Hey friends here I had collect some crucial and silly differences which are usually asked in interview so I request specially to finance students to kindly go through it I confident that will sure help us:
Difference between bonds and debentures:
Both bonds and debentures are instruments available to a company to raise money from the public. This is the similarity between the two, but on closer inspection, we find that there are many glaring differences between the two.
Bonds are more secure than debentures. As a debenture holder, you provide unsecured loan to the company. It carries a higher rate of interest as the company does not give any collateral to you for your money. For this reason bond holders receive a lower rate of interest but are more secure.
If there is any bankruptcy, bondholders are paid first and the liability towards debenture holders is less.
Debenture holders get periodical interest on their money and upon completion of the term they get their principal amount back.
Bond holders do not receive periodical payments. Rather, they get principal plus interest accrued upon the completion of the term. They are much more secure than debentures and are issued mostly by government firms.
Both capital expenditures and revenue expenditures are crucial for a company to run successful and profitable business. However, both types of expenditures have some differences that distinguish one from the other.
Capital expenditures can be capitalized and depreciated over the useful life of the asset, while revenue expenditures must be expended on the statement of comprehensive income (Profit or loss account) for the accounting period in which it has occurred.
Revenue expenditure is recurring in nature, while capital expenditure is not.
Capital expenditures are made for a period more than one accounting period, but revenue expenditures are made for one accounting period.
What is the difference between Bad Debts and Doubtful Debts?
• Bad debts and doubtful debts are terms used to refer to money that has been owed to a business, by its customers who have obtained the goods and services prior to paying a price.
• A bad debt is referred to as an amount that most certainly will not be received by the business. Once a bad debt is identified, it will be removed from the accounts receivable account with a credit entry and will be debited to the bad debts expense account.
• A doubtful debt, as its name suggests, is an accounts receivable that the business is not sure whether it will receive. The accounting entry will require a debit to be made in the provision for loss account and a credit entry to be made in the provision for doubtful debts account.
• The similarities between the provision for doubtful debts and bad debts accounts are that they are in line with the accounting principles of showing the true and correct view of the business, in its accounting books.
• Maintaining bad debts and doubtful debts accounts are also important for credit control.
Money Market vs. Capital Market
• Money markets and capital markets provide investors access to finance which are used for growth and further expansion, and both markets trade on computerized exchanges.
• The main difference between the two markets is the maturity periods of the securities traded in them. Money markets are for short term lending and borrowing, and capital markets are for longer periods.
• The forms of securities traded under both markets are different; in money markets, the instruments include treasury bills, certificates of deposit, banker’s acceptances, commercial papers and repo agreements. In capital markets, instruments include stocks and bonds.
• As an individual investor, the best place to invest your money would be in the capital markets, either the primary market or secondary market. In the perspective of a large financial institution or corporation looking for larger funding requirements, the money market would be ideal.
The key distinguishing feature between the money and capital markets is the maturity period of the securities traded in them. The money market refers to all institutions and procedures that provide for transactions in short-term debt instruments generally issued by borrowers with very high credit ratings. By financial convention, short-term means maturity periods of one year or less. Notice that equity instruments, either common or preferred, are not traded in the money market. The major instruments issued and traded are U.S. Treasury bills, various federal agency securities, bankers" acceptances, negotiable certificates of deposit, and commercial paper. Keep in mind that the money market is an intangible market. You do not walk into a building on Wall Street that has the words "Money Market" etched in stone over its arches. Rather, the money market is primarily a telephone and computer market.
The capital market refers to all institutions and procedures that provide for transactions in long-term financial instruments. Long-term here means having maturity periods that extend beyond one year. In the broad sense, this encompasses term loans and financial leases, corporate equities, and bonds. The funds that comprise the firm's capital structure are raised in the capital market. Important elements of the capital market are the organized security exchanges and the over-the-counter markets.
• Certificates of deposit and commercial papers are both instruments used in the money market for different financial purposes.
• A certificate of deposit (CD) is a document issued by the bank to an investor who chooses to deposit his funds in the bank for a specific amount of time. Once the money has been deposited the depositor cannot withdraw the funds before maturity without incurring a penalty for early withdrawal.
• Commercial paper is used a substitute for a bank loan and is a short term money market instrument which matures within a period of 270 days.
• The main difference between the two forms of instruments is the time period of maturity of the two. While a CD is usually for a longer term, a promissory note is for a shorter period.
