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COMMERCE
Important Terms

CONTENTS
1
...
Cost and Management Accounting
3
...
Auditing
5
...
Commerce
7
...

•

Financial Accounting: The objective of financial accounting is to ascertain the financial
performance as well as financial position of the business by preparing financial statements
...


•

Management Accounting: The objective of management accounting is to make effective
decisions for the business by using accounting information
...

•

Reliability: Accounting information is said to be reliable if it is accurate, unbiased, complete and
faithfully presented
...


•

Understandability: Accounting information is understandable if it enables the users to
understand the content and significance of financial reports
...


Concepts in Accounting:
Following are the concepts in accounting;
•

Separate Entity Concept: According to this concept business is treated as a separate entity from
its owners
...


•

Dual Aspect Concept: According to this concept, “for every debit, there is an equivalent credit
...


•

Cost Concept: According to this concept an asset is normally recorded in the books of accounts
at its original acquisition cost
...


•

Matching Concept: The matching concept requires that revenue earned is matched with the
expenses incurred in earning that revenue
...


•

Conservatism / Prudence Concept: Prudence concept states that profits should not be
recognized until realized, but a loss should be recognized as soon as it is foreseen
...
’

•

Materiality Concept: According to this concept all material items should be disclosed in the
financial statements
...


Generally Accepted Accounting Principles (GAAP):
Accounting principles are basically rules and procedures adopted by accountants universally while
recording the business transactions in books of accounts
...
Till now 41 IAS are issued by IASC
...
Till now 13 IFRS are issued by IASB
...


•

Accrual System of Accounting: It is a system in which accounting entries are recorded on the
basis of amount having become due for payment or receipt
...

•

Assets: Assets are the economic resources from whom the business is expected to get benefit in
near future
...


•

Capital: Capital is the amount or economic resources invested by owner in the business
...


•

Revenue: Revenue is the price of goods sold or service rendered by a business to its customers
...


Drawings:
The amount of cash or goods taken away by the owner from the business for his personal use is
known as drawings
...


•

Cash Discount: Cash discount is an allowance given by a creditor to a debtor if the amount is
paid by the debtor within the specified discount period
...


Monetary Event:
Events which can be measured in terms of money and change the financial position of business are
known as monetary events
...
Assets = Liabilities + Capital

Systems of Accounting:
Double Entry System: A system in which both aspects of a transaction are recorded, one is debited
and the other is credited is known as double entry system
...


What is an Account?
Account is an individual record of an asset, liability, revenue, expense and capital in a summarized
manner
...
g
...


3|Page

Financial Accounting
•

Important Questions

Real Accounts: Accounts which are related with non-current assets of an organization are known
as real accounts e
...
machinery account
...
g
...


Journal and Journalizing:
The book in which transactions are first of all recorded chronologically together with its short
description is called journal
...
While
recording of a transaction in journal is called journalizing
...

•

Simple Entry: An entry in which one account is debited and another account is credited is called
simple entry
...


Narration:
A short explanation of each transaction which is written under each entry is called narration
...


Posting:
The process of transferring information from journal to ledger is known as posting
...


Debit Note & Credit Note:
•

Debit None: If goods bought on credit are returned to the supplier for any solid reason e
...

defective of goods, the buyer debits the supplier account and informs the supplier through a note
...


•

Credit Note: If goods sold on credit are returned by the customer for any solid reason e
...

defective of goods, the seller credits the customer account and informs the supplier through a
note
...


4|Page

Financial Accounting

Important Questions

Voucher:
Any written evidence in support of a business transaction is known as voucher
...


•

Double Column Cash Book: A book in which both cash and bank transactions are recorded is
called double column cash book
...


Contra Entry:
An entry in which cash account and bank account is involved and is recorded on both sided of cash
book is called contra entry
...
g
...


Imprest System:
A system in which a fixed sum of money is given to the cashier to cover all the petty expenses for the
month is called imprest system
...
The statement of
explanation is called bank reconciliation statement
...


Closing Entries:
At the end of every accounting period, all accounts relating to expenses and revenues are closed by
transferring their balances to trading and profit and loss account
...


Adjusting Entries:
Adjusting entries are journal entries made at the end of the accounting period to allocate revenue and
expenses to the period in which they actually occurred

5|Page

Financial Accounting

Important Questions

Rectifying Entries:
Entries necessary to correct the errors in books of accounts are called rectifying entries
...
e
...


Profit & Loss Account:
The account which shows the net result i
...
net profit or net loss of the business is known as profit &
loss account
...
Financial statements include income statement, balance sheet, statement of
changes in equity, cash flow statement and notes to the accounts
...


•

Balance Sheet: Balance sheet is the statement which shows the financial position of the business
on a specific date
...


Real & Fictitious Assets:
•

Real Assets: Assets which have some market value are called real assets e
...
machinery
...
g
...


