Inflation and Expenses

Everybody has variably heard of the word inflation. As a matter of fact, any educated person would like to rattle off his/her knowledge on inflation, and with the current market news (maybe I follow it a bit too much) its all over. So here's a small peek into what is it and how it affects us.

Inflation: In simple terms it is the phenomenon due to which the little orange candies which used to cost 10paise each back when I was a kid at school, now cost more than 50paise (on a conservative estimate). Or the onion butter masala dosa a south Indian delicacy that used to cost a mere Rs 13, would now cost somewhere in the region of Rs 20 to Rs 25.

How does inflation affect me: Due to inflation the cost of every goods or service that you buy goes up. And you are not spared, whether you are spending in dollar, euro, yen or the rupee. It affects all commodities and makes them dearer every year. So in general the price of petrol/ diesel you buy at the pump goes up every year.

The amount of real return earned by keeping money in the bank goes down. For example, given the current real scenario in India, the interest rate offered in a normal savings account hovers around 3.5%. While with the recent released figures, the inflation hovers around 5% and above. If we were to assume that today you have Rs. 100 which would purchase you a cake at the Barista, then due to inflation next year the same cake would cost you Rs. 105. But since you chose to eat the cake next year, and kept the money in the bank, your money grew to only Rs. 103.5. And so you don't have enough money to purchase the cake anymore.

Are there any standard measures: In India, inflation is measured by the Wholesale Price Index (or the WPI) released by the Reserve Bank of India(or RBI) every Friday. Check under the Database -> Weekly Statistical Supplement and select "Index Numbers of Wholesale Prices". The WPI is a more broad based measure than the variably used Consumer Price Index (or CPI) used by other countries, or many other measures. The WPI numbers released for India include on the upwards of 435 item prices and give a good picture of the overall price rises.

What is the extent of the affect it has on us: Year to year, there is hardly any effect that an individual may feel. In fact with increasing efficiency in some spaces, prices may actually go down in some categories of goods, most notably technology products. But in the long run we all get hurt by inflation. Even if we assume a modest average inflation figure of 5% per year, in 20 years the cost of any good is bound to grow by 2.65 times. So we need to plan our savings in such a manner that we beat atleast that figure.

Why is there inflation: Economists vary regarding all the possible factors affecting inflation. But some of the most common reasons are

• Increase in the price of goods due to increase in demand in excess of supply available. This also gives rise to ocassional black market.
• Increase in money supply due to government/ central bank policy. Sometimes if the government sees that there is not much spending by the consumer, it may reduce interest rates to encourage the consumer to borrow and spend. This decreases the value of money, and companies increase the selling price to keep the value that they earn the same. This in turn pushes up prices.
• Higher interest rates. Due to this the cost of purchase of raw materials or labor increases for the business which may be passed onto the consumer. This effect may not be seen immediately, but is over the long term prices rise/fall to match interest rates.

Any other information: Yes. There are two more terms that be mentioned in the context. They are deflation and stagflation. Plus there are other terms like disinflation, reinflation and hyperinflation, but of lesser significance.

Currency Carry Trade

The recent and ongoing global financial crisis was precipitated due to a lot of factors, a few of which I actually know about and all of which I am sure no single person knows about. Albeit everybody would agree a part of it was due to the collapse of the American consumer market, especially the housing market where individuals could no longer afford the monthly payments on the houses they purchased on loan.

The other factor that I am aware about is the effect of the Yen Carry Trade. Today I read an article in Investopedia, which pretty much explains in basic terms what it means with an example.

What does it mean

A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates - which can often be substantial, depending on the amount of leverage the investor chooses to use.

Example

Here's an example of a "yen carry trade": a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar was to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

Britain's Got Talent

Measuring Code Quality

Find the original picture source here.