Different of reserve capital and capital reserve:
RESERVE CAPITAL: Part of the authorized capital of a firm that has not been called up and is, therefore, available for drawing in case of a need. CAPITAL RESERVE: capital reserve Resource created by the accumulated capital surplus (not revenue surplus) of a firm, such as by an upward revaluation of its assets to reflect their current market value after appreciation. Allocating such sums to capital reserve means they are permanently invested and will not be paid as dividends. As the names indicate, both capital reserves and revenue reserves have some differences.
• Revenue reserves are arisen from trading activities like retained earnings, while capital reserve are arisen due to non trading activities like revaluation reserve.
• Generally, revenue reserves can be distributed as dividend among shareholders, but capital reserves can never be distributed as a dividend.
• Capital reserves are usually kept for long-term purposes, but revenue reserves are not kept for long-term purposes.
• Some capital reserves like revaluation of assets cannot be realized in monetary terms, even though book shows the value; however, revenue reserves can be realized in monetary terms.
STOCK V/S SECURITY: Stocks
Stocks are parts of capital investments made by an investor in a publicly traded firm. The investor who purchases the stocks are known as a shareholder/stock holder, and is entitled to receive dividend, voting rights, and capital gains, depending on the type of shareholding and the performance of the company and its shares in the stock market. Stocks and shares refer to the same instrument and these financial assets are usually traded on organized stock exchanges around the world such the New York Stock Exchange, the London Stock Exchange, The Tokyo Stock Exchange, etc. There are 2 types of stock known as common stock or preferred stock. Common or ordinary stock carries voting rights with higher control given to shareholders in business decisions. However, unlike preference shareholders, ordinary shareholders are not entitled always to receive dividend, and dividend may only be received when the business performs well.
Securities
Securities refer to a broader set of financial assets such as bank notes, bonds, stocks, futures, forwards, options, swaps, etc. These securities are divided into different types depending on their distinguishing characteristics. Debt securities such as bonds, debentures, and bank notes are used as forms of obtaining credit and entitle the holder of the debt security (the lender) to receive principal and interest payments. Stocks and shares are equity securities and represent an ownership interest in the firm’s assets. The shareholder of the company can trade his shares on the stock exchange at any time. The return to the shareholder of tying up funds in shares is the income from dividends or capital gains in selling the share at a higher price than what it was bought for. Derivatives such as futures, forward, and options are the third type of security, and represent a contract or agreement made between two parties, to perform a specific action or fulfill a promise at a future date. For example, a futures contract is a promise to buy or sell an asset a future date at an agreed upon price.
Securities vs Stocks
The similarities between stocks and securities are that they both represent financial instruments. However, a stock is only one form of security belonging to the equity class of all securities. A typical investor would want to create an investment portfolio containing assets from all security classes, in order to reduce his risk by spreading out his investments, and not ‘putting his eggs in one basket’. This clearly shows how stocks are different from securities as investing solely in the stock market is riskier than investing in a broader set of securities. If the investor wishes to invest only in shares, it would be advisable to spread the investment to a number of industries that may not be affected by the same economic or industrial influences.
Dividends vs Earnings per Share (EPS):
• Earnings per share and dividends per share, both indicate the future prospects of the firm in terms of shareholder’s return and income allocated per shareholder.
• The two are different from each other in that, earnings per share measures the $ value of net income that is available for each of the company’s outstanding shares, and dividends per share shows the portion of profits that is paid out as dividends per share.
• The basic earnings per share is a measure of profitability, so the higher the EPS the better for a firm’s shareholders.
• Higher dividends per share, on the other hand, may indicate that the firm cannot reinvest enough funds back into the firm; therefore, distributing those funds. This is usually the case for a company with lower growth rates.
What is the difference between basic EPS and diluted EPS?:
• The main similarity between basic EPS and diluted EPS is the basic calculation that forms the basis for both.
• The two are quite different from each other because basic EPS will only consider the shares currently outstanding and unlike diluted EPS does not consider the potential dilution that could occur from convertibles, options, warrants, etc.
• The basic EPS will always be higher than a diluted EPS, since, in calculations, the diluted EPS will result in more outstanding shares, but will use the same net income used in the basic EPS calculation.
• An investor may not be willing to purchase shares that have a significant difference between their basic EPS and diluted EPS, due the potential negative effect that dilutions in the number of shares may have on the price of the share.
Accounting vs Economic Profit:
• The definitions of profit in the fields of accounting and economics are different to each other, and are calculated in a different manner.
• Accounting profit takes into consideration the excess revenue once the explicit costs are reduced, and economic profit considers the explicit costs, as well as the implicit opportunity costs.
• Accounting profit is always higher than the economic profit and is recorded in the company’s income statement.