Wasting Assets:
Assets whose value gradually reduce on account of use and finally exhausted completely are called
wasting assets e
...
mines, forest
...
It
depends upon certain future events
...


Marshalling
An arrangement in which assets and liabilities are shown in the balance sheet is known as
marshalling
...

•

Reserve: Undistributed portion of profits to meet any liability or contingency of the business is
called reserve
...


Revenue Reserves & Capital Reserves
•

Revenue Reserves: The portion of profit which is not paid to shareholders and created out of the
revenue profit earned in the normal course of the business is called revenue reserves
...


Provision:
Provision means providing for possible loss or liability, the amount of which cannot be determined
exactly e
...
provision for taxation
...


•

Outstanding Expenses: The expenses which have been incurred during the current year but have
not been paid till the end of current year are known as outstanding expenses
...


•

Unearned Revenue: Unearned revenue is the cash received in advance against goods or services
not yet delivered to the customer
...


Operating Expenses:
The expenses which incurred to generate revenues from the sales of goods are called operating
expenses
...
CGS = opening stock + purchases + direct expenses– closing stock

Difference between Bad Debts and Bad Debts Recovered:
•

Bad Debts: The debts which are irrecoverable form the debtors are called bad debts
...


Loss:
Loss is the excess of expenses over revenues for an accounting period
...
Normal loss is not recorded in books of accounts
...
e
...
It is recorded in books of accounts
...
Work sheet consists of
account titles, trial balance, adjustments, adjusted trial balance, income statement and balance sheet
...


•

Revenue Expenditure: Expenditure incurred in the day-to-day conduct of a business and the
effect of which is completely exhausted within the current accounting period is called revenue
expenditure
...


Amortization:
Decrease in the value of intangible assets such as patents, copy rights is called amortization
...


8|Page

Financial Accounting

Important Questions

Depreciation:
Depreciation is the systematic allocation of cost of asset over its useful life
...
(original cost – scrap value) ÷ estimated useful life

Declining/Diminishing Balance Method:
Under diminishing balance method depreciation is calculated on the book value of an asset
...
Amount of depreciation remains constant
...


Machine Hour Rate Method:
Depreciation under machine hour rate method is calculated with the help of following formula
(original cost – scrap value) ÷ life of asset in hours
...

•

Cost Accounting: The objective of cost accounting is to determine the cost of goods
manufactured by the business
...


Cost:
Cost is the value of money utilized to obtain a particular product or service
...

•

Cost Unit: Cost unit is a quantitative unit of product or service in relation to which costs are
ascertained
...


•

Profit Centre: Profit centre is a section of an organization that is responsible for producing profit
...

prime cost = direct material + direct labour + other direct expenses

Overheads (FOH):
FOH is the combination of all the indirect expenses
...

conversion cost = direct labour + FOH

Manufacturing Cost:
Manufacturing cost is the combination of direct material, direct labour and FOH
...
material + dir
...
It is predetermined cost of a unit of output
...


•

Period Cost: A cost that relates to a time period and are not affected by changes in the level of
activity are called period costs e
...
selling and admin expenses
...


•

Variable Cost: Variable costs are the costs that vary with the change in production e
...
if
production increases variable cost increases, if production decreases variable cost decrease
...


•

Opportunity Cost: Opportunity cost is the value of the benefit sacrificed when one course of
action is chosen, in preference to another
...


•

Avoidable cost: A cost that can be avoided (in whole or in part) by taking a particular decision is
known as avoidable cost
...

•

Job Costing (Job Order Costing): Job costing applies where work is undertaken according to
specific order and individual customer requirements that can be completed in a single accounting
period e
...
shipbuilding
...

Unit cost = total manufacturing cost ÷ total units produced

Costing Techniques:
•

Absorption (Full) Costing: Absorption costing includes variable manufacturing costs e
...
direct
material, direct labour and variable manufacturing overheads along with fixed manufacturing
overhead costs to each unit of product
...


•

Standard Costing: A costing that uses standards for costs and revenues for the purpose of control
through variance analysis
...


Cost-volume-profit (CVP) graph:
CVP graph is s graphical representation of the relationships between an organization’s costs, and
profits on y-axis and its sales volume on x-axis
...
Costs are separated into variable and fixed categories
...
It is also called Cost Volume Profit (CVP) Analysis
...
g
...


Margin of Safety:
The margin of safety is the excess of budgeted or actual sales over the breakeven volume of sales
...
= total budgeted (or actual) sales – break-even sales

Target Profit Analysis:
Target profit analysis estimates “what sales volume is needed to achieve a specific target profit
...


Activity-based Costing (ABC):
ABC is a costing method that focuses on the costs of various activities which are performed to
produce the product
...


13 | P a g e

Cost & Management Accounting

Important Questions

Activity-based management (ABM):
ABM is a management approach that focuses on managing activities as a way of eliminating waste
and reducing delays and defects
...


Budget:
Budget is an estimation of revenue and expenditure for some future period
...