Change of Perspective

I called up my brother today, wanting to discuss a transfer of funds to some account. I was expecting it to be a pretty regular call as calls between brothers could go. The call went something like this:

Tring, Tring

Bro: Jaldi bolo. (Be quick)
Me: Kyun ? (Why?) [Normal human tendency to delay proceedings when you are asked to speed them up.]
Bro: Abhi hum ICU mein hain. (Am in the Intensive Care Unit)
Me: Wahan kya kar raha hai? (What are you doing there?)
Bro: I got my duty posting here.
Me: Ok. We can talk later.
Bro: Nahi. Tum bolo... (It's Ok. You can speak)

Did I tell you my brother has completed his studies as a medical undergraduate student and is currently undergoing his one year long internship.

Do you push-up ?

As the age changes, so does the fad to exercise. Yesterday it might have been yoga, today it's power yoga. Fads come and go, but basics stay. And the one which has endured over the centuries is one's ability to do push-ups, variably called as dips.



I just found a push-up calculator, which determines your body fitness according to the number of push-ups you can do. Oh, and women can also measure their push-up strengths there.

I know money can't buy happiness

... but money can buy stuff that can buy happiness. For example this bike.

Biking trip to Srisailam

The fresh air. The cold nip of the morning breeze. Riding in silence and early morning darkness. Jumping over unseen and unheard speed breakers. Letting the throttle go full revs once on the highway. All this is happening to me, and I can't help but smile to myself with content arising out of bliss. Life could not get better.

And thus began another biking trip to Srisailam, a small hilly town around 230 kms from Hyderabad, in Kurnool district of Andhra Pradesh, India. Good roads. Nice weather. Ideal for a weekend drive I would say.

The road we took is more commonly known as the Srisailam highway, going through Kalwakurti, Achampet, Farahabad, Mallelatheertam onto Srisailam.

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Saturday
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The tiger outside the Farahabad Tiger Forest Reserve. Going inside was a missed opportunity since none of us six knew how to speak telugu, and the game reserve personnel there could not understand a single word of hindi/ english. Next time I go out in Andhra Pradesh, I vow to at least learn some bit of conversational telugu.



















The first glimpse of the Srisailam Dam, and the Krishna river on which it is built. As can be seen from the pictures, the crest gates are closed now. Next trip to this place will have to be during the rainy season, when water is flowing through the gates.




































Glimpse of the main entrance to the Srisailam Devesthanam. One of the twelve Shiva jyotirlingams, and houses the idol of Lord Mallikarjuna Swamy. Later we found most pilgrims to the place addressing each other with the term "Swamy", whether they were respectful, or irritable.


















And then we went for a boat ride on the dam lake.





































We also found the pilgrims in various meditative moods. Most of them seemed to be Shaivites and they were beginning to gather for the Maha Shiv Raatri coming up next week.



















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Sunday
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We left early on Sunday morning from Srisailam with the intent to visit Mallelatheertam on the way back.



Another view of the Srisailam Dam, from another view point.
















Found this strange place. Seemed like there was some coal mines long time ago. Makes for some wonderful backdrop.














And then it was onto Mallelatheertam and its jungles. Yes that is what it has, coupled with a small waterfall.

The unmistakable signboard inviting you to the waterfall. Its around 8 kms inside from the state highway, and is only a dirt track. There is a village inside through which we need to go. Also there is an admission fee for vehicles somewhere midway. Additionally we need to pay a token amount to go down to the waterfall (5 rupees per person). There are some 300+ steps down to the waterfall.









But being in the adventurous way, we decided to roam the jungles, climb trees, fight forest fires and generally monkey around.






































And then we found the waterfall. And happily it not being the rainy season, we quite merrily jumped around and lazed too under the waterfall. And have to admit that the falling water was cold, and pinched us like a million needles. All in all, one of the best refreshing baths I have had in a long time. Beats a spa anyday. Add to it that it was all in the open, some of us under near-nude conditions of clothing.

Laloo Prasad Yadav in comedy mood during the Railway Budget

Thanks to Amit's post, from where I got the link to this video. As he says, I am also in awe of the oratorical skills of this man. He keeps his audience engaged.