• Economic profit is not recorded in the firm’s accounting statements and is usually calculated for internal decision making purposes.
CAPM vs WACC
Share valuations are a must for every investor as well as financial expert. While there are investors who are expecting certain rate for their investment in shares in a company, there are lenders and equity holders in a company who also expect decent returns on their investments in a company. Various statistical tools are available for these purposes, and out of these CAPM and WACC are very popular. There are many differences in these two tools as readers would find out after going through this article.
CAPM stands for Capital Asset Pricing Model which is a method to find out the correct price of a stock or just about any asset using future cash flow projections and a discounted rate which is risk adjusted.
Every company has its own projections for cash flow for the next few years, but investors need to figure out the real worth of these future cash flows in terms of today’s market. This requires calculating a discount rate to come up with the Net Present Value of cash flows, or NPV. There are many methods to find out the fair value of the cost of capital of a company, and one of these is WACC (weighted average cost of capital). Every company knows the price (rate of interest) that it pays for the debt it has taken to raise the capital, but it has to calculate the cost of the equity that is made up of both debt as well as shareholders money. Shareholders also expect a decent rate of return on their investment in a company or else they are ready to sell the equity they are holding. This cost of equity is what it takes for a company to maintain share price at a good level (satisfactory for shareholders). It is this cost of equity that is given by CAPM and is calculated using the following formula.
Cost of Equity using CAPM = r= rf + b X ( rm – rf)
Here rf is the risk free rate, rm is the expected rate of return on the market and b (beta) is the measure of relationship between risk factor and the price of asset.
Weighted Average Cost of Capital (WACC) is based upon the proportion of debt and equity in the total capital of a company.
WACC = Re X E/V + Rd X (1- corporate tax rate) X D/V
Where D/V is the ratio of company’s debt to total value (debt + equity)
E/V is the ratio of company’s equity to company’s total (equity +debt)
What is the difference between Banking and Finance?:
The services provided by the banking sector and non-banking sector both involve providing investors avenues for managing their wealth in a manner that involves lower risk. The main difference between banking and non-banking financial institutions is that non-banking financial institutions cannot take deposits from customers like traditional banks do. Banks provide services that include accepting deposits, giving loans, and securities underwriting and offering shares to the public. Finance companies provide a much larger range of services than banking institutions, which include asset management services, insurance services, financial research facilities etc. The institutions under the banking industry are subject to much more stringent regulations compared to the financial services firms.
The difference between the two can be attributed this way, implicit cost is an anticipated loss of revenue even before the whole transaction pushed through. These are not in reflected in cash but rather this is based on benefits that a certain investment seems very promising.
Explicit cost on the other hand is the black and white accountability of all the profit. This is measured of course by its monetary value or any of its equivalent which can be counted and verified in a report. It can also be said that explicit cost is definite in nature and very exact, while implicit on the other hand focuses more on the value and personality of a certain transaction.
So there it goes, they may seem totally opposite from each other but then in every audit, they exist side by side. Just like yin yang, one couldn’t be without the other. There relativity cannot be be questioned since because of this, one can make the proper judgment if a certain investment is penetrating or not.
What is the difference between revenue and profit?
• Profit and revenue are two concepts that are intricately linked with any business.
• Profits are benefits that arise out of business activities while revenues are total money generated through the sale of goods and services.
• Profit = Revenue – expense
• To arrive at profit, one has to subtract all expenses, such as salary of employees, cost of raw material, electricity bill, rentals, insurance and similar other expenses, from the revenue.
Difference between Depreciation and Amortization:
Both depreciation and amortization are shown in the debit column and are a liability of the company. Being non cash expense, they act as a liability that decreases the earning of the company but help in increasing the cash flow of the company.
While depreciation requires calculation every year, amortization is pretty straight forward and you know how much amortization expense to be added to the liability column every year over the life span of the intangible asset. But the biggest difference between the two terms lies in the fact that depreciation applies to tangible assets while the word amortization is used for intangible assets.
Expenses vs Liabilities;
• Liabilities are those for which the benefit is obtained in the present, and the obligation is to be met in the future, whereas expenses are those, which are incurred currently, and payments too are made during the current period.
• Liabilities are recorded under the balance sheet, and expenses are recorded in the income statement as it reduces the company profitability.
• A company needs to make sure both liabilities and expenses are controlled so that it can manage to pay its debts for the liabilities in an event of bankruptcy, and the company does not face reduced profitability as for the latter.
STOCK OPTION V/S WARRANT:1. Stock options are contracts between two investors for the sale or purchase of stocks. Stock warrants are contracts between the company and the investors.