•

Surplus Budget: Excess of revenue over expenditure is called surplus budget
...


•

Master Budget: A master budget comprises the budgeted cash flow, budgeted income statement
and budgeted balance sheet
...
It remains constant regardless
of the change in production
...


•

Flexible Budget: A budget designed to change as the volume of activity changes (vary with
production) is called flexible budget
...


•

Zero-based Budget (ZBB): A budget in which all expenses must be justified for each new period
as it starts from a zero base
...


•

Operating Budget: Operating budget is a forecast and analysis of projected income and expenses
for a specific time period
...


•

Performance Budget: A budget which reflects the input of resources and the output of services
for each unit of an organization
...


14 | P a g e

Cost & Management Accounting

Important Questions

Budget variance:
The difference between the actual fixed overhead and the budgeted fixed overhead in the flexible
budget is called budget variance
...
Significant deviations from standards are flagged as exceptions
...
g
...


Net Operating Income (NOI):
Net operating income is the same thing as earnings before interest and tax
...


Target Costing:
Target costing involves setting a price for the product and then getting the production costs in line
with the target price to earn profit
...

•

Corporate Finance: Corporate finance is the branch of financial economics concerned with
business funding, decision making, and mergers & acquisitions
...


Decision Function of Financial Management:
•

Investment: The investment decision involves a determination of the total amount of assets
needed, the composition of the assets, and whether any assets need to be reduced, eliminated, or
replaced
...


•

Asset Management: The asset management decision involves efficiently managing the assets on
day-to-day basis, especially current assets
...
g
...

1
...

2
...


Agency Theory:
Agency theory is concerned with the branch of economics relating the behavior of principals and their
agents
...
g
...

In agency theory, shareholder would be an example of principal while manager would be an
example of an agent
...

•

Internal Stakeholders: employees and management

•

Connected Stakeholders: shareholders, customers, suppliers and bankers

•

External Stakeholders: government and pressure groups e
...
PEMRA

16 | P a g e

Financial Management

Important Questions

Corporate Social Responsibility:
A concept that implies that the firm should consider issues such as protecting the consumer, paying
fair wages, and considering environmental issues is known as corporate social responsibility
...
Three key groups in corporate governance are board of directors, executive officer and
common shareholders
...

•

Primary Market: A market where new securities are bought and sold for the first time
...


•

Money Market: A market where short-term government and corporate debt securities are traded
...
g
...
g
...


Time Value of Money:
Time value of money concept says that rupee in hand today is worth more than the rupee you are
going to get tomorrow
...


•

Compound Interest: Interest paid on both the original principal borrowed as well as on unpaid
interest is often referred to as compound interest
...


Compounding and Discounting:
Compounding is a way to determine current value of an investment to its future value while
discounting is a way to determine future value of an investment to its current value
...

•

Ordinary Annuity: An annuity whose payments occur at the end of each period
...


•

Perpetuity: Perpetuity is a type of annuity in which no time span is involved
...


•

Going-Concern Value: The value of share when it is sold as a continuing operating business
...


•

Market Value: The value at which buyers and sellers are willing to buy and sell any asset
...
” It is also known as fair value of security
...
g
...
10
...


Difference between Bond, Share and Debenture:
•

Bond: Bond is a long-term debt instrument issued by a corporation or company
...


•

Debenture: Debenture is a long term unsecured debt instrument
...


•

Yield to Maturity: The expected rate of return earned on a bond if it is held until maturity
...


•

Preferred Stock: A type of stock that has preference over common stock in the payment of
dividends and claims on assets
...
g
...


18 | P a g e

Financial Management

Important Questions

Risk:
Risk is the occurrence of unfavorable events
...


•

Unsystematic Risk: Unsystematic risk is the variability of return on stocks or portfolios not
explained by general market movements
...


Capital Asset Pricing Model (CAMP):
CAPM is a model that describes the relationship between risk and expected return
...


Beta:
Beta is an index measure of systematic risk and slope of characteristic line
...
Financial statements include income statement, balance sheet, statement of
changes in equity and cash flow statement
...


•

Balance Sheet: The statement which shows the financial position of the business on a specific
date is known as balance sheet
...
e
...


•

Statement of Changes in Equity: The statement which reports on the changes in equity of the
company during the stated period

•

Notes to the Accounts: Notes to the accounts give additional information stated in financial
statements
...


Financial Ratios
Financial ratio is an index that relates two accounting numbers and is obtained by dividing one
number by the other
...

•

Current Ratio: Current assets divided by current liabilities
...
Rule of thumb 2:1

•

Quick (Acid Test) Ratio: Quick assets divided by current liabilities
...
Rule of thumb 1:1
Quick Assets = Current Assets – (Inventory + Prepaid Exp)

•

Absolute Liquid Ratio: Absolute liquid assets divided by current liabilities
...
Rule of thumb 0
...