And now for a short before budget interview with the press, where he deftly handles the "election year" question.

Subprime in a Lighter Vein

I have been reading about the subprime crisis since some time now (almost 6 months). And it has existed in the financial markets longer than that, almost a year I think. On that front I have come across lots of explanations and it takes some time to adjust to all the terminology. But occasionally I come across some posts which present it in such a manner that it makes for some easy reading.

You can find the original source of my information here. Reproducing for my benefit.

First the presentation.



And the video



Will come up with some more from what I have read.

Stock screening ideas

I have begun to heavily involve myself in stock selection. Its very interesting to learn and read financial statements, the history of a company, its current growth drivers and its competitors. Each stock has its own story to tell. And herein lies my problem. That of there being too many publicly traded companies on the stock exchange for a human to do any fruitful analysis of a stock if we select to go in any particular lexicographical order.

Apropos to this, I have been reading a bit and have learned of a few nice ideas. The foremost of the lot is proposed by Joel Greenblatt in his book titled "The Little Book That Beats The Market" http://www.magicformulainvesting.com/book.do . The strategy that the book proposes is very simple in itself. All that we need to do is look for good companies at bargain prices. And for that, all we need to do is look for companies that give a high Return on Capital Employed (ROCE) or high Return on Assets (ROA). Such companies automatically become good since they are producing better results than their competitors and have a greater sustainability to do so going ahead. And we need to get these companies at bargain. So add to it that these companies should have a high Earnings Yield or a low P/E ratio. And you are pretty much done.

All my other reading point out that this book is pretty much correct. But as Joel Greenblatt goes on to say in the last chapter, there would be a few of us (like me), who like to think that no automatic stock selection criteria is greater than our individual capacity to select good stocks in the long run. Essentially each one of us likes to belive that we are Warren Buffets all. Or the cynic in us gets the better of our logical reasoning and having read a bit more than recommended, believes that since no automatic stock selectioin criteria worked over the long term (for example the Dogs of the Dow theory), even this is not going to work. All that it boils down to is that I like to hand pick my stocks. And this above criteria comes in real handy to get me started.

Add to the above two criterias, I found some others. All common sense, no nonsense at all. I will just list them and try to rationalize them from whatever I know.

• High Return on Capital Employed (ROCE): Shows how good the managment is, since it extracts the most out of whatever resources are available to it. Return on Assets (ROA) or Return on Equity (ROE) can also be variably used. It should be fixed at a minimum of 10%.
  
• High Earnings Yield or Low Price-to-Earnings (P/E): This actually denotes how much return an individual shareholder is entitled to. I marked it to a P/E of 4. Although if you are a sophisticated investor with access to large data, you can probably go for high values of the ratio EBIDTA/EV (i.e. Earnings Before Interests, Depreciation, Taxes and Amortization / Enterprise Value )
• Low Debt / Equity ratio: Fixed at 70% and less. Any higher and there are going to be problems with the operation of the entity each time there a adverse rate move by the central banks. Although this would preclude the banking sector (which far as I know shows a high debt on its balance sheet)
• Market Capitalization: 100 crores minimum. I don't want people to run away with my money. That figure seems reasonable enough to keep the interest of other investors also piqued so that I am not the only one tracking the stock.

That's pretty much the initial screen I would apply during my stock selection. And then rank the companies on all the parameters. Those that come up higher on the list of combined rankings make the grade for my personal scrutiny and study.

That I don't fully understand the financial statements of all the sectors is a story for another day. But the above parameters at least allow me to know, which stocks I want to look at and do research on.

Disgusted with self

I have been so caught up with the corporate world of managing things, achieving results and deliverables that I forgot I used to like to learn new things. That I once took pride in the fact that I was near the ideal where if I knew something, I could explain it to my grandmother or a kid.

Lots of people, including myself, think that building an application is like gluing different parts together, without thinking about form, just based on function. And indeed that is how it is promoted today in the software applications world. This approach does indeed work towards delivering results in the form of applications running in today's world.

