Category: Notes

Risk Management Notes

Risk: The quantifiable likelihood of loss or less-than-expected returns. Examples: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, Opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business, risk, counterparty risk, purchasing- power risk, event risk.

Internal risk: Internal Risks are those risks which arise from the events taking place within the business enterprise. Such risks arise during the ordinary course of a business. These risks, can be forecasted and the probability of their occurrence can be determined.

External risk: External risks are those risks which arise due to the events occurring outside the business organisation. Such events are generally beyond the control of an entrepreneur. Hence, the resulting risks cannot be forecasted and the probability of their occurrence cannot be determined with, accuracy.

Various sources of risk:

• Customer risk.
• Technical risk.
• Delivery risk.

Risk Management: Risk management can be defined as a process used to manage systematically pure risk exposures. It is a procedure to minimize, the adverse effect of a possible financial loss by –

• identifying potential sources of loss
• measuring the financial consequences of a loss occurring
• using controls to minimize actual losses or their financial consequences.

Risk analysis: Risk analysis is the process of defining and analyzing the dangers to individuals, businesses and government agencies posed by potential natural and human-caused adverse events.

Risk management planning: Risk management planning is the process of developing the risk management plan through the process of identifying risks, assessing risks and developing strategies to manage risks.

Risk control: Risk control is a method, by which firms evaluate potential losses and take action to reduce or eliminate such threats. Risk control is a technique that utilizes findings from risk assessments and implementing changes to reduce risk in these areas.

Transfer of risk: Risk transfer is a risk management and control strategy that involves the contractual shifting of a pure risk from one party to another. One example is the purchase of an insurance policy, by which a specified risk of loss is passed from the policyholder to the insurer.

Hedging: Hedging is an investment made in order to reduce the risk ‘ of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale.

Hedging Instruments: A hedging instrument is a designated financial instrument whose fair value or related cash flows should offset changes in the fair value or cash flows of a designated hedged item.

Foreign exchange rates fluctuate: The foreign exchange rate fluctuates because of the changes in the demand and supply position of foreign currency in the world market.

Process of risk management:

• Identify risk
• Evaluating risks.
• Select risk management techniques
• Implement and review decisions.

Foreign exchange risk:

• Exchange rate movements
• Foreign – Economic condition
• Political risk.

Classification of risk:
(1) Systematic Risks.

(2) Unsystematic Risks:
Examples of Systematic Risks:
(i) Market Risk

(ii) Interest Rate Risk

(iii) Purchasing Power Risk.

(iv) Examples of Unsystematic Risks

• Business Risk.
• Financial Risk
• Default or Insolvency Risk

(v) Other types of Risks

• Industry risk
• Stock-specific risk
• Liquidity risk
• Principal risk
• Currency risk
• Inflation risk.

kinds of foreign exchange exposure:

• Economic exposure
• Transaction exposure
• Translation exposure.

Various methods of managing transaction exposures:

• Forward market hedge.
• Money market hedge.
• Options market hedge.
• Exposure netting.

Various tools and techniques of foreign exchange risk management:

• Managing transaction exposures
• Exchange exposures:
• Information asymmetry
• Transaction cost
• Default cost.
• Managing economic exposures.
• Marketing Initiatives:
• Marketing selection
• Pricing strategy
• Product strategy
• Promotional strategy
• Production Initiatives
• Product sourcing
• Plant location
• Input mix.
• Raising productivity.

Vindicators of political and economic factors are below:

• Political risk Indicators
• Stability of local political environment
• Consensus regarding priorities
• Attitude of host government
• War.
• Mechanisms for expression of discontent.
• Economic Risk Indicators
• Inflation rate
• Current and potential state of country’s economy
• Resource Base
• Adjustment of external shocks.

Business Valuation Notes

Valuation: Valuation is the process of determining the current worth of an asset or a company; There are many techniques used to determine value. An analyst placing a value on a company looks at the company’s management, the composition of its capital structure, the prospect of future earnings, and the market value of assets.

Share: Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution of any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares.

Efficient market hypothesis: The efficient market hypothesis is the hypothesis that the stock market reacts immediately to all the information that is available. Three forms of the efficient market hypothesis can explain the theory behind share price movements.

Types of efficiencies in the context of the operation of financial markets:

• Allocative efficiency.
• Operational efficiency.
• Informational processing efficiency.

Business Finance Notes

Sources of long term financing: The sources of long term financing include ordinary share capital, preference share capital, debentures, long term borrowings form financial institutions and retained earnings.

Equity Shares: Equity shares are also known as ordinary shares or common shares and represent the owners capital in a company. The holders of these shares are the real owners of the company.

Preference Shares: Preference shares have a preference over the equity shares in the event of liquidation of company. The preference dividend rate is fixed and known. A company may issue preference shares with a maturity period (redeemable preference shares). A preference share may also, provide for the accumulation of dividend. It is called cumulative preference share.

Trading on equity: Trading on equity means to raise fixed cost capital such as borrowed capital and preference share capital, on the basis of equity share capital so as to increasing the income of equity shareholders.

Debenture: According to Section 2(12) of the companies act of 1956. “Debenture is an instrument issued by a company under its common seal, acknowledging the debt to the holder, and containing an undertaking to repay the debt on or after a specified period and to pay interest on the debt at a fixed rate at regular intervals usually, half yearly etc. until the debt is paid.”

Retained earning: Retained Earnings is a technique of financial management under which all profits of a company are not distributed amongst the shareholders as dividend but a part of the profits is retained in the company. This is also known as ploughing back of profits.