Financial Leverage (Debt) Ratios:
Debt ratios state the extent to which the firm is financed with debt
...
It shows the extent to which
the firm is financed by debt
...
It shows the percentage of a
company's assets that are provided via debt
...
It shows the firm’s ability to pay
annual interest expense, also known as interest coverage ratio
...

Debt Capacity: The maximum amount of debt a company can adequately service
...

•

Inventory Turnover Ratio: cost of goods sold divided by average inventory
...


•

Receivable Turnover Ratio: Net credit sales divided by average accounts receivable
...


•

Payable Turnover Ratio: Net credit purchases divided by average accounts payable
...


Operating Cycle and Cash Cycle:
•

Operating Cycle: A firm's operating cycle is equal to its inventory turnover in days plus its
receivable turnover in days
...


20 | P a g e

Financial Management

Important Questions

Profitability Ratios:
Profitability ratios relate profits to sales and investments
...

•

Return on Equity (ROE): Earning after tax divided by shareholders equity
...


•

Return on Investment (ROI): Earning after tax divided by shareholders fund or investment
...


•

Return on Capital Employed: Earnings before interest and tax (EBIT) divided by average
capital employed
...

•

Dividend Payout Ratio: Dividend per share divided by earning per share
...
of common shares outstanding
...


•

Price Earnings (P/E) Ratio: Market price per share divided by earnings per share
...


Index Analysis:
Index analysis is an analysis of percentage financial statements where all balance sheet or income
statement figures for a base year equal 100 and subsequent financial statement items are expressed as
percentages of their values in the base year
...
It shows the changes in
financial position of the firm
...
e
...


21 | P a g e

Financial Management

Important Questions

Cash Budget:
Cash budget is a forecast of a firm’s future cash flows arising from collections and disbursements
...

SGR = return of equity * (1 – dividend payout ratio)

Working Capital:
In finance ‘working capital’ is the same thing as current assets
...


Net Working Capital:
Net working capital refers to current assets less current liabilities
...


Approaches to Financing:
•

Conservative Approach: Conservative approach states that short term needs should be finance
with long-term debt
...


•

Aggressive Approach: Aggressive approach states that long-term needs should be financed with
short-term funds
...
g
...


Outsourcing:
Outsourcing is the subcontracting a certain business operation to an outside firm instead of doing it
“in-house
...


22 | P a g e

Financial Management

Important Questions

Money Market Instruments:
Money market instruments are all government securities and short-term corporate obligation
...


•

Commercial Paper: Commercial paper is essentially a short-term unsecured corporate IOU
...


Economic Order Quantity (EOQ):
EOQ is the order quantity that minimizes total inventory costs over the firm’s planning period
...


Capital Budgeting:
Capital budgeting is the process of identifying, analyzing and selecting the investment projects whose
cash flows are expected to extend beyond one year
...
Generate project proposals
2
...
Evaluate projects
4
...
Perform a post-audit for completed projects

Capital Budgeting Techniques:
If a company intends to start a new project, capital budgeting technique are employed to assess the
financial viability of the project
...


•

Internal Rate of Return: IRR is the discount rate that equates the present value of the future net
cash flows from an investment with the project’s initial investment
...


•

Net Present Value: NPV is the present value of project’s future net cash flows less the project’s
initial investment
...


•

Profitability Index: PI is the ratio of the present value of a project’s future net cash flows to the
project’s initial investment
...


23 | P a g e

Financial Management

Important Questions

Difference between Sunk Cost and Opportunity Cost:
•

Sunk Costs: Sunk costs are unrecoverable past outlays that are irrelevant to future decision
making
...


Hurdle Rate:
The minimum required rate of return on an investment in a discounted cash flow analysis
...


Capital Rationing:
Capital rationing selects the combination of investment proposals that will provide the greatest
increase in the value of the firm within the budget ceiling constraint
...


Types of Project:
Following are the three types of project;
•

Independent Project: A project whose acceptance does not prevent or require the acceptance of
one or more alternative projects
...


•

Mutually Exclusive Project: A project whose acceptance prevent the acceptance of one or more
alternative projects
...


Cost of Equity, Debt and Overall Capital:
•

Cost of Equity Capital: It is the required rate of return on investment of the common
shareholders of the company
...
Cost of
debt is represented by Kd
...


24 | P a g e

Financial Management

Important Questions

Cost of Equity Approaches
•

Dividend Discount Model: A model designed to compute the intrinsic value of common stock
through discount rate that equates the present value of all expected future dividends
...
Ke = Rf + Bi (Rm – Rf)

•

Before-Tax Cost of Debt plus Risk Premium: Ke is the sum of the before-tax cost of debt and a
risk premium in expected return for common stock over debt
...
EVA is equal to after-tax net operating profit less cost of
financing the firm's capital
...


Leverage:
Leverage is the use of fixed costs to increase the profitability of the firm
...
Higher operating leverage increases risk due to higher percentage of fixed costs
...

