Registrar of Companies to legally commence business. Separate Legal Entity: In the eyes of the law, a joint stock company is a separate unit than its shareholders and management. It has a separate existence in the eyes of law Artificial Person: Created under the provisions of Companies Law, a joint stock company has a special identity as an artificial person. It has gained the title of an artificial person since it can’t perform the basic human functions like eating, sleeping, breathing, etc but it has the authority to sign and get into contracts with third parties in its own name.  Perpetual Existence: Unlike partnership or proprietorship, the life of a joint stock company is not affected by the admission or withdrawal of its members. Since it is created by law, it can only be dissolved by law. Death, insolvency or quitting of any member will not result in the dissolution of the joint stock company. Limited liability of shareholders: The most attractive feature of this form of business is the limited liability of its shareholders. The personal assets of the owners cannot be claimed in case the company fails to repay its debt as there is in the case of other two most common business forms.  Common Seal: After incorporation, every company has a common seal (a stamp) which can be used to enter into contracts by a company. A company is only bound to the contracts that carry its seal along with the signatures of its directors.  Transferability of shares: the shares of a joint stock company can be transferred easily from one shareholder to another. There are some conditions in case of a private company applied to transfer of shares whereas the shares of a public company are easily transferable from one person to another. The market where these shares are sold and purchased is called Stock Exchange. Merits The popularity of joint stock companies has increased since they offer the advantage of raising more capital and a clear distinction between the firm, its management and its owners. To understand this in depth, let’s look at the various advantages/ merits of a joint stock company. Limited liability: In a joint stock company, the liability of its shareholders is limited to the unpaid amount of the shares allotted to them which means that their personal assets are not under the risk of being claimed in case of the insolvency of the company. This is one of the major advantages of incorporating a company. This benefit is not enjoyed by sole proprietorship or partnership form of business.  Large amount of funds: one of the major drawbacks of other forms of business is limited funds.There is a limit as to how much money a single owner or a group of partners can raise. This problem is solved by a joint stock company. The capital that can be raised in a company is more than any other form as many people pool in their funds. Although there is a limit of 200 members in a private company, the number of shareholders in a public company can be unlimited, therefore, large funds are available.   Perpetual Succession: The life of a joint stock company is never ending. Members may come, members may go, but the company will go on forever. In other forms, the business life is intact with the life and will of its owners and that is a major drawback that restricts their growth. Transferability of Shares: People are hesitant when it comes to blocking their money in long term funds as huge risk is involved. However, the shares of a joint stock company are easily transferable. This allows people to invest in the shares of a company and then sell off their shares when it is profitable. Efficient Management: In a joint stock company, owners are separate from the management and the top executives are appointed cohesively by the shareholders so they make sure that most efficient people are selected who will manage the company effectively and increase the wealth of shareholders eventually. Types A joint stock company can be differentiated on the basis of liability, number of members or on the basis of ownership. The different types of companies are as follows: On the basis of liability: Limited Liability: a company in which the liability of its members is limited up to the unpaid amount on their shares. This is the most common type of company seen in practice.  Unlimited Liability: when

If you’ve ever asked yourself, “what is the meaning of the monetary policy,” this article is for you! This article aims to explain the ins and outs of monetary policy in a simple, easy-to-understand way. As the name suggests, monetary policy concerns an economy’s monetary aspects. It manages/controls the overall supply of money in an economy. The monetary policy covers a set of tools governed by the central bank and is used to control two major variables of an economy: inflation and unemployment. In India, monetary policy is governed by the central bank of India, i.e. Reserve Bank of India. RBI controls liquidity in the Indian economy using various instruments, thus bringing stability to the country.  Objectives of Monetary Policy The primary objectives of the monetary policy in India include: Inflation: Controlling inflation is one of the main objectives of monetary policy, as neither too much nor too little inflation is ideal for an economy. Hence, the monetary policy of an economy can be employed to maintain healthy inflation levels in the country. Unemployment: An expansionary monetary policy focuses on increasing the country’s money supply, production, and employment opportunities. Exchange rates: Exchange rates also get affected due to changes in monetary policy. An expansionary monetary policy increases the money supply in the economy and makes domestic currency cheaper in the foreign market. Tools of Monetary Policy and How They Work The central government employs several monetary policy tools to manage the money supply in the economy. These instruments of monetary policy are: Open Market Operations:  Open market operations refer to when the central bank buys or sells securities from/to private banks. Banks’ cash reserves rise when they buy securities, and so does their ability to lend. This is done when monetary policy is to be expanded. When central banks sell securities, liquidity is soaked, and it is often done when a tight policy is needed. Statutory Liquidity Ratios(SLR):  SLR can be described as a minimum percentage of liquid funds (cash, gold, government securities, etc.) to be mandatorily held by commercial banks. To increase liquidity in the economy, the central bank will reduce the percentage of minimum funds to be held by banks. If the central bank wishes to tighten the money supply, it will raise the liquidity ratio. Repo Rate:  Repo rate refers to the rates at which the central bank lends funds to commercial banks for short-term needs against collateral (treasury notes and treasury bills). Suppose the central bank wishes to combat inflation. In that case, it will increase the repo rate as it will discourage commercial banks from arranging funds from the central bank, and thus lesser funds are available with the central bank to disburse as loans. As a result, it aims to curb spending and keep inflation within a range. Reverse Repo Rate:  It refers to the rates at which a central bank borrows money from commercial banks of an economy. An increase in the reverse repo rate will help in combating inflation/reducing the money supply as it will encourage banks to park funds with RBI. Alternatively, a reduction in the reverse repo rate is used to increase the money supply in the economy.  