Term loan: Term loan refers to loan given for a particular period of time. It , may be short or long period. Short term, which is less than a year. Medium term, which lies between two to five years. Long term, which is„ more than 5 years upto 20 years.

Cost of capital: Cost of capital is defined as the minimum rate of return that a firm must earn on its investments so that market value per share remains unchanged.

Cost of equity capital: It refers to the minimum rate of return that a company must earn on the equity share capital financed portion of an investment project so that the market price of share does not change.

Cost of preferred capital: Cost of preference share capital is the rate of return that must be earned on preference capital financed investments, to keep unchanged the earnings available to the equity shareholders.

Cost of debt capital: Cost of debt refers to the minimum rate of return expected by the suppliers of debt capital.

Weighted average cost of capital: Weighted average cost of capital is nothing but overall cost of capital. In other words in case of WACC proper weightage is given to the cost of each and every source of funds i.e. proper assessment Of relative proportion of each source of funds, to the total, is ascertained by considering either the book value or the market value of each source, of funds.

Capital structure: Capital structure is basically focussed towards the objective of profit maximisation? Capital structure is nothing but the financial structure of a firm, which consists of different combinations of securities. In other words it represents the relationship between the various long term forms of financing such as debentures, preference shares capital on equity etc.

Optimal capital structure: “OCS refers to that Capital structure or combination of debt and equity that leads to the maximum value of the firm”. Hence thereby the wealth of its owners also increases with the minimisation of cost of capital.

Flexible capital structure: Flexible capital structure means the capital structure of the firm should be flexible, so that without much practical difficulties, a firm can change the securities in capital structure.

Capital expenditure: Capital expenditure refers to investment that Involves huqe amount, associated with high risk and the benefits from such investment are derived over a longer period of time.

Leverage: Leverage is the employment of fixed assets or funds for which a firm has to meet fixed costs or fixed rate of interest obligation irrespective of the level of activities attained or profit earned.

Types of leverages:

• Operating leverage
• Financial leverage.
• Combined leverage.

Personal leverage: Personal, leverage refers to an individual replicating the advantages of corporate debt by borrowing on personal account and subscribing for an equivalent amount of shares in an unlevered company.

Financial leverage: The use of long term fixed interest and dividend bearing securities like debentures and preference shares along with equity is called financial leverage or trading on equity.

Operating Leverage: The operating leverage occurs when a firm has fixed costs which must be recovered irrespective of sales volume. The fixed costs remaining same the percentage change in operating revenue will be more than the percentage change in sales. This occurrence is known as operating leverage.

Net income approach (NIA): Under this approach, the cost of equity capital and cost of debt capital are assumed to be independent to the capital structure.

Net operating income approach (NOIA): Under this approach, the cost of equity increases in accordance with leverage. Due to which the weighted average cost of capital remains constant and the value of the firm also remains constant as leverage is changed.

Traditional approach of capital structure: The traditional approach of capital structure states that when the Weighted Average Cost of Capital (WACC) is minimized, and the market value of assets are maximized, an optimal structure of capital exists.

MM approach of capital structure: The Modigliani – Miller (MM) hypothesis is identical to the net operatinq income approach. MM arque, that in the absence of taxes, a firm’s market value and the cost of capital remain invariant to the capital structure changes.

Advantages of equity shares:

• It is a good source of long – term finance
• It serves as a permanent source of capital
• Issuance of equity share capital creates no charge on the assets of the company.

Disadvantages of equity shares:

• The cost of issuance of equity shares is high
• Trading on equity is not possible
• Excessive issue of equity shares may result in over-capitalization..

Advantages of Preference Shares are:

• Fixed return
• Absence of charge on assets
• Capital structure flexibility
• Widening of the capital market
• Less capital losses.

Disadvantages of Preference Shares are:

• Dilution of claim over assets
• Tax disadvantages
• Increase in financial burden.

Advantages of debentures:

• Less costly
• Tax deduction
• No ownership dilution
• Fixed interest
• Reduced real obligation.

Limitations of debentures:

• Obligatory payment.
• Financial risk associated with debenture is higher than equity share’s.
• Cash out flow on maturity is very high.

Merits of long – term loan:

• Cash Flow.
• Save time.
• Increase flexibility
• Lower interest rates
• Build credit.

Disadvantages of long – term loans:

• Liquidation
• Risk.
• Collateral
• Contract contents.

Basic qualities which a sound capital structure should possess:

• Profitability.
• Solvency.
• Flexibility.

Assumptions of MM Hypothesis:

• There are perfect capital markets
• Investors behave rationally
• Information about the company is available to all without arty cost
• There are no floatation and transaction costs
• No investor is large enough to effect the market price of shares
• There is no risk or uncertainty in regard to the future of the firm.
• The firm has, a rigid investment policy

Investment Appraisal Notes

Investment appraisal: Investment appraisal is an integral part of capital budgeting (see capital budget)., and is applicable to areas even where the returns may not be easily quantifiable such as personnel, marketing, and training

Inflation: Inflation is the rate at which the general level of prices for goods and services is rises and subsequently, purchasing power falls.

Types Of inflation:

• Demand pull inflation
• Cost push inflation
• Built-in inflation

Risk analysis: Risk analysis is the process of defining and analyzing the dangers to individuals, businesses and government agencies posed by potential natural and human-caused adverse events.

Risk: The quantifiable likelihood of loss or less-than-expected returns. Examples: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing- power risk, event risk.

Systematic risk: Systematic risks are associated with external environment , these are non diversifiable and is associated with securities market as well as economic, sociological, political considerations of the prices of all securities in the market. Unsystematic risk: Unsystematic risk is also called unique risk and it is unique to firm or industry. It is caused by factors like labour strike, irregular disorganised management policies and consumer preferences.

