Question

Explain the different method of Bonds and Investment Accounting we have done in class. If you start your own private company and wish to raise capital, what ratios should you consider important?

Answer 1

The different method of bonds are: -

1.) Government Bonds: - A Government Bond is a bond in which government sells bonds to the central bank of the country and receives money in return. It is done when government is in need of money as all the major account is in running in deficit, be lt fiscal deficit or balance of account deficit.

2.) Corporate Bonds: - A company issues its bond when it is in need of money. It is one of the area through which company raises money for its operations. They can also aplly for a bank loan or issue its share to raise money. It completely depends on management decisions and position of Balance Sheet, how to raise money for operations. Issuing bonds result in payment of interest and it is an deductable expense. However, a company increases its risk as debt equity ratio have an negative impact on account of bond issue.

Types of Investment Accounting: -

Individual Retirement Accout: - An amount has been deposited every month so that its benefit at the time of retirement.

401K: - An amount has been invested every month so that lareg amount is accumulated at the time of retirement.

Ratios should be kept in mind while starting a company and raising a capital: -

i) Debt Equity ratio: - It signifies amount of own capital vs owned capital in the company. Therefore, large amount of own capital improves the ratio and also helps in getting loans easily. However, if a debt can generate more money than the interest required to be paid then it may affect our DE ratio but it will incraese our profitability.

2.) Return on Equity: - A capital invested should provide adequate returns after cutting all the expenses. A higher ROE reflects a healthy position of the company.

3.) Current ratio: - Its calculated by dividing Current Assets by Current Liability.

A Current Assets is an assets which is receivable within next 12 months. Similarly, Current Liabilities is amount payable within next 12 months. A Current assets should always be double of cuurent liability, so to have adequate amount for working capital requirements.

3.) Quick Ratio: - A Quick ratio is same as Current ratio with one exception. While calculating Quick Ratio, current assets doesn't include inventory.