2. The company does not profit from a transaction involving stock options, but they do profit in transactions involving stock warrants.
3. Stock options have to follow a strict set of rules regarding their sale. Stock warrants’ terms are highly customizable.
4. Stock warrants are only exercisable at their expiration; stock options can be issued to be exercised anytime within their life, or only at their expiration.
Differences between book value and market value;
The book value and the market value of a company can be very different. The book value is the true indicative of the company’s worth where as market value is the projection of company’s worth. Book value is calculated on the basis of all the tangible assets which are physically present with the company and can be touched, felt or sensed. The market value is calculated according to the book value plus the value of intangible assets. The book value is generally calculated at a fixed interval of time to assess the company’s performance where as market value is calculated only in cases of acquisitions and mergers.
CURRENT RATIO V/S QUICK RATIO: Both quick ratio and current ratio are called liquidity ratios and reflect a company’s ability to meet its short term obligations. Liquidity of a company is said to be an indicator of its financial health. Two of the most common liquidity ratios are Current and Quick ratios. The use of the word current in current ratio implies current assets and current liabilities, and in fact, it is a ratio of these two only.
Current ratio = current assets/ current liabilities
Quick ratio = (cash + marketable securities + net receivables) / current liabilities
It is clear then that while inventories are taken into account in the case of current ratio, they are overlooked in the case of quick ratio.
Difference between ROE and ROA
One major difference between ROE and ROA is debt. If there is no debt, shareholder’s equity and total assets of the company will be same. This means that in this scenario, ROE and ROA will be equal. Now if the company decides to take a loan, ROE would become greater than ROA. A higher ROE is not always an indicator of an impressive performance of a company. In this regard, ROA is a better indicator of the financial performance of a company.
OPERATING LEVERAGE –FINANCIAL LEVERAGE:
In a company, there are two types of costs, fixed and variable costs. The ratio of fixed to variable costs in a company reflects the volume of operating leverage used by the company. A high fixed to variable cost ratio simply indicates that the company is employing operating leverage. On the contrary, a higher variable cost to fixed cost ratio indicates smaller operating leverage. Operating leverage is also dependent upon profit margins and the number of sales. A company with high profit margin and few sales is highly leveraged while a company that generates high sales at low profit margins is obviously less leveraged.
On the other hand, financial leverage is talked about when a company decides to get its assets financed by taking loans. This becomes inevitable when raising capital by issuing shares to public is not possible. Now availing loans means they become a liability on which it is necessary for the company to pay interest. Here it is to be remembered that a company takes loans only when it is of the opinion that return on investment from such loans will be higher than the interest it needs to pay on the loan amount.
If you are an investor, you need to pay attention to both these factors. If after going through its financial statements, you find that both operating as well as financial leverage are high, it is better to stay away from such a company. High financial leverage can be a big problem when the calculations of the company go awry and the return on investments are not as high as company has planned and they fall below the rate of interest that it needs to pay to its creditors.
While financial leverage is more important in the case of huge business houses, it is operating leverage that is crucial for small business units. Fixed cost of production is more important for small companies while it is not so important for large production houses. It is financial leverage that makes all the difference in the debt equity ratio of a big company. The combined effect of both the leverages is given by the following formula.
Degree of combined leverage = Degree of operating leverage X degree of operating leverage
Capital Structure vs Financial Structure:
• Capital structure of a company is long term financing which includes long term debt, common stock and preferred stock and retained earnings.
• Financial structure on the other hands also includes short term debt and accounts payable.
• Capital structure is thus a subset of financial structure of a company.
Opportunity Cost vs Trade Off
• Trade off and opportunity cost are two concepts that are made use of in many situations in life.
• Though similar in meaning, trade off is sacrificing one thing to get another while opportunity cost is the cost incurred by losing out on one thing to get another
Discounted Cash Flow (DCF) vs. Dividend Discount Model (DDM):
• There are statistical models available to make a fair assessment of the present value of the stock of a company and out of them DDM and DCF are very popular
• DCF takes into account future cash flow projections of a company and arrives at the present value discounting the future rates.
• DDM is similar to DCF in the sense that it too makes use of these future cash flow projections but also takes into account future dividend rates.
Difference between Inventory and Stock
• Stock and inventory are used interchangeably which is not correct
• Stock pertains to goods only, both in terms of quantity as well as its monetary value
• Inventory is the sum of stock and assets that include plant and machinery
Prepared by: BhavesKumar Dasharathbhai Suthar,( CMS-DDU,NADIAD)
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