Business risk: This relates to the variability of the business, sales, income, profits etc. which in turn depend on the market conditions for the product mix, input supplies, strength of competitors, etc. The Internal Business Risk leads to fall in revenues and in profit of the company, but can be corrected by certain changes in the company’s policies.

Financial risk: This relates to the method of financing, adopted by the company, high leverage leading to larger debt servicing problems or short-term liquidity or process equipment, as well as utilities, support and related assets. It should not be based on the insured value or depreciated value of the assets. It includes the replacement value of the buildings and the grounds if these assets are maintainted by the maintenance expenditures.

Replacement decision: Decision regarding replacement of an existing asset with another is based on the net present value and internal rate of return of the incremental cash flows, i.e. the difference between periodic net cash flows if the existing asset is kept and the periodic net cash flows if the asset is replaced. In Capital budgeting and enqineering economics, the existing asset is called the defender and the asset which is proposed to replace the defender is called the challenger. Estimation of incremental cash flows for such replacement analysis involves calculation of net cash flows of the defender, net cash flows of the challenger and then finding the difference in cash flows for both the assets.

Capital rationing: Capital rationing is the act of placing restrictions on the amount of new investments or projects undertaken by a company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on specific portions of a budget.

Various capital investment appraisal techniques:

• Net present value.
• Accounting rate of return.
• Internal rate of return.
• Modified internal rate of return.
• Adjusted present value.
• Profitability index.
• Equivalent annuity.
• Pay back period.

Various types of Capital rationing:

• Soft Rationing.
• Hard Rationing.

Different tax system of international risk management:

• Establishing the context.
• Identification.
• Assessment.
• Potential risk treatments.
• Risk avoidance.
• Risk reduction.
• Risk retention.
• Risk transfer.

Working Capital Management Notes

Working Capital: Working capital is that part of the firms total capital which is required for financing short term assets or current assets such as cash, debtors, inventories, marketable securities. It is also known as circulating capital.

Concept of working capital: Working capital is the amount of funds necessary to cover the cost of operating the enterprise. There are two concepts of working capital:

• Gross working capital
• Net working capital

Gross working capital: is the capital invested in total current assets of the enterprise. Net working capital is the excess of current assets over current liabilities.

Different types of working capital:

• Permanent working capital
• Temporary working capital
• Gross working capital
• Net working capital

Working capital management: Working capital management refers to the administration of all aspects of current assets namely cash, debtors, inventories and marketable securities and current liabilities. This basically determines the levels and compositions of current assets to ensure that right sources are tapped to finance current assets and current liabilities are paid in time.

Conservative approach to working capital financing: Conservative approach to working capital financing depends on long-term funds for financing needs. The firm finances the permanent current assets and a part of the temporary current assets with long-term funds. If the temporary assets are not needed then the long-term funds are invested in the marketable securities. A firm following this approach will face less risk but along with low returns.

Determinants of working capital:

• Opersational efficiency
• Growth and Expansion

Operating cycle: The term operating cycle or cash cycle refers to the time duration required to convert the cash to raw materials, raw materials to work-in-progress, work in progress to finished goods, finished goods to debtors and debtors back to cash.

Cash management: Cash management refers to the process of managing cash i.e. its inflow and outflow in an organisation for cash demanding activities and minimising funds committed to cash balances.

Cash cycle: It is the net time interval between cash collections from sale of the product and cash .payment for resources acquired by the firm. It also represents the time interval over which additional funds called working capital, should be obtained in order to carry out the firm’s operations.

Various floats which necessitates management of cash: Float refers to the amount of money tied up between the time a payment is initiated and cleared funds become available in the company’s bank account. The different types of float are:

Various Cash Management Techniques:

• Budgeting
• Investing
• Credit
• Generating income

Receivables: Receivables are also known as accounts receivables or Book debts. Receivables are the claims against its customers for the goods , sold to the customers in the ordinary.course of business on credit basis. The purpose of lending goods on credit basis is to attract more customers, meet competition and to increase sales and profits.

Receivable management: Receivables management is a decision making process which takes into account the creation of debtors turnover and minimising the cost of borrowing of working capital due to lacking of funds in receivables.

Ageing Schedule: Ageing schedule is a table that classifies accounts receivable and payables according to their dates. It helps in managing cash and analyzing payments.

Debtors Turnover Ratio: A concern may sell goods on cash as well as on credit. Credit is one of the important elements of’ sales promotion. The volume of sales can be increased by following a liberal credit policy.

Inventory Management: Inventory Management refers to the purchase of raw materials from the right source at the right time and at the right price and supplying the materials to the production department as and when required. The main objective of inventory, management is to reduce the order placing, receiving and inventory carrying cost

Objectives of inventory management:

• Availability of materials
• Best services to consumers.
• Wastage minimisation
• Optimum Investment.

EOQ: Economic Order Quantity is a point at which the; carrying cost and the ordering cost are equal. Economic order Quantity is that ‘ size of the lot to be purchased which is economically viable. This is the quantity of materials which can be purchased at minimum costs.

Benefits of holding inventories:

• Avoiding Lost Sales
• Gaining Quantity Discounts
• Reducing Order Cost.

Techniques of inventory management:

• Fixation of levels
• ABC Analysis
• VED analysis
• FSN analysis
• Economic order quantity
• Perpetual inventory system.

ABC analysis OR Pareto analysis: ABC analysis is a method of material control, wherein the materials are divided into a number of categories. Materials are controlled giving importance to its value. Materials are graded as A, B & C where in materials with ‘A’ grade are costly in value but less in number where as materials with ‘C grade are cheap in value and more in number. Grade ‘B’ materials are moderate in value and moderate number of such items are maintained.