But I am beginning to realize the difference between a mason and a sculptor. When a sculptor build a sculpture, he has the final form in his mind. It is only he who decides the design and only he who delivers it. And then it becomes a thing of beauty to behold. A thing which lasts for generations. No wonder application architects are respected so highly (I wonder how much they are paid in monetary terms).

December 22 - 25, 2007

4 days. 1400 kms. 2 bikes. 2 riders. And lots of places. Description of the saga follows.

December 22.

5:30 am
- I manage to meet Randhir, half an hour late from the earlier designated time.
- Early morning mist on the highway. Loads of traffic. Riding under the lights. Covered barely 30 kms in one hour.
- Stop at the sign a bit out of the city saying 495 kms to Pune. Sunlight begins to show us the path more clearly. Its nearly 6:45 am

7:30 am
- Cruising at 90 kmph, when suddenly a cruiser with two people overtake us driving at 100kmph and we give chase.
- next 30-40 kms was spent in hot pursuit with bikes running at 100 kmph +, maxing out at a little over 115 kmph.

8:30 am
- Stop for breakfast. A quaint little dhaba. Puri and subjee. Just 2 more truckers besides us.

10:45 am

- Covered 250 kms when this scenery hit us.
- Not a single soul around for miles.























- Naidurg. 100 kms from Sholapur. Was sorry that we did not have time to visit.






11:00 am
- Indapur Co-operative sugar factory. Uses sugarcane from the plantations around.
- The transportation medium
- Our bike speed a measly 20kmph for 15 mins



12:15 pm

- Lunch at Kamat Hotel (not part of the chain of Kamat hotels I think)
- Fill up bike tank. Check air pressure in tyres. Zoom. Time 1:00pm

1:30 pm

- eeks! We have been dozing on the bike for the last half hour. Bike speed 60 kmph.
- realized our folly and raised speed.

6:00 pm
- Sholapur road outside Pune. 4 lane. Metalled. Divider in between. Drove at 115-120kmph for what seemed like 10 kms. Fulfilled the heart's content.

7:00 pm
- At friends place. Tired. Bums itching. Paining. etc, etc but the heart glad.


December 23

1:30 pm















- Jump into the water. But had nothing to change into.

2:30 pm
-Lions Point. Lonavala. 60 kms from Pune. 625 meters from sea level.















- Butta. Juice. Cold drinks. Against this background.

4:30 pm
- Fighting steep climbs. Non-existent roads. Not a single soul in sight.
- Mulsi Dam lake. Calendar moments.


December 24 & 25

- Random shots

These signs were visible on the part of the highway NH9 when it was part of Maharashtra state.











- Grape vines. (Probable next destination - Nashik. The wine valley of India)












- Awesome pic against the sun. Photographer - Me.














- 7:30 am on Christmas Day. Morning mist. (not fog or smoke!)











- Probably forgot to add. 100kms of the highway went through Karnataka also.













3:00 pm on December 25, 2007.

I barely managed to shrug off the shoulder pack, before collapsing on the bed. Having traveled 1400 kilometers, I realized driving in city traffic is much more taxing on your energies than the highway. The last 30 kms just outside and in the city totally wore me out. But yes! The elation remains to this day. Long standing desire done. Next target - Himalayas.

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There are some pretty high resolution pics in this post. Click on them to get a larger image.

My credit score is being tracked !!!

I always knew that there exist credit bureaus in the developed countries which track the credit score of an individual or corporation. For example I once read some where that on the Amercian credit rating scale, a rating of less than 600 is sub-prime. I had this thing at the back of my mind since a long time, and today I just happened to come across the equivalent credit site for India.

Credit Information Bureau (India) Limited aims to (in their own words) "fulfill the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of Members." The Members are institutions like banks, non-banking finance companies, Credit Card companies, Housing Finance companies amongst others. It started with the joint efforts of State Bank of India (SBI) and Housing Finance Development Corporation (HDFC), Dun and Bradstreet Information Services India and Trans Union International with a shareholding pattern of 40:40:10:10, although it now diversified amongst many more entities.