Degree of operating leverage = % change in EBIT ÷ % change is sales (1% change in sales will
lead to __% change in EBIT)
...
Higher financial leverage increases financial risk due to higher percentage of
financing costs
...


Total Firm Risk:
Total firm risk is the sum of business risk plus financial risk
...
It includes both company-specific and Market Risks
...


Break-Even Analysis:
Break-even analysis is a technique for studying the relationship among variable and fixed costs, sales
volume, and profits of the firm
...

•

Break-Even Point: A point where total revenues are total cost are equal is called break-even
point
...


Capital Structure:
Capital structure refers to the proportion of firm’s long permanent long-term financing
...


Capitalization Rate:
The discount rate used to determine the present value of cash flows is called capitalization rate
...


•

Traditional Approach: A theory of capital structure in which there exists an optimal capital
structure therefore value of firm can be increased through proper use of financial leverage
...
(Combination of the net tax effect with bankruptcy and agency
costs will result in an optimal capital structure
...


Financial Signaling:
Financial signaling occurs when the manager of a firm uses capital structure changes to convey
information about the profitability and risk of the firm
...


Stock Split:
An increase in the number of outstanding shares by reducing the par value of stock is known as stock
split
...


26 | P a g e

Financial Management

Important Questions

Dividend Reinvestment Plan (DRIP):
An optional plan allowing shareholders to automatically reinvest dividend payments in additional
shares of the company’s stock is called dividend reinvestment plan
...


Initial Public Offering (IPO):
A company’s first offering of common stock directly to general public is called IPO
...

•

Operating Lease: Operating lease refers to a short-term lease that is often cancelable
...


Fair Market Value:
The price at which an asset can be sold at arm’s length transaction is called fair market value
...


•

Exchangeable Bond: Exchangeable bond allows the holder to exchange the bond for

common stock of another company
...


Derivative:
A financial asset which derives its value from some underlying asset is called derivative
...


•

Call Option: A contract that gives the holder the right to purchase a specified quantity of the
underlying assets at a predetermined price on or before a fixed expiration date
...


Restructuring:
Any change in a company’s capital structure, operations or ownership to make it more profitable is
known as corporate restructuring
...


Consolidation:
The combination of two or more firms into an entirely new firm is called consolidation
...

•

Strategic Acquisition: A firm that acquires another firm as part of its overall business strategy
...


Strategic Alliance:
An agreement between two or more independent firm to cooperate in order to achieve some specific
commercial objective is called strategic alliance
...


•

Outsourcing: Outsourcing is the subcontracting a certain business operation to an outside firm
instead of doing it “in-house
...


Objectives of Audit:
•

Primary Objective: Primary objective is to express an opinion on financial statements (through
audit report)
...


Types of Errors:
•

Error of Omission: When a transaction has been completely omitted to record in the book of
accounts is called error of omission
...


•

Compensatory Error: An error which is committed to compensate the effect of first error is
called compensatory error
...

a
...

b
...


Error & Fraud:
•

Error: Unintentional mistake in the books of accounts is known as error
...


Internal Control:
All policies and procedures established to achieve the objective of management is known as internal
control
...

•

Internal Audit: Internal audit is the audit which is undertaken by employees of the organization
to check financial irregularities
...


•

Internal Check: Checking the work of one person by another automatically
...


29 | P a g e

Auditing

Important Questions

Types of Audit (in terms of timing):
Following are three types of audit in terms of timing;
•

Final Audit: Audit of accounts which is conducted after the end of the financial year is called
final audit
...


•

Continuous Audit: The audit which remains continue throughout the financial year is called
continuous audit
...


•

Interim Audit: Audit which is conducted between two final audits to find out and check interim
profits of a company is called interim audit
...
g
...


•

Operational Audit: Audit which is conducted to determine the operational efficiency and
effectiveness of company is called operational audit
...


•

Special Audit: Special audit is conducted to find out the fraud or misuse of public funds is an
organization
...
The letter is
written by the auditor in response to appointment letter before the commencement of audit work
...
It helps the auditor to
obtain appropriate audit evidence
...


Audit Working Papers (Audit File):
Audit working papers are the documents which record all the audit evidence obtained during the
course of audit
...
g
...


•

Current Audit File: Current audit file consists of matters relating to the year of audit e
...
audit
planning
...


Substantive Procedures:
Substantive tests are performed to obtain audit evidence to detect material misstatements in financial
statements
...

•

Analytical Procedures: Analytical Procedures include comparison of financial information with
prior period information, budgets, forecasts, similar industries and so on
...


•

Observation: Observation means looking at certain procedures performed by others to obtain
audit evidence such as observing the stock taking
...


Management Representations Letter:
Management representation letter is issued by the management of the company that they are
responsible for the information stated in financial statement, it is considered as audit evidence
...


Test Checking:
Test checking refers to intensive checking of selected number of transactions
...