Just-In-Time Management: Just-In-Time (JIT) is a broad philosophy of seeking excellence and eliminatingwaste in the manufacturing process. A major objective of JIT is to have items . only at the right place at the right time i.e. to purchase and produce items only before they are needed so that work-in- rocess inventory is keet low. As a concept, JIT means that virtually no inventories are held at any stage of production and that exact number of units is brought to each successive stages of production at the right time.

Safety stock: The receipt of inventory from the suppliers may be delayed beyond the expected lead time. The delay may be because of strikes, floods, transportation and communication barriers, and also because of seasonal nature of the raw materials. This inturn would disrupt the production schedule. To prevent this situation the firm maintains additional inventory which is known as “safety stock”.

Different principles of Working Capital:

• Principle of Risk Variation
• Principle of Cost of Capital
• Principle of Equity Position
• Principle of Maturity of Payment.

Various types of working capital:

• Permanent working capital.
• Temporary working capital.
• Gross working capital.
• Net working capital.

Methods of estimating working capital requirements:

• Conventional Method or Cash Cycle Method
• Operating Cycle Method.

Objectives of cash management:

• Transactionary motive.
• Precautionary motive.
• Speculative motive.

Factors influencing size of receivables:

• Volume of credit sales.
• New products.
• Location.
• Credit policy.
• Credit worthiness of the customers.
• Credit collection efforts.

Various Inventory Management Techniques:

• Fixation of levels
• ABC analysis
• VED analysis
• FSN analysis
• Economic order quantity
• Perpetual inventory system.

Determinants of working capital:

• Operational efficiency.
• Growth and Expansion.
• Profit Appropriation.
• Capital structure of the company.
• Policies of RBI.
• Changes in prices.
• Profitability.
• Nature and size of the firm.
• Sales volume.
• Business terms.

Different sources of finance for funding working capital:
1. Trade Credit:
Accrued Expenses and Deferred Income.

2. Bank Borrowing:

• Loans
• Cash Credit
• Overdrafts
• Purchasing and Discounting of bills.

Various Cash Management Techniques:

• Cash Planning.
• Cash Forecasts and Budgeting.
• Investment of Surplus Funds.

Management of Accounts Receivable:
(1) Forming of Credit Policy.

(2) Credit Evaluation of Individual Accounts:

• Credit Information.
• Credit Investigation.
• Credit Limit
• Collection Procedure.

(3) Control of Receivables.

The Finance Function Notes

Finance: The term “Finance” is understood as provision of funds as and when needed. It refers to the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.

Business finance: Business Finance refers to that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.

Financial management: According to IF. Bradley “Financial Management is the area of business management devoted to the judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals”.

Functions of financial mangement:

• Estimation of financial requirements of a firm.
• Selection of right and appropriate source of funds for raising the funds.
• After selecting the right source, raising the funds required by the firm.
• Lastly accumulating, proper allocation of funds to different profitable avenues becomes essential.

Objectives of financial management:
Financial management has three main objectives they are –

• Maintaining of adequate Liquid Assets
• Maximisation of profit
• Maximisation of wealth.

Profit Maximisation is a primary objective and a social obligation. Profit is a tool through which efficiency of the organisation can be measured. The growth and survival of a company depends upon its ability to earn profit. The profit earned can be preserved for meeting future deficiency.

Wealth maximisation: Wealth Maxmisation refers to creation of wealth of the concern. In other words, it refers to the increase in the market value of shares.

Goals of financial management:

• Profit maximisation
• Wealth maximisation
• Maximising firm value
• Acquiring sufficient fund.

Economic environment for business: Economic Environment refers to all those economic factors, which have a bearing on the functioning of a business. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods.

Financial Markets: Financial markets represent an important segment of the financial system. It refers to an outlet where financial products, financial services and financial securities are traded.

Financial markets can be classified:

• Money market and capital market
• Primary market and secondary market
• Organised and unorganised market
• Foreign exchange market
• Broad, deep and shallow market.

Secondary market: Secondary market is, a market for all those securities and stock which are already issued to the public. It deals with sale/purchase of already issued equity/debts by corporates and others. It is also known as stock market.

Intermediaries of secondary markets:

• Market Intermediaries Registration and Supervision Department (MIRSD).
• Market Regulation Department (MRD).

Capital market: Capital market is, the market for long term finance. Capital market is the medium that channelises the small savings of the community and makes it available for industrial outlets.

Money Market: Money market basically deals with short term financial assets, which are close substitute of money.

Financial Dualism: The financial system of most developing countries are ‘characterised by coexistence and cooperation between the formal ’ and informal financial sectors. The coexistence of these two sectors is known as ‘financial dualism’.

Financial institutions: Financial institutions render financial services of dealing in financial assets i.e. mobilise the savings against financial claims. Financial Institutions range from pawn shops and money lenders to banks, pension funds, insurance companies, brokerage houses, investment trusts and stock exchanges.

Financial instruments: Financial instruments range from the common – coins, currency notes and cheques; mortgages, corporate bills, and stocks – to the more exotic – futures and swaps of high finance.

Aims of finance functions:

• Acquiring Sufficient and Suitable Funds.
• Proper Utilization of Funds
• Increasing Profitability.
• Maximizing Firm’s Value.

Different goals of financial management:
(a) Specific Goals:

• Profit Maximisation
• Wealth Maximisation

(b) Other Goals:

• Maintaining balanced asset structure
• Ensuring efficiency in business operations
• Ensuring financial discipline
• Planning judicious utilisation of funds
• Maintaining liquidity of funds.