The interesting thing to note is that the bureau gives out information on the basis of reciprocity. Which essentially means that institutions which have made their complete data available to CIBIL are only eligible to receive the Credit Information Report (CIR). Additionally, if your lending institution gets a credit report on you, you can obtain a copy of the report for yourself.

So the very pertinent question that remains in this day and age of identity theft and no sanctity of private personal information is one of what is the nature of information that they collect and store about us. From the website,

The CIR includes the following information:

• Basic borrower information like:
  1. Name
  2. Address
     
     In case of individuals:
     
  3. Identification numbers
  4. Passport ID
  5. Voters ID
  6. Date of birth
     
     In case of non-individuals
  7. D-U-N-S^® Number
  8. Registration Number
  9. Legal Constitution
• Records of all the credit facilities availed by the borrower
• Past payment history
• Amount overdue
• Number of inquiries made on that borrower, by different Members
• Suit-filed status.

Doesn't leave much to the imagination of the creditor, right?? Well there is an indicative list of what it does not hold also. Again, from their website:

The CIR does not contain:

• Income / Revenue details
• Amount(s) deposited with the bank
• Details of borrowers' assets
• Value of asset(s) mortgaged
• Details of investment(s)

Some relief there! And the best point there is the amount(s) deposited with bank. It would take a finance whiz to figure out all the transactions that go on amongst us bachelors/bachelorette staying with flatmates and working with colleagues.

The question that still remains whether it is good to have an entity like this. I think it is very necessary for me. I am young and earning but at the same time I am responsible. Which means my past bank balance does not determine my credit quality. When I take a loan I am confident that I will be able to repay it. With an agency like this, it does not require lengthy explanations. The finance company would ask just to make sure I still maintain the same habits.

So when are you tracked into this database. Do you use a credit card?? Did you ever take a loan from a recognized financial institution, however itsy-bitsy it was?? Did you ever overdraw your bank account?? Well if you did do any of those things, you are already in this database. You can't go off this database. Which means you need to learn to live with this. Which leaves with the one choice that one faces with every new entity. Do you want to learn more about its functioning and make it your friend for an easier financial life or would you rather suspect its intentions at the very start and keep agonizing over it and blame it for your poor credit quality.

I think I will make it my associate for a lifetime. What do you think??

Johnny Gaddar : Movie Review

If you have read my other posts you would have hardly found any mention of cinema, let alone a full blown movie review. Which is where this becomes more special. This movie is enthralling to the say the least, and by far one of the best things doing the rounds of bollywood in recent times.

Johnny Gaddar starts with the story of a motley of five out to make quick money getting involved in a shady deal. In a span of four days they need to gather Rs. 2.5 crore and earn a 100% profit on that, with every putting up the same amount and thereby entitled to equal profits. The elder in the group is Seshadri (Dharmendra) who is the glue for the group. Due to him the club owner-cum-compulsive gambler Prakash (Vinay Pathak) tolerates Shardul (Zakir Hussain), a fellow crony and a snob. Then there is Shiva (Daya Shetty), the strongman in the group. And the new discovery - Vikram (Neil Nitin Mukesh, grandson of the singing maestro Mukesh of yesteryears), who is the youngest in the group there to earn the fast buck.

All goes fine till the money is gathered and given a send off to purchase the loot. And then all goes spine tingling. Each frame keeps you guessing, wanting you to make a prediction for the next twist. And when the actual plot unfolds you are left wondering why you missed that angle and you curse yourself. In end you just begin to accept the brilliance of direction in the movie. And no less should be expected when a movie derives its inspiration from James Hadley Chase and Amitabh Bachhan's relatively unknown "Parwana". One request: don't fall off your seats as you go wow with every murder that takes unfolds in the movie.

