Top Senior Auditor Solved MCQs Past Papers

(1) Double entry book-keeping was fathered by:

(a) F.W.Taylor
(b) Henry Fayol
(c) Lucas Pacioli.
(2) Funds Flow Statement and sources and application statement are:’
(a) Synonymous
(b) Antagonistic
(c) None of these.
(3) Depreciation in spirit is similar to:
(a) Depletion
(b) Amortization
(c) Depression.
4) Balance Sheet is always prepared:
(a) for the year ended.
(b) As on a specified date.
(c) None of these.
(5) In Insurance, the following Profit and Loss Accounts are prepared:
(a) Separate for Fire, Marine, and Accidents etc.
(b) Consolidated for Fire, Marine, and Accidents etc.(c) None of these.
(6) Partners in Pakistan can today be fixed at the following numbers:
(a) 20
(b) 50
(c) 75.
(7) Flexible budget is a budget with the following features:
(a) Changes with volume of production.
(b) Changes with variable expenses
(c) Changes in Direct material.
(8) Break Even can be calculated as under:
(a) ______VC_______
FC- TR TC
(b) FC
I- VC TR(c) None of these.
(9) Quick Ratio can be computed as under:
(a) Quick . Assets/Quick Liabilities
(b) Quick . Liabilities Current Assets
(c) Current Assets/ Current Liabilities
(10) In straight line method of depreciation, the written down value of a fixed asset will be at
the end of the life of the asset as under:
(a) Rupee one
(b) Rupee zero (c) None of these.
(11) Sales budget must be prepared:
(a) Independently
(b) Depending on production capacity
(c) Based on Sales forecasts of market.
(12) Consolidation of subsidiary accounts in the balance sheet of a unlisted Holding
company is at present in Pakistan:
(a) Compulsory
(b) Voluntary
(c) Required.
(13) Retained earning is synonymous to:
(a) Accumulated profit and loss account
(b) Profit for the year
(c) None of these.
(14) The requirements of an audit report for a Banking Company in Pakistan is under:
(a) Under the Banking Companies Ordinance, 1962.
(b) Under the Companies Ordinance, 1984.
(c) Under (a) and (b) above.
(15) Deferred Taxation is:
(a) Fixed asset
(b) Fixed liabilities
(c) Part of Owners Equity.
(16) Investment Corporation of Pakistan follows:
(a) Open-end mutual funds
(b) Closed-end mutual funds
(c) None of these.
(17) Directors Report is —- in respect of financial report constituent.
(a) Mandatory for a limited Company
(b) Voluntary for a limited Company
(c) None of these.
(18) Every limited Company in Pakistan is required by law to include the following along
with financial reports:
(a) Ratio Analysis
(b) Chairman’s Review
(c) None of these.
(19) Cash budget excludes the following:
(a) Non-Cash items
(b) Cash items
(c) Purchase on Credit items.
(20) NGOs are legally required to:
(a) Prepare accounts in a prescribed manner under the law.(b) Prepare accounts as desired
by donors.
(c) None of these.
1. Fixed Cost:

a. Changes with production

b. Never changes even if production capacity is doubled
c. None of the above
2. Conversion cost is:
a. Material Cost + Overhead Cost
b. Direct Labour + Material Cost
c. Labour Cost + Overhead Cost
3. Process Costing is relevant to:
a. Cement industry
b. Job Order cost oriented Projects
c. None of the above
4. Operating Profit is:
a. Profit after deducting financial costs
b. Profit after deducting taxes
c. Profit after deducting normal operating expenses including depreciation
5. A good Cost Accounting System is:
a. If it computes estimated cost only
b. If it cannot be reconciled with financial accounts
c. If it enables management to increase productivity and rationalize cost structure
6. Verification includes:
a. Checking Vouchers
b. Examining audit report
c. None of the above
7. Stratified audit sample means:
a. Randomly selected items for audit
b. Purposively selected items for audit
c. Items carefully selected from each group
8. Internal Control is totally synonymous with:
a. Internal check
b. Internal audit
c. None of above
9. Audit of a bank is generally conducted through:
a. Routine checking
b. Couching
c. Balance sheet audit
10. An auditor is liable for his annual audit of accounts o:
a. Creditors
b. Bankers
c. Owners
11. Income Tax is levied on:
a. Agricultural Income
b. Presumptive Income
c. None of above
12. If a firm has paid super-tax, its partners may follow any one of the following behaviours:
a. No need to pay income tax, even if the income exceeds the taxable limit.
b. Pay income tax, even if the income does not exceed the taxable income.
c. Pay income tax as required under the law.
13. A resident multinational company need not:
a. Pay income tax, if it s caused under Double Taxation agreement.
b. If it is not enjoying tax exemption under the Income Tax Ordinance, 1979
(Second Schedule).
c. None of above
14. Income Tax rates are the same for:
a. Limited Companies
b. Banking Companies
c. None of above
15. Super Tax on companies is:
a. In vogue in Pakistan
b. Not in vogue in Pakistan
c. None of above
16. Current Ratio is calculated as:
a. Fixed Assets/Current Liabilities
b. Current Liabilities/Current Assets
c. Current Assets/Current Liabilities
17. Short-term loan can be described as:
a. If the period is three years
b. If the period is less than one year
c. If the period is over one year
18. A partnership, in today’s Pakistan, under the current law can have the following number
of partners:
a. 50
b. 20
c. 100
19. Combination can be best described as:
a. Restructuring of Capital of a Company
b. Reduction of Capital of a Company
c. Amalgamation of two different types of businesses
20. Sources of funds can be increased by:
a. Describing selling prices
b. Increasing expenditure
c. None of above
Write only the correct answer in the Answer Book. Do not reproduce the questions.
(1) Books of original entry are called:
(a) Ledger
(b) Work sheets
(c) Journal
(d) None of these
(2) For preparing balance sheets prepaid expenses are shown as part of:
(a) Liability
(b) Equities
(c) Assets
(d) None of these
(3) Unpaid and unrecorded expenses are called:
(a) Prepaid expenses
(b) Accrued expenses
(c) Additional expenses
(d) None of these
(4) Amount, cash, or other assets removed from business by owner is:
(a) Capital
(b) Drawings
(c) Assets
(d) None of these
(5) Under the diminishing balance method, depreciation amount is:
(a) Payment
(b) Receipt
(c) Expenditure
(d) None of these
(6) Users of accounting information include:
(a) The tax authorities
(b) Investors
(c) Creditors
(d) All of these
(7) The business form(s) in which the owner(s) is (are) personally liable is (are) the:
(a) Partnership only
(b) Proprietorship
(c) Corporation only
(d) Partnership and proprietorship
(e) None of these
(8) The investment of personal assets by the owner:
(a) Increases total assets and increases owner’s equity
(b) Increases total assets only
(c) Has no effect on assets but increases owner’s equity
(d) Increase assets and liabilities
(e) None of these
(9) All of the following are forms of organizations except:
(a) Proprietorship
(b) Corporation
(c) Retailer
(d) Partnership
(e) None of these
(10) Economic resources of a business that are expected to be of benefit in the future are
referred to as:
(a) Liabilities
(b) Owner’s equity
(c) Withdrawals
(d) Assets
(e) None of these
(11) An owner investment of land into the business would:
(a) Decrease withdrawals
(b) Increase liabilities
(c) Increase owner’s equity
(d) Decrease assets
(e) None of these
(12) A cash purchase of supplies would:
(a) Decrease owner’s equity
(b) Increase liabilities
(c) Have no effect on total assets
(d) None of these
(13) An owner investment of each into the business would:
(a) Increase assets
(b) Decrease liabilities
(c) Increase withdrawals
(d) Decrease owner’s equity
(e) None of these
(14) The payment of rent each month for office space would:
(a) Decrease total assets
(b) Increase liabilities
(c) Increase owner’s equity
(d) None of these
(15) Real accounts are related to:
(a) Assets
(b) Expenses and incomes
(c) Customers and Creditors etc.
(d) None of these
(16) Which one of the following accounts would usually have a debit balance?
(a) Cash
(b) Creditors
(c) Accounts payable
(d) Salaries Expenses
(e) None of these
(17) Quick assets include which of the following?
(a) Cash
(b) Accounts Receivable
(c) Inventories
(d) Only (a) and (b)
(e) None of these
(18) Net income plus operating expenses is equal to:
(a) Net sales
(b) Cost of goods available for sale
(c) Cost of goods sold
(d) Gross profit
(e) None of these
(19) The maximum number of partners in Pakistan can be fixed at the following:
(a) 20
(b) 50
(c) 75
(d) None of these
(20) Balance sheet is always prepared:
(a) For the year ended
(b) As on a specific date
(c) None of these
Write only the correct answer in the Answer Book. Do not reproduce the questions.

