Service Tax


 

Service Tax is an Indirect Tax.  Why is it called an Indirect Tax? Well, you the consumer pay it indirectly to the government.

Service Tax was introduced in India in 1994 by Finance Minsiter Manmohan Singh with an intention to reduce tax burden from Manufacturing /Servicing companies for the services they provide. So how is the burden reduced? It is transferred to the consumers. The service tax is pre calculated and added to the price of a product. When you purchase a product, you are paying the service tax on the product and this amount is paid back to the government by the company.

This service tax is only applicable to those firms whose turnover is more than Rs.10 lacs per annum and all states other than Jammu and Kashmir.  Currently the service tax rate in India is 12.36%.

Service Tax  ——————————————– 12.00%

+ Education Cess @ 2%——————————-  0.24%

+Senior and Higher Education Cess @1%———0.12%

Effective Tax rate                                          12.36%

 

For Firm’s Accounting:

When you sell a product/service you receive the Service Tax from the consumer. You will record it as ST Payable as you are obliged to pay it back to the government what you received it from the consumers or end users.

When you purchase a product/service you are paying service tax the retailer or supplier.  You are the buyer or creditor. If you are a firm purchasing from a supplier, you will record the service tax amount paid on your purchase as ‘’ST Receivable’’.  As you have already paid this ST, this amount will be set off against your ‘’ST Payable’’ obligation.

-D.V.P

How Stock Index and its daily percentage changes are calculated


The stock market fluctuates daily. Someday it rises high and someday reaches rock bottom.  There are several stock indexes across the globe i.e. S&P 500, Dow Jones, Nikkei 225, Sensex, Nifty, etc.

These indexes are the statistical weighted average of few major companies listed under them. Sensex is calculated based on 30 companies and Nifty on 50 companies. It will be easier to understand with an example.

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Assume the calculation for an Index called ABC ( I will take very small fictional numbers so that there is no confusion)

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ABC takes into consideration 3 companies ( just for simple calculation).  These companies are available for trading. FREE-FLOAT MARKET CAPITALISATION METHOD IS USED TO CALCULATE INDEX.  It is simply multiplying the number of shares available to public with the current market price of the share.

Eg: XYZ company with 2000 shares, out of which only 1500 shares available for public trade at market price Rs. 120/- per share

=1500*120= Rs.180,000 Free Float Market capitalisation

MNO  company with 3000 shares, out of which only 2000 shares available for public trade at market price Rs. 500/- per share

=2000*500= Rs.1000,000 Free Float Market capitalisation

PQR company with 1000 shares, out of which only 800 shares available for public trade at market price Rs. 200/- per share

=800*200= Rs.160,000 Free Float Market capitalisation

So, total Free Float Market Capitalisation = 180,000+1000,000+160,000=1,340,000

Now, the year ABC INDEX had begun or the BASE YEAR it would have the initial Market Cap value like the one we calculated now. (eg: Sensex’s base year is 1978-79)

So now we take 2 assumptions about base year and its Market Cap

  1. Base year: 2000-01
  2. 2.       Market Cap: Rs.200,000

The base year Market Cap is considered 100. So daily or within every few minutes how much the Market Cap has increased or decreased to that base year is calculated

Calculation of ABC INDEX: 1,340,000* 100/200,000= 670 points

Tomorrow if the share prices of companies change and the Free Float Market Cap changes from Rs.1,340,000 to Rs.1,335,000 then how the changes are shown?

Calculation: 1,335,000* 100/200,000= 667.5 points

The Stock Market Index has gone down from 670 points to 667.5 points, i.e. the market is down by 2.5 points

Percentage Decrease = 2.5/670*100 = 0.37%

So, that’s how you get the news: The Market Today is at 667.5 points, down by 2.5 points or 0.37%.

Please do give me your feedback about the article and if you have any more doubts you want to be clear on. Thankyou.

DVP

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Know Your EMI Calculations and your Overall Payment


Presently people are being provided plethora of choices to take Loans. Home Loans, Car Loans, Personal

EMI Calculation and Overall Payment

loans, Education Loans and so on. Loan makes life easier but along with it comes the EMI (Equated Monthly Instalments).

People pay EMI monthly for years together usually ranging from 1-20 years. It makes it very convenient to pay small amounts from time to time rather than a lump sum amount at once.

But did you ever think how much your Overall EMI total up to in years? Or how is this EMI calculated? You can do it yourself so that you have an idea how much you need to shell out and which scheme will benefit you more. The longer duration you take the higher you end up paying. The EMI might be low but the overall payment throughout the years increases.

Gather information about various schemes in which you are interested. You need to know 3 things

  1. The amount of loan you require
  2. The Annual Interest rate of a Bank on a loan
  3. Number of years (more specifically months) to repay the loan

Formula to calculate:

E = P×R×(1 + R)n/((1 + R)n – 1)

E = EMI

P= Loan Amount

R= Rate of Interest (divide it by 12 to make it monthly interest)

Eg:

  1. Leela takes a loan of Rs.1 lac for 3 years (i.e. 36 months)  at an interest rate of 12 %

Calculate his EMI and Overall amount paid at the end of 3 years

Calculation:  (100,000*12%)*(1+12%/12)36/((1+12%/12)36-1)

= 3321.43

So your EMI is Rs.3321.43

Now that you are paying it every month for 3 years, how much it totals up to:

= 3321.43 *36 = Rs.119,572/-

So overall you pay Rs. 119,572 in total (excluding the bank charges/processing fee)

Let us calculate a similar sum with longer duration

  1. Krishnan takes a loan of Rs.1 lac for 5 years (i.e. 60 months)  at an interest rate of 12 %

Calculate his EMI and Overall amount paid at the end of 5 years

Calculation:  (100,000*12%)*(1+12%/12)60/((1+12%/12)60-1)

= 2224.44

So your EMI is Rs.2224.44/-

Now that you are paying it every month for 3 years, how much it totals up to:

= 2224.44 *60 = Rs.133,467/-

So overall you pay Rs. 133,467 in total (excluding the bank charges/processing fee)

So as you see in both the examples, the amount was same, the rate was same but as the Krishnan took loan for more years his overall payment is higher though the monthly EMI was low.