The plot holds on very nicely and the performances are really good. Just that amount of shock and incredulity on every one's faces to convince the characters in the movie as well as keep the audience in the loop. Besides the main cast, Rimi Sen delivers the role of Mrs. Shardul a.k.a. Twinkle very well. This lassy gal is learning it seems. And Ashwini Kalsekar is all powerful performance for the small part she has. In fact all the supporting cast has done their roles optimally.

The director Sriram Raghavan has done a very good job of the movie. And I loved the camera angles and the edits (I think it is called cinematography in the broader sense). And the background score beautifully matches the sequences (yes, that is all the music that is there, except for the ending score).

Perhaps this review is a tad too late in coming but I recommend you to definitely find time for it. One of the best in recent times that I seen to come out of bollywood. The money and time spent is worth every penny.

Dabba Trading

Although I have not written for a while, I have been reading some. And most of the stuff that I read these days an explanation can be found on the internet, most notable them is probably the wikipedia. But I came across this new term which is intriguing and for which wikipedia doesn't have an entry yet.

"Dabba Trading" is a flourishing illegal trading in the backgrounds of the stock market. What approximately happens in such transactions is this: When a client enters a trade for say 100 shares, the broker actually registers a trade for say 1 or 10 shares with the main exchange. Then at the end of the day, the total deliverables are calculated and to hedge the positions derivatives are used. With the help of the latest available software, even the screen of the investor shows that trade for 100 shares have been registered when in reality it is different.

So the question remains why people still flock to such operators. Because these operators allow you to trade on a margin of just 10%. Because larger corporate operators have to yet reach the small towns and villages where such activity is much more. According to a recent estimate, such trades run into thousands of crores of rupees every single day. No wonder the SEBI and others are trying hard to dig these people out. The actual SEBI guideline for banning of such operations were originally issued in 2003. But they are still prevalent in India, mostly in the western parts.

Far as I could find out, a certain Pradeep Kumar Bansal was the first among the dabba traders who had been banned by SEBI on the exchanges. And that was way back in 2003. Ah! the vagaries of greed and fear that drive the fools to the slaughterhouse. As Satyjit Das, of the Traders, Guns & Money fame, would say : any form of derivative instrument is designed to profit just one entity - your broker.

For the benefit of my NRI / PIO readers and friends

Now even you can invest directly in Indian equities. Earlier there were a lot of channels. Now they seem to have reduced.

NRIs can invest in domestic markets

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Update: Changed the text into an url, since some were having problems viewing.

Nagarjuna Sagar Dam n Ethipothala Falls

It had been ages since I went out of town on a pleasure trip of any kind. So the law of averages took over and I landed up in the midst of a relaxing day out with friends.

The ferry which ferried us to the museum situated on the island.

This formation looked a formidable presence on the way to the museum.

Just beside the landing of the island on which the museum was situated, this above water channel looked like something out of the Discovery channel programs on wildlife flora and fauna in dense African Jungles.

Not too much of a garden flowers fan, yet I find this pretty beautiful.

And finally the much talked about Nagarjuna Konda museum. We were not allowed to click pictures inside so had to be content with this picture. The museum contains depictions of the evolution of man since the stone age, as found from the Nagarjuna Konda valley area nearby.

This man was ready to give us a ride on his small coracle like boat, before the guard came and shooed him away. It was interesting to watch him pull his boat using two ropes tied from end to end. Some skill.

The Nagarjuna Sagar Dam. You can find a better picture here. It is the world's tallest masonry dam and is built on the Krishna River.

Various views of the Ethipothala falls. It is not big by the standards on which a fall might be judged. But when you are standing 50ft away from it, it really is big.

A downstream view of the same Ethipothala falls. I don't about others, but every time I get to get into water, there is this bliss that descends on me. As if all the worries of the world have been washed away by the flowing water and life is to be lived anew devoid of all burdens.

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The above pics are high resolution and you may download them for your own use.