(1) The measureable value of an alternative use of resources is referred to as:

(a) An opportunity cost
(b) An imputed cost
(c) A different cost
(d) A sunk cost
(e) None of these
(2) A quantitative expression of management objectives is an:
(a) Organizational chart
(b)Management chart
(c) Budget
(d) Procedural chart
(e) None of these
(3) A cost center is:
(a) A unit of production in relation to which costs are ascertained
(b) A location which is responsible for controlling direct costs
(c) Part of the factory overhead system by which costs are gathered
(d) Any location or department which incurs cost
(e) None of these
(4) At break-even point of 400 units sold the variable costs were Rs. 400 and the fixed costs
were Rs.200. What will be the 401 units sold contributing to profit before income tax?
(a) Rs. 0.00
(b) Rs. 0.50
(c) Rs. 1.00
(d) Rs. 1.50
(e) None of these
(5) In considering a special order situation that will enable a company to make use of
currently idle capacity, which of the following cost will be irrelevant:
(a) Materials
(b) Depreciation
(c) Direct labour
(d) Variable factory overhead
(e) None of these
(6) A fixed cost:
(a) May change in total when such change is not related to changes in production
(b) Will not change in total because it is not related to changes in production
(c) Is constant per unit for each unit of change in production
(d) May change in total, depending on production with the relevant range
(e) None of these
(7) Completion of a job is result in:
(a) DR finished goods …….. CR WIP
(b) DR Cost of goods ……… CR finished goods
(c) DR WIP ……………..….….. CR FOH control
(d) DR FOH control …….….. CR FOH applied
(e) None of these
(8) Operating cost in often named as:
(a) Manufacturing cost plus commercial expenses
(b) Prime cost plus factory overheads
(c) Direct material plus direct labour
(d) Selling plus administrative expenses
(e) None of these
(9) Expenses such as rent and depreciation of a building are shared by several departments
these are:
(a) Indirect expenses
(b) Direct expenses
(c) Joint expenses
(d) All of the above
(e) None of these
(10) If under applied FOH is closed to cost of goods sold, the journal entry is:
(a) DR Cost of goods sold …….. CR FOH control
(b) DR FOH control ……..……….. CR Cost of goods sold
(c) DR FOH control ……..……….. CR Profit % loss account
(d) None of these
(11) Re-order quantity …… 3600 units
Maximum consumption …… 900 units per week
Minimum comsumption …….300 units per week
Re-order period …………….….5 weeks
Based on this data Re-order level is:
(a) 4500 units
(b) 3900 units
(c) 1200 units
(d) 400 units
(e) None of these
(12) The time lag between indenting and receiving material is called:
(a) Lead time
(b) Idle time
(c) Stock out time
(d) None of these
(13) A credit balance remaining in FOH Control account is called:
(a) Over-applied overhead
(b) Under-applied overhead
(c) Actual overhead
(d) None of these
(14) Direct material cost plus direct labour cost is called:
(a) Prime cost
(b) Conversion cost
(c) Product cost
(d) All of these
(e) None of these
(15) Productivity means:
(a) The ability to produce
(b) All units produced
(c) Good units produced
(d) None of these
(16) A segment of the business that generates both revenue and cost is called:
(a) Profit Center
(b) Cost Center
(c) Cost driver
(d) All of these
(e) None of these
(17) Verification includes:
(a) Checking vouchers
(b) Examining audit report
(c) None of these
(18) Audit of a bank is generally conducted through:
(a) Routine checking
(b) Vouching
(c) Balance sheet audit
(d) None of these
(19) Economics resources of a business that are expected to be of benefit in the future are
referred to as:
(a) Liabilities
(b) Owner’s equity
(c) Withdrawals
(d) Assets
(e) None of these
(20) Short term Loan can be best described as:
(a) If the period is three years
(b) If the period is less than one year
(c) If the period is over one year
(d) None of these
(1) Maximum number of partners in a partnership firm set up in Pakistan under Partnership
Act, 1932 is:
(a) 5
(b) 25
(c) 20
(d) None of these
(2) Preparation of final financial reports is governed in Pakistan under:
(a) No law
(b) Companies Ordinance 1984
(c) None of these
(3) Depreciation is based on:
(a) Economic life of asset
(b) Declared life of asset by supplier
(c) Normal life of asset
(d) None of these
(4) Inventory turnover is calculated as under:
(a) Cost of Goods sold/Closing Inventory
(b) Gross profit/Closing Inventory
(c) Sales/Opening Inventory
(d) None of these
(5) There is a difference between:
(a) Worksheet and Balance Sheet
(b) Worksheet and profit and loss account
(c) Worksheet as combination of results of profits and financial positions
(d) None of these