I hope this article helped you.

For all those Non-finance students who want to skip the torturous calculation please download the below link and simply feed in your loan details and you will get the results calculated.

https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdGk2TjFZTnUwUlktUVNIQVBMQjZ2https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdGk2TjFZTnUwUlktUVNIQVBMQjZ2Tnc&output=xls

Great Brains, Good Heart 🙂

D.V.P

Calculate your future Income on your Monthly Fixed Investment yourself


Many people have started investing and planning a good savings for their future. Monthly Investment scheme seems to be very popular among all and especially among the new age income earners as it is quite reasonable. And if you are not sure about this I will show you the calculation as to how much your monthly investment will fetch you more income after a certain period.

You need to invest a fixed monthly amount eg: Rs.1000. There are various schemes available with different amount and different rate of interest and period. If you want to choose which scheme will fetch you more returns with the given information then do the following calculation.

Example:

You invest Rs.1000 per month

You will get returns at 8% compounded MONTHLY

You are depositing for 9 years

Calculation:
A = Rs.1000 per month

Rate of interest monthly = 8/12 months = 0.667% = 0.667/100 = 0.00667

N (period)  = 9 * 12 months = 108 months

Formula:                       A*(1+r) *( (1+r)n  -1)/ r

= 1000*(1+0.00667) * ((1+0.00667)108 -1)/  0.00667

= Rs.158479

So investing Rs.1000 per month at the rate of 8% per annum compounded monthly you will get Rs. 158,479/- at the end of 9 years

D.V.P

For non-finance student who simply want to calculate without the formula download the below excel link and click Enable Editing and simply calculate entering your details
https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdG9LZnpQcjlzZWY1QnZRQWVsb3N0clE&output=xls

Cash Flow Statement Explained


Cash flow statements are one of the essential Financial Statements that help you to understand the financial health and movement of the company.  It can be derived from the Balance sheets and the Income statements. Given an option of choosing only one statement among all these to analyse you may choose Cash Flow statement to know how the company is performing during a course of time. It is provided in the annual report of the listed company
So what exactly is a Cash Flow Statement? And what makes it the so important?
Cash Flow statement is a part of Fundamental Analysis showing the usage of cash and cash equivalents within an organisation for an ascertained period of time mostly a year or a quarter. It is not same as the Net Income of the company.
 It has three components namely
Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Flow from Financing Activities
1. Cash Flow from Operating Activities
As the name suggest it involves the principal revenue generating activities. Net Income includes future incomes and expenses and non cash adjustments like depreciation and amortisation.  We need to know how cash has been utilised during a year. So we add back the depreciation to the Net income and add the Net Working Capital i.e. add or subtract the cash received from Debtors or paid to Creditors.  When the debtors pay you, the Bills receivable in Balance sheet reduces and we add in Cash flow and vice versa.
Operating Activity
Net Income
Add: Depreciation
Add: Cash received from Sales
Less: Cash Purchases
Cash from Debtors
Payment to creditors
Cash from Commission and fees
Cash Operating Expense
Royalty and other revenue
Payment of wages
Income Tax
TOTAL CASH FROM OPERATIONS
If e.g. Balance sheet of Year 1 show Creditor as Rs.10,000 and Year 2 shows it as Rs.8,000 that means, Rs.2000 of cash outflow has happened to pay off the Creditors. So we subtract it from the cash flow. Similarly every cash expense and income is checked in the same way.
2. Cash Flow from Investing Activities
It takes into consideration the cash used to buy new equipment, buildings or short-term assets such as marketable securities.
Add:
Less:
Sale of fixed Asset
Purchase of Fixed Asset
Sale of Investment
Purchase of investments
Interest Received
Dividend Received
TOTAL INVESTING ACTIVITY

3. Cash Flow from Financing Activities

A company receives money when it issues equity or debentures to the public or get a loan. It shells out its money when it has to pay dividend to shareholders and interest to debenture holders and also while redeeming it.  These changes decide the cash flow from financing activity
Add:
Less:
Issue of shares
Dividends paid
Issue of debentures in cash
Interest paid on Loan/ Debenture
Loan Received
Loan Repayment
TOTAL FINANCING ACTIVITY
All the three sub cash flows would be totalled and added to the Opening balance of Cash to reach Cash and Cash equivalent at the end of the year
Cash Flow Statement
Add: Cash from Operating activity
Add: Cash from Investing Activity
Add: Cash from Financing Activity
         Add: Opening Balance of Cash & Equivalent
Cash & Equivalent at the end of the year
Negative Cash Flow is not preferred as seen as sign of weak business but we need to check whether the company has followed any growth strategy and hugely made investments which led to the cash outflows.
-D.V.P