Marginal Standing Facility:  This facility is often used when interbank liquidity dries up. In such emergencies, banks can borrow funds from RBI against securities. Types of Monetary Policy Based on the objectives of the monetary policy can be divided into two types: Expansionary and Contractionary Expansionary Monetary Policy The expansionary policy aims to expand or increase an economy’s overall money. The policy is usually implemented to boost the country’s economic growth by increasing the money supply, employment, and overall production in the economy. This can be done by lowering repo rates for commercial banks, purchasing securities from banks, or decreasing statutory liquidity ratios. The other aspect of expansionary policy is that it can lead to inflation in the country. Contractionary Monetary Policy The contractionary policy aims at reducing the money supply in an economy. This policy is adopted when the government wants to control inflation in the economy. The same can be achieved by increasing the repo rates for commercial banks, selling securities to the banks, or increasing statutory liquidity ratios.  Difference Between Monetary Policy and Fiscal Policy Both monetary and fiscal policies are policies of the central government aiming to bring stability to the country and boost economic growth. However, these two have basic differences as below. Meaning: Monetary policy refers to the central government’s policy to regulate the economy’s overall money supply.  Fiscal policy refers to the policy concerned with the government’s tax revenue and expenditure for economic growth. Management: The RBI is in charge of monetary policy. Fiscal policy is operated by the Ministry of Finance of India. Concern: Monetary policy is concerned with banks and credit control. Fiscal policy is concerned with the government’s revenue and expenditure. Aim: Monetary policy aims for economic stability, and fiscal policy focuses on overall economic growth. Nature: Monetary policy meetings occur at regular intervals, and decisions are taken when the need arises. Fiscal policy, on the other hand, changes every year. Conclusion Monetary policy is the act of controlling the amount of money in circulation. It involves controlling interest rates, adjusting reserve requirements, and using government spending (government spending stimulates the economy because when the government spends, it adds to the money supply).

Japan is known to be the origin of candlestick patterns, and as a result, candlestick patterns are also called Japanese candlestick patterns. They have been implemented in Japan since the 18th century, and now it has become a popular practice in the investment and trending space to predict the trend of the market, stocks, or other financial assets.  There are thousands of candlestick patterns available, and it can be hard to identify them. A bullish engulfing pattern is one of those candlestick patterns used in technical analysis. This article is your guide to know everything you need to know about this candlestick pattern. We will cover what a bullish engulfing pattern is, what it indicates with an example, its limitations, and how it is different from a bearish engulfing pattern in this article.  What is the bullish engulfing pattern? A bullish engulfing pattern is a part of the candlestick-based technical analysis performed to know the trend reversal possibility and the best time to invest in equity stock. It helps technical analysts know that a trend reversal is in store, and it’s time to take advantage of that.    As its name suggests, a bullish engulfing pattern shows a positive change in the trend, and it completely covers (engulfs) the red/bearish candle. It typically appears when the market or a stock is in a red and downward trend. The appearance of a bullish engulfing candle means that the trend will reverse, and the market or the stock will go upwards.  How to identify a bullish engulfing pattern? These are the main traits of a bullish engulfing pattern that helps you identify it.  It appears during a downward trend. A big and strongly positive (green) candle engulfs the previous red candle. It is a strong indication if a Doji candle appears before the bullish candle. (A Doji candle forms when the opening and closing price are almost similar with no major changes during the day.) The next candle following the bullish engulfing candle closes above its high (this is not mandatory, though). The bullish engulfing pattern shows a reversal and indicates that the selling pressure is reducing with investors and traders focusing on buying momentum.  What are the trading implications of this pattern? Now that the base is clear, let’s understand the implications this pattern has on investors and their decisions. As the image shows, a bullish engulfing pattern comes after a downward trend when the selling pressure is already high. When a giant green candle overshadows the red bearish candle, it is the start of a bullish trend. This is day one for investors.  On the second day, bears again try to take the market down, and that reflects in the red candle as shown in the picture. However, the closing is still higher than the previous day’s candle as the bulls try to take charge. That is day two. We can also call this candle a gap up after a gap down in the morning session.  A risk-taking investor may enter the trade on the first or second day, while a risk-averse investor would wait for two to three days for the reversal trend to confirm and continue.  The reversal of the trend occurs as the investor sentiments change from bearish to bullish, and that reflects in the candles. Eventually, it is a win for bulls over bears.  What is the key difference between bullish and bearish engulfing patterns? A bearish engulfing pattern is the counterpart of a bullish engulfing pattern. It appears when the market is in an upward trend. Opposite of the bullish engulfing, a big red candle covers a bullish candle and engulfs it completely in the bearish engulfing pattern.  It sets a new course of trend as the market sentiments change to bearish, and investors put pressure on selling. You can see how the candlestick pattern looks in the image below.  Bullish and bearish, both the engulfing patterns work similarly for different market scenarios. The only difference is that the first one leads to an upward market trend, while the latter is a reversal pattern that invites a market downturn.  When doesn’t the bullish engulfing pattern work? No candlestick pattern ensures a sure shot result, and a bullish engulfing pattern is no different. If the candles following the bullish candle are Doji, or let’s say the market is going sideways, then even if the market is rising eventually, it doesn’t confirm a trend reversal. This can reduce the effect of the bullish engulfing pattern.  While a bullish engulfing pattern confirms a trend reversal, it does not necessarily help investors determine the range for the coming trend with a price target. Thus, the pattern alone is not enough for investors. They need to combine it with other candlestick patterns or other technical analysis techniques to secure a profitable trade.  Conclusion Bullish engulfing patterns help investors find a reversal in trend and take advantage of the upcoming market bullishness. It appears when the market is already in the downward trend and covers the bearish candle. It is suggested for investors to wait for two to three days to make sure that the trend reversal alarm is not false. Investors should also use other candlestick patterns or tools to analyze the perfect price target and know when to exit the market.