Voucher:
Written evidence in support of a business transaction is called voucher
...


Investigation:
Examination of accounting records undertaken for a special purpose is called investigation
...
Annual Report: Annual report states fairness about Profit & Loss A/C and Balance Sheet
...
Prospectus Report: Prospectus report is about performance of company
...
Statutory Report: Statutory report is about shares allotment and receipts & payments
...
Unqualified Audit Report: Unqualified audit report is issued when financial statements are
prepared in accordance with the Companies Ordinance 1984 and Generally Accepted Accounting
Principles
...
Qualified Audit Report: Qualified report is issued when auditor is able to form an opinion but
there is limitation on scope of auditor’s work and auditor’s is in disagreement with management
on certain issues
...
Disclaimer of Opinion Report: Disclaimer of Opinion report is issued when auditor is unable to
form and express an opinion due to limitation on scope of auditor’s work which is considered to
be of fundamental importance
...
Adverse Opinion Report: Adverse opinion report is issued when financial statements of a
company are materially misstated and not prepared in accordance with Companies Ordinance
1984 and GAAP
...
Liability for Negligence: If the auditor does not perform his duties with reasonable care and skill
e
...
fails to examine the books of accounts, he may be held liable for negligence
...
Liability for Misfeasance: If auditor fails to disclose the material items in financial statements,
he may be held liable for misfeasance
...
Liability to Third Party: If third party suffer loss by relying on the financial statements certified
by the auditor, the auditor may be liable for liability to third party
...
Criminal Liability: If an auditor intentionally and willfully certifies wrong books of accounts
and financial statements to deceive shareholders, he may be held liable for criminal liability
...
(In economics scarcity means limited resources
...
g
...


•

Macro Economics: Macro economics is the study of economy as whole or in aggregate form
such as GDP
...


•

Deductive Method: Deductive method is the process of reasoning from general to particular
...
Economics is science because it uses scientific methods and
economics is an art because it presents solution of economic problems
...


Utility:
Utility is the power of a good or service by which a human want is satisfied e
...
bread satisfies
hunger
...


Consumer Surplus:
Consumer surplus is the difference between the price that a consumer is willing to pay and the price
that he actually does pays for a commodity
...


Budget Line (Price Line):
Budget line shows different combinations of two commodities which can be purchased with a given
money income and prices of two commodities
...

•

Indifference Map: Indifference map is a set of indifference curves showing lower and higher
level of satisfaction
...

•

Law of Demand: Law of demand states increase in price will lead to decrease in quantity
demanded and decrease in price will lead to increase in quantity demanded
...


Elasticity of Demand (Ed):
Ed is the ratio of percentage change in quantity demanded due to percentage change in price
...


•

Floor Price: Floor price is the minimum price which is determined by the government
...
e
...

•

Luxury Goods: Luxury goods are those goods whose elasticity is more (income increases
demand increases and vice versa) than one in responsiveness to income changes
...


Difference between Giffen Goods & Inferior Goods:
•

Giffen Goods: Giffen goods are the type of inferior goods for which demand increases as the
price increases and demand decreases as the price decreases
...
e
...


Complementary Goods:
Complementary goods are those goods whose use is interrelated with the use of paired goods
...


34 | P a g e

Economics

Important Questions

Supply:
Supply is that part of stock which a supplier is willing to offer for sale at a given price
...


Market:
Market is a place where goods are bought and sold between buyers and sellers
...
e
...


Market Equilibrium:
Market equilibrium is a point where market forces such as demand and supply are balanced
...

Equilibrium price = price at which quantity demand is equal to quantity supplied
...


Forms of Market:
•

Monopoly: Monopoly is a form of market in which there is only single seller in the market
...


•

Oligopoly: Oligopoly is a form of market in which few firms have control over the market
...


Monopolistic Competition:
Monopolistic competition is that market situation in which both monopoly and competition co-exist
...

•

Normal Profit: AR = AC (or) TR = TC

•

Abnormal Profit: AR > AC (or) TR > TC

Price Discrimination:
If producer or seller charges different price from different consumers of the same product is known as
price discrimination
...
This is done to capture the foreign market
...


Gross Domestic Product (GDP):
GDP is the monetary value of all the goods and service produced in a country within a year
...

GNP = GDP + Income from abroad – income of foreigners

Net National Product (NNP):
NNP = GNP - Depreciation

Net National Income:
NNI = NNP + Subsidies – indirect taxes

Personal Income:
Personal income is the total income received by a person from all sources
...

Per capital income = National income ÷ total population

Difference between Nominal GDP & Real GDP:
•

Nominal GDP: When all the components of GDP are valued at the current market price, is called
nominal GDP
...

Real GDP consider the effect of inflation
...
g
...


36 | P a g e

Economics

Important Questions

Public Finance:
Public finance is the management of income and expenditure of the government
...