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Listening to: Guns 'N Roses - Human Being.mp3
via FoxyTunes

Why I Want To Become A Professor One Day

Carnegie Mellon Professor Randy Pausch, who is dying from pancreatic cancer, gave his last lecture at the university Sept. 18, 2007, before a packed McConomy Auditorium. In his moving talk, "Really Achieving Your Childhood Dreams," Pausch talked about his lessons learned and gave advice to students on how to achieve their own career and personal goals.

Revenue Recognition Methods

Depending on the business undertaking, the revenue of a firm varies according to the time and the deal with the customer. For example, a car maker gets its payment when a customer buys its car and pays for it. On the other hand, a prepaid mobile service provider gets the payment before it has provided its services - use of its network for the limited number of minutes provided. And a very visible category in the infrastructure development scenario in India is that of part payment based on the partial completion of a project, for example construction of flyovers.

The GAAP (Generally Accepted Accounting Practice) accounting standards allow for various methods for such revenue recognition. Companies are free to choose the method that best suits their business. And thereby it becomes very essential during an income statement analysis to determine that the method followed actually reflects the correct business scenario.

Sales basis method
Under this the earnings process is complete from the company, and the revenue is reasonably assured. This is the case where an individual buys a car and pays through cash or credit. Even when the customer pays through the credit card, the revenue from sale and the corresponding cost for manufacturing is recognized in the period when the sale was made. The actual cash may be delivered at any time later.

Percentage of completion method
This is the case of the airport, bridges and other long term project constructions. In these the whole work is not delivered within one accounting period. Here the revenue is reasonably assured. So at the end of every accounting period the firm recognizes revenue based on estimates of work completion. The estimate of completed work may be based on two parameters

• Actual engineering work completed as estimated by the management/ engineering team.
• Cost incurred to date, if the total cost has been reasonably estimated earlier. In case the cost estimate is revised in the future, the revised cost estimate is used to do the calculations for the next year.

For example, if it is estimated that a company A is building a flyover for Rs. 5,00,00,000 and it estimates that it would cost it Rs. 4,00,00,000. Here we assume that the payer is genuine and will pay up. Now if in the first year A incurs a cost of Rs. 1,00,00,000, going by percentage complete method, it would recognize a revenue of Rs. 1,25,00,000, thus making a profit of Rs. 25,00,000 for the first year.

If in the second year, A's project management goes on an overdrive and it incurs a cost of Rs. 1,50,00,000 for the second year for the amount of work it has done. So the total cost is now Rs. 2,50,00,000 based on which it recognizes a revenue of Rs. 3,12,50,000 [ (25/40) * Rs. 5,00,00,000 ]. The total profit for the 2 years comes to Rs. 62,50,000 out of which Rs. 25,00,000 was recognized in the first year itself. So the profit for the second year comes to Rs. 37,50,000.

Completed contract method
Under this method, the revenue is recognized only when the whole project is completed and delivery of the goods has been given to the customer. So if the project lasts for five years, there would be no profit for the first four years and would recognize it only at the end of the fifth year.

This is used when the costs can be estimated but the work is incomplete and the payment is not assured as well. Or it can be used where the costs can't be estimated by the supplier firm before delivery of the product.
Installment sales method
For example, if the cost of product is Rs. 100 and it is sold for Rs. 150. The gross profit is 50%. So when the seller receives Rs. 50 in the first installment of payment, the firm recognizes 1/3 (Rs. 50/Rs. 150) of the profit also which amounts to Rs. 50/3. This method is used when the earnings process is complete from the supplier/seller side but the payment is not assured or rests on the credibility of the buyer. For example in the current subprime housing issue.

Cost recovery method
Continuing from the above example, if the cost is Rs. 100 and it is sold for Rs. 150. When the first installment of Rs. 50 is received, no profit is recognized. With another Rs. 60 of revenue a profit of Rs. 10 is recognized. And with the remaining Rs. 40, the rest of Rs. 40 of profit is recognized in the period of the third year.
This is used when the earnings process is complete but there are contingencies built in there.