(6) Deferred Revenue is:

(a) Liability
(b) Asset
(c) None of these
(7) Preparation of annual report of a firm is governed under:
(a) Partnership Act 1932
(b) Under partnership Deed
(c) None of these
(8) Deferred Taxation amount be treated as:
(a) Foot note
(b) An item in the Balance Sheet on asset side
(c) None of these
(9) Return of Equity will be calculated as under:
(a) Operating Profit x 100/Equity
(b) Net profit x 100/Paid up Capital only
(c) None of these
(10) Current maturity of long term loan is:
(a) Current Liability
(b) Long Term Liability
(c) None of these
Write only the correct answer in the Answer Book. Do not reproduce the questions.

(1) Prime cost is calculated as under:

(a) Manufacturing Cost/Cost of Goods Sold
(b) Direct Method plus factory overheads
(c) Direct labour + Direct Material
(d) None of these
(2) Process Cost is very much applicable in:
(a) Construction Industry
(b) Pharmaceutical Industry
(c) Air line company
(d) None of these
(3) The latest computation of variances of manufacturing overheads is in one the following
ways:
(a) Two variance approaches
(b) Three variance approaches
(c) Four variance approaches
(d) None of these

(4) Random sampling in auditing means:

(a) Selection through convenience sampling
(b) Selection through scientific sampling approach
(c) None of these
(5) Expenditure incurred in procuring machinery is:
(a) An admissible expenditure for tax purposes
(b) No admissible for tax purposes
(c) None of these

(6) Increase in income constitutes:

(a) Inflows
(b) Outflows
(c) None of these
(7) M & A stands for:
(a) Mergers & Analysis
(b) Mergers & Acquisitions
(c) Mergers & Allocation
(d) None of these
(8) An endowment insurance policy can be taken in respect of:
(a) Fire insurance
(b) Accident insurance
(c) Life insurance
(d) None of these
(9) Audit and special audit are the same:
(a) In Insurance Company
(b) In Banking Company
(c) None of these

(10) Acid test is the same as:

(a) Quick test
(b) Liquid test
(c) None of these
(1) Acid Test Ratio is calculated as under:
(a) Current Assets/Current Liabilities
(b) Fixed Assets/Current Liabilities
(c) Liquid Assets/Current Liabilities
(d) None of these
(2) Deferred cost is a:
(a) Liability
(b)Asset
(c) None of these
(3) Work Sheet is:
(a) Balance Sheet
(b) Fund Flows Statement
(c) A combination of Profit and Loss Account and Balance Sheet items
(d) None of these
(4) Banks, for the preparation of financial statements, are governed under:
(a) Banking Companies Ordinance, 1962
(b) State Bank of Pakistan Act
(c) None of these
(5) Return on investment is computed:
(a) Investment/Profit x 100
(b) Profit x 100/Investment
(c) None of these
Write only the correct answer in the Answer Book. Do not reproduce the questions.

(1) Rent of the premises constitutes variable expenses for cost allocation:
(a) True
(b) False
(2) Sugar used in a sugarcane company is:
(a) Variable cost
(b) Fixed cost
(c) None of these
(3) An auditor is liable under the following circumstances:
(a) Third Party Liabilities
(b) Fraud perpetrated in highly sophisticated circumstances
(c) None of these
(4) Agricultural income is taxable under the Income Tax Laws of Pakistan:
(a) True
(b) False
(5) Principal and markup payment within one year constitutes long term liability for
disclosure in the balance sheet of a company.
(a) True
(b) False
(6) Ordinarily one can have the following partners in a partnership in Pakistan under the
Partnership Act 1932.
(a) 10
(b) 20
(c) 30
(d) None of these
(7) Working Capital finance can be termed as “Running Finance” in a limited company.
(a) True
(b) False
(8) Income from Capital gains arising out of trading on a stock strange in Pakistan is taxable
these days:
(a) True
(b) False
(9) Conversion Cost is calculated as under:
(a) Labour Plus Materials
(b) Labour plus overheads
(c) None of these
(10) Current Ratio can be calculated as under:
(a) Current Liabilities/Current Assets
(b) Current Assets/Current Liabilities
(c) None of these