Monetary Policy:
Monetary policy is mainly concerned with dealing how much money the community should have or
perhaps more correctly deciding whether to increase or decrease the volume of purchase power
...

•

Direct Tax: A tax which is paid by the person on whom it is levied e
...
income tax is called
direct tax
...
g
...


•

Proportional Tax: Proportional tax is the tax in which tax is charged with the same rate of tax
from each taxpayer, irrespective of income e
...
sales tax
...


•

Progressive Tax: A tax is a tax which takes a higher proportion of tax as income increases and
vice versa is progressive (income increase tax rate increase and income decrease tax rate
decrease)
...
Final BoP should always be balanced
...


•

Capital Account: Capital account is that part of BoP in which foreign investment in Pakistan and
Pakistan’s investment in foreign countries are recorded
...

•

Balance of trade will be negative when exports are less than imports
...


37 | P a g e

Economics

Important Questions

Foreign Exchange Rate:
Exchange rate is the rate at which currency of one country can be exchanged for currency of another
country (price of one country’s currency in terms of another country’s currency)
...
e
...
It is also called floating exchange rate
...


Difference between Capitalism & Socialism:
•

Capitalism: Capitalism refers to the private ownership of capital goods
...
e
...


•

Socialism: Socialism refers to an economic system in which there is little private ownership and
state owns virtually all the factors of production
...
In communism economic system prices are set by govt
...


Imports Quotas:
Import quota is a limit on the quantity of goods that can be produced imported
...

•

Commerce: Commerce includes all those activities which are related with buying and selling of
goods and services
...

o

Extractive Industry: The industry which is related with extraction of hidden resources from
the surface of earth e
...
mining
...
g
...


o

Constructive Industry: The industry which is related with construction of roads, dams and
building etc
...
g
...


Entrepot Trade:
When goods are imported from one country with a view to re-export them to other country is known
as entrepot trade
...


Rules Applicable in the Absence of Partnership Agreement:
1
...

2
...

3
...

4
...

5
...


Unlimited Liability:
Unlimited liability means if business is unable to pay debts then personal property of owner can be
sold to pay off business debt
...
He does not invest
capital but receives profit for the usage of his name
...

•

Perpetual Succession: It means that the life of company is infinite
...


Types of Company:
•

Chartered Company: A company which is formed by the order of Queen or King e
...
East India
Company
...
g
...


•

Registered Company: A company which is formed and registered under Co
...
g
...


•

Company Limited by Shares: A company in which the liability of members is limited up to the
face value of their shares e
...
SNGPL
...
g
...


•

Unlimited Company: A company in which the liability of members is unlimited
...

•

Memorandum of Association: Memorandum of association is most important legal document of
company which includes object of formation
...


•

Articles of Association: Articles of association includes the internal rules and regulations for
internal management to govern the company
...


Difference between Holding Co & Subsidiary Co:
•

Holding Company: A company which holds more than 50% shares of another company
(subsidiary company) e
...
PSO is the holding PICIC
...
g
...


Promoters:
The promoters is a person who initially takes all necessary steps to form a company
...


40 | P a g e

Commerce

Important Questions

Meetings of Company:
A meeting in which directors and shareholders decide the company’s matter is called meeting of
company;
•

BOD Meeting: A meeting in which board of directors decide the company’s matter
...

o

Statutory Meeting: The first meeting of shareholders of company
...


o

Extra-ordinary General Meeting: The meeting which is conducted for particular and urgent
nature of work which cannot be postponed till next AGM
...

•

Ordinary Resolution: A resolution which is passed by the simple majority of members
...


•

Extra-ordinary Resolution: A resolution which is passed by three fourth (3/4) majority of
members on special notice of 14 days
...


Business Combination:
Business combination is the joining of two or more companies to form a single company for better
business activities
...


•

Vertical Combination: When two or more different nature of business units are combined under
one management is vertical combination
...


Merger:
When a company purchases the business of another company in which acquiring company retains its
identity is called merger
...


•

Cartel (Syndicate): Cartel or Syndicate is a group of similar nature of companies formed to
regulate the price
...


=====================================================

42 | P a g e

Money, Banking & Finance

Important Questions
MONEY, BANKING & FINANCE

Barter System:
Barter system is direct exchange of goods and services without use of money
...


Metallic Money:
The money which is made of any material such as gold, silver etc
...

•

Full Bodied Coins: Money whose face value is equal to the value of metal used in money
...


Paper Money:
Paper money means the currency notes issued by the central bank on behalf of the government
...


•

Convertible Paper Money: The money which can be converted into gold or silver reserves is
known as convertible paper money
...


•

Fiat Money: Fiat money is inconvertible money having face value more than its real value
...
as it is used as a medium of exchange and standard of value
...

•

Limited Legal Tender: The money that can only be used up to a certain limit is limited legal
tender e
...
coins in Pakistan
...
g
...


Plastic Money:
Plastic money means credit cards and other plastic cards that serve as the purpose of money
...
g
...
Currency Principle: According to currency principle, central bank must keep 100% gold
reserves against each and every note issued
...