Decisions of financial management:

• Investment decisions.
• Financing Decisions.
• Dividend Decision.

Role of financial markets:

• Growth in Income
• Productive Usage.
• Capital Formation
• Price Discovery
• Sale Mechanism
• Information Availability.

Features of primary market:

• New long term capital.
• Issued by the company directly.
• Issue new security certificates.
• Setting up new business.
• Facilitating capital formation.
• Converting private capital into public capital.

Functions of primary market:

• Facilitate capital growth.
• Issue new stocks.
• Raise funds from the public.
• Issuance of new securities by corporations.
• Methods of issuing securities.

Functions of Capital Market:

• Allocation functions
• Liquidity functions
• Indicative function
• Savings and investment functions
• Transfer function
• Merger function.

Features of money market:

• Short term financing
• No fixed place
• Liquidity adjustment
• Existence of sub-markets
• Prevalence of healthy competition
• Highly developed industrial system
• International attraction
• Uniformity of interest rate
• Highly organised banking system.

Scope of financial management:

• Financial Estimation.
• Planning of the capital structure.
• Selecting right source of funds.
• Investment of funds.
• Analysing the financial performance.
• Planning of profit.
• Ensuring liquidity.

Objectives of financial management:
1. Specific Objectives:

• Profit Maximisation.
• Wealth Maximisation.

2. General Objectives:

• Balanced asset structure
• Liquidity
• Proper planning of funds
• Efficiency
• Financial discipline.

Factors constitute economic environment of business:

• Economic system
• Economic planning
• Industry
• Agriculture
• Infrastructure
• Financial & fiscal sectors
• Removal of regional imbalances.
• Price and distribution controls.
• Economic reforms
• Human resource
• Per capital income and national income.

Types of financial markets:

• Money market and capital market.
• Primary market and secondary market.
• Organised and Unorganised market.
• Foreign Exchange market.
• Broad, deep and shallow market.

Different instruments ‘traded in money market:

• Treasury bills
• Commercial bills
• Certificates of deposits
• Inter-bank participation certificates
• Commercial papers
• Money at call or call money

GST and Technology Notes

GST providers: To enable taxable persons to comply with the requirements of GST, 34 companies have been given permission to act as GST suvidha providers. These providers will enable a middle tier of entrepreneurs, who can develop innovative services and solutions for a variety of tax payers.

GSTN: Goods and Services Tax Network (GSTN) is a nonprofit non-government company, which will provide shared IT infrastructure and service to both central and state governments including tax payers and other stakeholders. The Frontend services of registration, Returns and payments to all taxpayers will be provided by GSTN. It will be the interface between the government and the taxpayers.

GST system: Under GST system a uniform sharing of IT infrastructure between the center and states has been established.

GSP: GSP stands for GST Suvidha Provider. A GSP is considered as an enabler for the taxpayer to comply with the provisions of the GST law through its web platform (essentially an online compliance platform such as ClearTax).

GSP eco-system: Under GSP eco-system uploading invoice information, matching of input tax credit (ITC) claims, creation of party-wise ledgers, uploading of returns, payment of taxes, signing of documents with digital signature is done electronically.

Mandatory for e-commerce operator to obtain registration: Yes it it mandatory for e-commerce operator to obtain registration. Section 19 r/w Schedule-III of the MGL, provides, that the threshold exemption is not available to e-commerce operators and they would be liable to be registered irrespective of the value of supply made by them.

Aggregator: Section 43B(a) of the MGL defines aggregator to mean a person, who owns and manages an electronic platform, and by means of the application and communication device, enables a potential customer to connect .with the persons providing service of a particular kind under the brand name or trade name of the said aggregator. For instance, Qla cabs would be an aggregator.

Aggregator required to be registered under GST: Yes an aggregator required to be registered under GST. Section 19 r/w Schedule-III of the MGL, provides that the threshold exemption is not available to aggregators and they would be liable to be registered irrespective of the value of supply made by them.

Tax Collection at Source (TCS): In terms of Section 43C(1) of the MGL, the e-commerce operator is required to collect (i.e. deduct) an amount out of the consideration paid or payable to the actual supplier of goods or services in respect of supplies of goods and / or services made through such operator. The amount so deducted/collected -is called as Tax Collection at Source (TCS).

Concept of GST Eco-system: A common GST system will provide linkage to all State/UT Commercial Tax departments, Central Tax authorities, Taxpayers, Banks and other stakeholders. The eco-system consists of all stakeholders starting from taxpayer to tax professional to tax officials to GST portal to Banks to accounting authorities.

Empowered Group on IT Infrastructure for GST with following members:

• Member (B&C), CBEC.
• Additional Secretary (Revenue), DoR.
• DG (Systems), CBEC as Member-Secretary
• FA, Ministry of Finance
• Member Secretary, Empowered Group of State Finance Ministers
• Member Technology Advisory Group for Unique Protects (TAGUP).
• Commercial Tax Commissioners of Maharashtra, Assam, Karnataka, West Bengal and Gujarat.

Services will be rendered by GSTN:

• Registration (including existing taxpayer master migration and issue of PAN based registration number)
• Payment management including payment gateways and integration with banking systems
  Return filing and processing.
• Taxpayer management, including account management, notifications, information, and status tracking.
• Tax authority account and ledger Management.
• Computation of settlement (includinq IGST settlement) between the Centre and States; Clearing house for IGST].