Share capital: The sum total of the nominal value of the shares of a company is called share capital.
102. Funds flow statement: It is the statement deals with the financial resources for running business
activities. It explains how the funds obtained and how they used.
103. Sources of funds: There are two sources of funds internal sources and external sources.
Internal source: Funds from operations is the only internal sources of funds and
some important points add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the following
items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation Of fixed assets
External sources: (a) Funds from long-term loans
(b)Sale of fixed assets
(c) Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment of tax
liability (d) Payment of fixed liability
105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For example 6
months or less from another company which have surplus liquidity? Such deposits made by one
company in another company are called ICD.
106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt issued by
banks there is no prescribed interest rate on such CDs it is based on the prevailing market
conditions.
107. Public deposits: It is very important source of short term and medium term finance. The
company can accept PD from members of the public and shareholders. It has the maturity period of
6 months to 3 years.
108. Euro issues: The euro issues means that the issue is listed on a European stock Exchange.
The subscription can come from any part of the world except India.
109. GDR (Global depository receipts): A depository receipt is basically a negotiable certificate,
dominated in us dollars that represents a non-US company publicly traded in local currency equity
shares.
110. ADR (American depository receipts): Depository receipts issued by a company in the USA are
known as ADRs. Such receipts are to be issued in accordance with the provisions stipulated by the
securities Exchange commission (SEC) of USA like SEBI in India.
111. Commercial banks: Commercial banks extend foreign currency loans for international
operations, just like rupee loans. The banks also provided overdraft.
112. Development banks: It offers long-term and medium term loans including foreign currency loans
113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc. provide indirect
assistance for obtaining foreign currency.
114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for
professionally or technically qualified entrepreneurs and persons possessing relevantexperience and
skills and entrepreneur traits.
115. Unsecured loans: It constitutes a significant part of long-term finance available to an enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one period to
another.
117. Sources of cash:
Internal sources
(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves
External sources-
(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits
119. Budget: It is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies.
120. Budgetary control: It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the actual results compared
with the forecasted and planned ones.
121. Cash budget: It is a summary statement of firm’s expected cash inflow and outflow over a
specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the purpose of
presenting in one report the highlights of the budget forecast.
123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of the level of
activity actually attained.
124. Zero- base- budgeting: It is a management tool which provides a systematic method for
evaluating all operations and programmes, current of new allows for budget reductions and
expansions in a rational inner and allows reallocation of source from low to high priority programs.
125. Goodwill: The present value of firm’s anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and balance
shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the causes of
difference between the two balances and pass necessary correcting or adjusting entries in the books
of the firm.
128. Responsibilities of accounting: It is a system of control by delegating and locating the
Responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the expense incurs and
revenue it earns.
130. Cost centre: A location, person or item of equipment for which cost may be ascertained and
used for the purpose of cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing costs for
determination of costs of products or services planning, controlling and reducing such costs and
furnishing of information management for decision making.
133. Elements of cost:
(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components of total costs: (A) Prime cost (B) Factory cost
(C)Total cost of production (D) Total c0st
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also known as
basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include cost of
indirect material indirect labour and indirect expenses incurred in factory. This cost is also known as
works cost or production cost or manufacturing cost.
137. Cost of production: In office and administration overheads are added to factory cost, office cost
is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production to get the
total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs may be
ascertained or expressed.
140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing (D)Operation costing
(E)Operating costing (F)Unit costing (G)Batch costing.
141. Techniques of costing: (a) marginal costing (b) direct costing (c) absorption costing (d) uniform
costing.
142. Standard costing: standard costing is a system under which the cost of the product is
determined in advance on certain predetermined standards.
143. Marginal costing: it is a technique of costing in which allocation of expenditure to production is
restricted to those expenses which arise as a result of production, i.e., materials, labour, direct
expenses and variable overheads.
144. Derivative: derivative is product whose value is derived from the value of one or more basic
variables of underlying asset.
145. Forwards: a forward contract is customized contracts between two entities were settlement
takes place on a specific date in the future at today’s pre agreed price.
146. Futures: A future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Future contracts are standardized exchange traded