2
...
Only a percentage of notes in circulation should be covered by gold
...
Fixed Fiduciary System: In fixed fiduciary method, central bank issues a fixed amount of notes
without keeping any metallic reserves
...
But all notes issued
above this limit must be covered by 100% gold reserves
...
Proportional Reserve System: In proportional reserve method, central bank is required to keep a
certain percentage of gold or silver reserve generally from 25% to 40% to issue the notes and
remaining notes are covered by securities
...

3
...
The reserve may be in the form of gold, silver or
foreign exchange
...


Quantity Theory of Money (QTM):
QTM states that price is the function of quantity of money in circulation P = f(q)
...


Trade Cycle (Business Cycle):
Business cycle is the fluctuation in the economic activities i
...
production and sales etc
...


•

Recession: During recession, business activities start declining i
...
slow down of business
...


•

Recovery: Recovery is the revival of business activities
...


Inflation:
Inflation is the persistent increase in general price level
...


•

Cost Push Inflation: When there is an increase in the cost of production, there will be an increase
in the price level, it is called cost push inflation
...
e
...


•

Hyper Inflation: When the general price level increases rapidly i
...
above 50%
...


•

Budgetary Inflation: When the govt
...


Deflation:
Deflation is a general decrease in price level and increase in the purchasing value of money
...


Foreign Exchange Rate:
Exchange rate is the rate at which currency of one country can be exchanged for currency of another
(price of one country’s currency in terms of another country’s currency)
...
e
...
It is also called floating exchange rate
...


Difference between Spot Rate & Forward Rate:
•

Spot Rate: Spot rate means the exchange rate at the spot or at the moment i
...
market price
...


Inter-Bank Rate:
The rate at which central bank and commercial banks sell and buy foreign exchange is called interbank rate
...


45 | P a g e

Money, Banking & Finance

Important Questions

Bank:
Bank is an institution which receives deposits and advances loans
...
6 billion
...


Mortgage Bank:
The bank which provides loans against immovable property e
...
loan against land and building
...
g
...


•

Pledger & Pledgee: If bank provides loans against movable property e
...
loan against goods,
then customer is pledger and bank is pledgee
...


•

Lessor & Lessee: When the bank provides an asset to customer on the basis of lease financing
then bank is lessor and customer is lessee
...
O/D facility is provided to only current
account holder
...

•

Required Reserve Ratio: Required reserve ratio means that each bank is required to keep 20% of
its liabilities as cash
...

•

Crossing of Cheque: A cheque is said to be crossed when two transverse parallel lines are drawn
on its face with or without some words
...


46 | P a g e

Money, Banking & Finance

Important Questions

Lien:
Lien is the right of a person to retain the property in possession till all the dues are cleared
...

In 1974, 13 commercial banks were merged to form 5 nationalized banks i
...
HBL, UBL, ABL, MCB
& NBP
...
In 1991,
commercial banks were privatized
...


Monetary Policy:
Monetary policy is mainly concerned with dealing how much money the community should have or
perhaps more correctly deciding whether to increase or decrease the volume of purchase power
...
Open Market Operation: Sale and purchase of securities in open market by the central bank is
called open market operation
...

•

In inflation, central bank sells the securities to reduce the money supply

•

In deflation, central bank purchases the securities to increase the money supply
...
Credit Rationing (Credit Ceiling): Central bank puts limit for the grant of credit
...

•

In inflation, central bank decreases the credit limit

•

In deflation, central bank increases the credit limit
...
Bank Rate / Discount Rate Policy: Bank rate means the rate of interest at which commercial
banks get loans from the central bank
...
Bank of Sweden used
this method for the 1st time
...


•

In deflation, central bank decreases bank rate & discount rate to increase money supply
...
Change in Reserve Ratio: All the scheduled commercial banks are required to keep a certain
percentage (20%) of their deposits with the central bank, it is known as reserve ratio
...


•

In deflation, central bank decrease the cash reserve ratio to increase the credit volume
...

However at the time of returning principal sum a service charge is paid by the borrower to the bank
...


Mark Up Financing:
If a seller agrees with his purchase to provide him a specific commodity on a certain profit added to
his cost, is called mark up financing or murabahah
...
”

Buy Back Agreement (Mark Down):
In this system the seller will sell his property to bank with the promise that he will purchase back in
future
...
Afterwards the client buys back the same property at
some higher price in future
...

The lessee pays monthly or annual rent for the uses of the asset and ownership remains with the
lessor
...
After that the
bank hires the asset to the client and client makes payment in installments
...


Musharakah:
Musharakah is a system in which partners joins their hands on the basis of profit and loss sharing
...


Modaraba:
Under this system, a bank invests money in the business and client invests his knowledge and
services
...
The profit will be
shared by both while the loss will bear by the “rab-ul-mall”

---