Basic features of GST common portal:

• Tax payer registration (New, surrender, cancelation, etc.)
• Invoices upload, auto-draftirig of Purchase register- of buyer Periodic GST Returns filing.
• Tax payment including integration with agency banks.
• ITC and Cash Ledger and Liability Register
• MIS reporting for tax payers, tax officials and other stakeholders.
• BI/Analytics for Tax officials.

Assessment and Returns Notes

Assessment: Assessment means determination of tax liability under this act and includes self- assessment, re-assessment, provisional assessment, summary assessment and best judgment assessment.

First returns needs to be filed by taxable in respect of outward suppliers: First returns of outwards supplies needs to be filed from the date on which he became liable to registration till the end of the month in which the registration has been granted.

First returns needs to be filed by taxable in respect of inward suppliers: First returns of inwards supplies needs to be filed from the date of registration till the end of the month in which the registration has been granted.

Required to furnish the details of outward taxable supply: All registered taxable persons are required to furnish the details of outward supplies of goods and services made during the tax period.

GST payment to be done by the taxable person: At the time of supply of Goods as explained in Section 12 and at the time of supply of services as explained in Section 13. The time is generally the earliest of one of the three events, namely receiving payment, issuance of invoice or completion supply. Different situations envisaged and different tax points have been explained in the aforesaid sections.

Tax liability register: Tax Liability Register will reflect the total tax liability of a taxpayer (after netting) for the particular month.

Cash Ledger: The information will be reflected on real time basis. This ledger can be used for making any payment on account of GST.

Input tax: “Input tax” has been defined in section 2 (57) of the MGL and section 2 (1) (d) of the IGST Act. Input tax in relation to a taxable person, means the {IGST. and CGST} in respect of CGST Act and {IGST and SGST} in respect of . SGST Act, charged on any supply of goods and/or services to him which are used, or are intended to be used, in the course or furtherance of his. business and includes .the tax payable Under sub-section (3) of section 7. Under the IGST Act, input tax is defined as IGST CGST or SGST charged on any. supply of goods and / or services.

E-FPB: E-FPB stands for Electronic Focal Point Branch. These are branches of authorized banks which are authorized to collect payment of GST. Each authorized bank will nominate only one branch as Its E- FPB for pan India Transactions. The E-FPB will have to open accounts under each major head for all governments. Total 38 accounts (one each for CGST, IGST and one each for SGST for each State/UT Govt.) will have to be opened. Any amount received by such E-FPB towards GST will be credited to the appropriate account held by such E-FPB.

Supplier account for this TDS while filing his return: Any amount shown as TDS will be reflected in the electronic cash ledger of the concerned, supplier. He can utilize this amount towards discharging his liability towards tax, interest fees and any other amount.

Input tax includes tax (CGST/ IGST/ SGST): Yes, in terms of section 2(54), 2(55) & 2(20) of the MGL respectively. It may be noted that credit of tax paid on capital goods also is permitted to be availed in one installment.

Details to be submitted while furnishing the details of outward supply: The supplier has to furnish the details of invoices, debit notes, credit notes and revised invoices issued in relation to outward supplies made durjnq the tax period.

Required to file an annual return: AH registered taxable persons are required to furnish an annual return for every financial year in form GSTR-9. A registered taxable person opting to pay tax under the composition scheme is required to file the annual return in form GSTR- 9A.

Required to furnish final return: Any registered taxable person whose registration whose registration has been cancelled is required to file final return in form GSTR-10. The return has to be filed within 3 months from the date of cancellation or date of order of cancellation, whichever is earlier.

Zero rated transactions: Certain supplies of goods and services are Zero rated i.e GST is not payable on supply of goods and services but still input tax credit is available.

Main features of GST payment process:

• Electronically generated challan from GSTN Common Portal.
• Warehousing of Digital Challan.
• Convenience of making payment online
• Logical tax collection data in electronic format
• Faster remittance of tax revenue to the Government Account
• Paperless transactions
• Speedy Accounting and reporting
• Electronic -reconciliation of all receipts
• Simplified procedure for banks.

Claim of input credit under GST:

• A person must have a tax invoice(of purchase) or debit note issued by registered dealer.
• Should have received the goods/services.
• The tax charged on purchases has been deDosited/oaid to the government by the supplier in cash or via claiming input credit.
• Supplier has filed GST returns

Various heads under which information needs to be furnished:

• Name of Taxable Person
• Whether Liable to Statutory Audit
• Auditors
• Details of Expenditure
• Details of Income
• Return Reconciliation Statement
• Other
• Profit as per the Profit and Loss Statement.

Sections which will be auto-populated at the time of system login:

• GSTIN
• Legal Name
• Business Name
• Address

Sections under which information needs to be furnished:

• Application Reference Number
• Effective Date of Surrender/ Cancellation.
• Whether cancellation order has been passed.
• If Yes, Unique ID of Cancellation order
• Date of Cancellation Order
• Particulars of Closing Stock
• Amount of Tax Payable on Closing Stock
• Verification.

Procedure and Levy Under GST Notes

Power to levy GST derived from Article 246A of the Constitution, which was introduced by the Constitution (101st Amendment) Act, 2016 confers concurrent powers to both parliament and state legislatures to make laws with respect to GST. However, clause 2 of Article 246A read with Article 269A provides exclusive power to the Parliament to legislate with respect to interstate trade or commerce.

Deemed registration: The grant of registration or the Unique Identity Number under the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act shall be deemed to be a grant of registration or.the Unique Identity Number under this Act subject to the condition that the application for registration or the Unique Identity Number has not been rejected under this Act within the time specified in sub-section (10) of section 25.

Registration granted under GST can be cancelled: Registration, may be cancelled, if the person, who has voluntarily registered doesn’t commence business within 6 months from the registration. Further, the registered person himself may apply for cancellation of registration only after the expiry of 1 year from the date of registration.