contracts.
147. Options: An option gives the holder of the option the right to do something. The option holder
option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to sell an asset by a certain
date for a certain price.
150. Option price: Option price is the price which the option buyer pays to the option seller. It is also
referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called expiration date.
152. European option: It is the option at exercised only on expiration date itself.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between future prices and spot prices can be summarized in terms
of what is known as cost of carry.
155. Initial margin: The amount that must be deposited in the margin a/c at the time of first entered
into future contract is known as initial margin.
156 Maintenance margin: This is somewhat lower than initial margin.
157. Mark to market: In future market, at the end of the each trading day, the margin a/c is adjusted
to reflect the investors’ gains or loss depending upon the futures selling price. This is called mark to
market.
158. Baskets: basket options are options on portfolio of underlying asset.
159. Swaps: swaps are private agreements between two parties to exchange cash flows in the
future according to a pre agreed formula.
160. Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects the costs faced
when actually trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the market it deals with the long term investment funds. It
consists of two markets 1.primary market 2.secondary market.
163. Primary market: Those companies which are issuing new shares in this market. It is also called
new issue market.
164. Secondary market: Secondary market is the market where shares buying and selling. In India
secondary market is called stock exchange.
165. Arbitrage: It means purchase and sale of securities in different markets in order to profit from
price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by price
fluctuations of securities held in a portfolio.
166. Meaning of ratio: Ratios are relationships expressed in mathematical terms between figures
which are connected with each other in same manner.
167. Activity ratio: It is a measure of the level of activity attained over a period.
168. Mutual fund: A mutual fund is a pool of money, collected from investors, and is invested
according to certain investment objectives.
169. Characteristics of mutual fund: Ownership of the MF is in the hands of the of the investors MF
managed by investment professionals The value of portfolio is updated every day
170. Advantage of MF to investors: Portfolio diversification Professional management Reduction in
risk Reduction of transaction casts Liquidity Convenience and flexibility
171. Net asset value: the value of one unit of investment is called as the Net Asset Value
172. Open-ended fund: open ended funds means investors can buy and sell units of fund, at NAV
related prices at any time, directly from the fund this is called open ended fund.
173. Close ended funds: close ended funds means it is open for sale to investors for a specific
period, after which further sales are closed. Any further transaction for buying the units or
repurchasing them, happen, in the secondary markets.
174. Dividend option: investors who choose a dividend on their investments, will receive dividends
from the MF, as when such dividends are declared.
175. Growth option: investors who do not require periodic income distributions can be choose the
growth option.
176. Equity funds: equity funds are those that invest pre-dominantly in equity shares of company.
177. Types of equity funds: Simple equity funds Primary market funds Sectoral funds Index funds
178. Sectoral funds: Sectoral funds choose to invest in one or more chosen sectors of the equity
markets.
179. Index funds: The fund manager takes a view on companies that are expected to perform well,
and invests in these companies
180. Debt funds: the debt funds are those that are pre-dominantly invest in debt securities.
181. Liquid funds: the debt funds invest only in instruments with maturities less than one year.
182. Gilt funds: gilt funds invests only in securities that are issued by the GOVT. and therefore does
not carry any credit risk.
183. Balanced funds: Funds that invest both in debt and equity markets are called balanced funds.
184. Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and the AMC
with prior approval of SEBI.
185. Trustee: Trustee is responsible to the investors in the MF and appoint the AMC for managing
the investment portfolio.
186. AMC: the AMC describes Asset Management Company; it is the business face of the MF, as it
manages all the affairs of the MF.
187. R & T Agents: the R&T agents are responsible for the investor servicing functions, as they
maintain the records of investors in MF.
188. Custodians: Custodians are responsible for the securities held in the mutual fund’s portfolio.
189. Scheme takes over: if an existing MF scheme is taken over by another AMC, it is called as
scheme take over.
190. Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive at the price.
192. Market capitalization: market capitalization means number of shares issued multiplied with
market price per share.
193. Price earnings ratio: The ratio between the share price and the post tax earnings of company is
called as price earnings ratio.
194. Dividend yield: The dividend paid out by the company, is usually a percentage of the face value
of a share.
195. Market risk: It refers to the risk which the investor is exposed to as a result of adverse
movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk: It the risk which an investor has to face as a result of a fall in the interest
rates at the time of reinvesting the interest income flows from the fixed income security.
197. Call risk: Call risk is associated with bonds have an embedded call option in them. This option
hives the issuer the right to call back the bonds prior to maturity.
198. Credit risk: Credit risk refers to the probability that a borrower could default on a commitment to
repay debt or band loans
199. Inflation risk: Inflation risk reflects the changes in the purchasing power of the cash flows
resulting from the fixed income security.
200. Liquid risk: It is also called market risk, it refers to the ease with which bonds could be traded in
the market.