Nonresident become liable for registration: A nonresident taxable person shall become liable for registration, when he makes any taxable supply.

Registered person required display his certificate of registration: Every registered person shall- display his registration certificate in a prominent location at his principal place and at every additional place or place of business.

Compulsory registration: A business whose aggregate turnover in a financial year exceeds Rs 20 lakhs has to mandatorily register under Goods and Services Tax. This limit is set at Rs 10 lakhs for North Eastern and hilly states flagged as special category states.

Bill of supply: A bill of supply should be issued instead of a tax invoice in case of the following supplies:

• Supply of exempted goods or services.
• Supplies made by a composition supplier.

Copies of invoices are required in case of supply of goods: The invoice should be prepared in triplicate. The original is for the recipient, the duplicate for the transporter and the triplicate for the supplier.

Receipt voucher: Receipt voucher is issued when advance is collected/ received in relation to supply of goods or services.

Every Registered person is required to maintain books of account: Every registered person is required to maintain books of accountancy his principal place of business that is mentioned in the certificate of registration.

Basic accounts to be maintained by every registered person: The following accounts need to be maintained production or manufacture of goods, inward or outward supply of goods or services, stock of goods, input tax credit availed, output tax payable and paid.

Provisional input tax credit: The input tax credit availed by the recipient in its return is allowed to the recipient on a provisional basis. Once the input tax credit availed by the recipient is matched with the outward supply details furnished by the supplier, input tax credit will become final.

Tax deducted at source: Tax deducted at source is a mechanism, wherein the recipient of goods or services will deduct out of the amount payable to the supplier, an amount at a percentage of value of supply and deposit the same to the account of the government within the time prescribed.

Authorized to undertake the audit of a taxable person: The commissioner of CGST/SGST or any. officer authorized by him may undertake audit of any registered person.

Threshold for opting to pay tax under the composition scheme: The threshold for composition scheme is Rs. 50 Lakhs of aggregate turnover in financial year.

Minimum rate of tax prescribed for composition scheme: The minimum rate of tax prescribed for composition scheme is 1%.

Remission of tax/duty: Remission of tax/duty means relieving the tax payer from the obligation to pay taxon goods when they are lost or destroyed due to any natural causes. Remission is subject to conditions stipulated under the law and rules made there under.

Documents required for GST registration:

• PAN card of the Company
• Proof of constitution like partnership deed, Memorandum of Association (MOA) /Articles of Association (AOA), certificate of incorporation.
• Details and proof of place of business like rent agreement or electricity bill.
• Cancelled cheque of your bank account showing name of account holder, MICR code, IFSC code and bank branch details.

Cases in which registration is compulsory:

• persons making any inter-State taxable supply.
• casual taxable persons.
• persons who are required to pay tax under reverse charge.
• non-resident taxable persons.
• persons who are required to deduct tax under section 37.
• persons who supply goods and/or services on behalf of other registered taxable persons whether as an agent or otherwise.

GST Acts: CGST Act, SGST Act, IGST Act Notes

CGST: The tax will be imposed by the central government of India. It will replace excise duty, service tax, SAD (Special Additional Duty), CVD (Countervailing Duty), ADE (Additional Duties of Excise) and other indirect taxes levied by the central government. CGST will be applicable on supplies within a state and the tax revenue will go only to the central government.

SGST: The tax will be imposed by the state government. It will replace sales tax, VAT, entertainment tax, entry tax, luxury tax, Octroi, purchase tax and taxes on lottery. SGST will be applicable on supplies within a state and the tax revenue will go only to the state government.

UTGST: The tax will be imposed by the Union Territory of Chnadigarh, Lakshadweep, Daman and Diu, Dadra and Nagar Haveli, Andaman and Nicobar Islands, Delhi and, Puducherry. It will replace sales tax, VAT, entertainment tax, entry tax, luxury tax, Octroi, purchase tax and taxes on lottery. UTGST will be applicable on supplies within , a union territory.

IGST: Integrated, Goods and service tax.

IGST: “Integrated Goods and Services Tax” (IGST) means tax levied under the IGST Act on the supply of any goods and/or services in the course of inter-State trade or commerce.

Aggregate turnover: An Aggregate turnover means the aggregate value of all taxable supplies, exempt supplies and exports of goods and/ or services of a person having the same PAN, to be computed on all India basis and excludes taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be. Aggregate turnover does not include the value of inward supplies on which tax is payable by a person on reverse charge basis, under sub-section (3) of Section 8 and the value of inward supplies.

Adjudicating authority: Any authority Competent to pass any order or (4) decision under this Act, but does not include the Board/the Revisional Authority, Authority for Advance Ruiing, Appellate Authority for Advance Ruling, the First Appellate Authority and the Appellate Tribunal.

Agent: An “agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business Of supply or receipt of goods or services on behalf of another, whether disclosed or not.

Goods: It means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Capital goods: It means goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.

Casual taxable person: A person who occasionally undertakes transactions involving supply of goods and/or services in the course or furtherance of business whether as principal, agent or in any other capacity, in a taxable territory where he has no fixed place of business.

Place of business: place from where the business is ordinarily carried on, and includes a warehouse; a godown or any other place where a taxable person stores his goods, provides or receives goods and/or services. Composite supply; It means a supply made by a taxable person to a recipient comprising two or more supplies of goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Mised supply refers to two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Exempt Supply of any goods or services is one which attracts nil rate of tax or which may be wholly exempt from tax. It includes non-taxable supply. In case of exempt supply in respect of any goods and/or services, the taxable person shall not be required to pay tax.

Zero-Rated Supply: It means export or supply of goods or services to a Special Economic Zone developer or a Special Economic Zone unit.

Non-Taxable Supply: Non-taxable supply is sale of any goods or services which attracts nil rate of tax and is similar to exempt supply.

Taxable Supply: It means the Supply on which tax shall be paid under GST.

Inward supply: It means in relation to a person, shall mean receipt of goods and/or services whether by purchase, acquisition or any other means and whether or not for any , consideration.

Outward supply: It is in relation to a person, shall mean supply of goods or services, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other means made or agreed to be made by such person in the course or furtherance of business.

Job work: It means undertaking any treatment or process by a person on goods belonging to another registered taxable person and the expression “job worker” shall be construed accordingly

Input: It means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Input service: Input service means any service used or intended to be used by a supplier in the’ course or furtherance of business.

Input service distributor: It means an office of the supplier of goods and / or services which receives tax invoices issued under section 28 towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above.

Input tax: A input tax in relation to a taxable person, means the IGST, including that on import of goods, CGST and SGST charged on any supply of goods or services to him and includes the tax payable under sub-section (3) of section 8, but does not include the tax paid under section 9.

Reverse charge: Reverse charge is the liability to pay tax by the recipient of supply of goods or services instead of the supplier of such goods or services in respect of such categories of supplies as notified under sub-section (3) of section 8.

Works contract: If means a contract wherein transfer of property in goods is involved in the execution of such contract and includes contract for building, construction, fabrication, completion, erection, installation, fitting out. improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property.

Non taxable person: It means a taxable person who occasionally undertakes transactions involving supply of goods and/or services whether as principal or agent or in any other capacity but who has no fixed place of business in India.

Supplier: It means in relation to any goods and/or services shall mean the person supplying the said goods and/or services and shall include an agent acting as such on behalf of such supplier in’ relation to the goods and/or services supplied.

Export of services:

• The supplier of service is located in India
• The recipient of service is located outside India.
• The place of supply of service is outside India.

Import of services:

• The supplier of service is located outside India.
• The recipient of service is located in India
• The place of supply of service is in India.

Intermediary: A. “Intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.

Authorities not permitted to pass an order/ decision under the GST laws:

• The Central Board of Excise and Customs.
• Revisional Authority.
• Authority for Advance Ruling
• Appellate Authority for Advance Ruling
• Appellate Authority
• Appellate Tribunal.

Work, Energy and Power Physics Notes

The words work, energy and power are very commonly used in our day to day lives. A man reading a book, a women washing clothes, a farmer ploughing his fields, all are said to be doing their work. Similarly, the energy in a person is decided on the basis of the work done by him. In the same way, a person wining a championship or boxing match is said to be very powerful.

We studied Newton’s law of motion in the previous chapter. With the help of these many problems of Mechanics can be solved. In this chapter we will study about work, energy and power, and their uses to solve the problems.

→ Work: When the force applied on any object changes the position of the object, then work done is defined as the product of the component of force in the direction of motion and the displacement; i. e.
Work = \(\vec{F} \cdot \vec{d}\) = Fd cosθ

→ Work done by variable force: For a variable force, the work done is the area under the curve between force axis and displacement axis.

→ Energy: The ability of doing work is called energy. There are various forms of energy such as sound energy, chemical energy, light energy, solar energy, nuclear energy, etc.

→ Kinetic energy: Kinetic energy is that energy which is in an object (body) due to its motion. Its value is calculated by the work done in bringing the object from zero velocity to that velocity.

→ Potential energy: It is that energy which is due to the position of the object. Its value is calculated by the force applied in moving an object (body) from one state to the other.

→ Potential energy of the spring: The potential energy of a spring is \(\frac{1}{2}\)kx , where k is spring constant.

→ Law of conservation of mechanical energy: The mechanical energy of any body or a system i. e., the sum of its kinetic energy and potential energy is constant in the presence of conservative forces. This is stated as ;
K + U = constant.

→ Conservative and non-conservative forces: A force is said to be conservative if the work done by or against the force is dependent only on the initial and final positions of the body and not on the path followed by the body. Example the gravitational force, magnetic force, etc. A non-conservative force is if the work done by or against the force is depend upon the path followed by the body.

Example friction, induction force, etc.

→ Power: The rate of doing work is called power.

→ Collision: The mutual interaction between two bodies for a short interval of time is called collision.

→ Types of collision: Collisions are of two types:

1. Elastic collision: Inelastic collision both momentum and kinetic energy are conserved quantities.
2. Inelastic collision: In inelastic collision the kinetic energy is not conserved but momentum is conserved.

→ One dimensional elastic collision: When before and after collision the velocity of the particles is in the previous direction then it is called one dimensional elastic collision.

→ Completely inelastic collision: The collision in which the colliding bodies stick together and move as one body after collision, is called completely inelastic collision.

→ Two-dimensional collision: When initial and final velocities lie in a plane, it is called two-dimensional collision.

→ Work: Work done is the product of component of force in the direction of motion and displacement.

→ Energy: The ability to do work is called energy.

→ Kinetic energy: The energy associated with the motion of an object is called kinetic energy.

→ Potential energy: The energy possessed by a body by virtue of its position.

→ Force constant: For any spring the force constant is that force which generates unit displacement.

→ Conservative force: A force is said to be conservative force if the work done by or against the force is dependent only on the initial and final positions of the body and not on the path followed by the body.

→ Non-conservative force: If the work done by or against the force is dependent on the path followed by the body.

→ Collision: The intt raction between two bodies for a short interval of time is called collision.

Physics Notes