Definitions Flashcards
Learn the vocabulary
Capitol budgeting
Process of making and managing expenditures on long-lived assets
Capital structure
The proportions of the firm’s financing from current and long-term debt and equity
Net working capital
= Current assets - current liabilities
Sole proprietorship
A business owned by one person:
- cheapest business to form no formal Charter is required in a few government regulations must be satisfied for most Industries
- pays no corporate income taxes all profits of the business are taxed as individual income
- the sole proprietorship has unlimited liability for business debts and obligations. No distinction is made between personal and business assets
- because the only money invested in The Firm is the Proprietors, the equity money that can be raised by the sole proprietor is limited to the Proprietors personal wealth.
Partnership
Business formed by two or more people
General partnership
All Partners agree to provide some fraction of the work and cash and to share the profits and losses. Each partner is liable for all the debts of the partnership. A partnership agreement specifies the nature of their agreement.
Limited Partnerships
Permit the liability of some of the partners to be limited to the amount of cash each has contributed to the partnership. Limited Partnerships usually require that at least one partner be a general partner and the limited partners do not participate in managing the business.
Corporation
Corporation is a distinct legal entity. Corporation can have a name enjoy many of the legal powers of a natural person. Corporations can enter contracts May Sue and be sued. For your sectional purposes the corporation is a citizen of its state of Incorporation.
Agency relationship
The relationship between stockholders and management.
Agency problem
Conflict of interest between the principal and the agent
Stakeholders
Someone other than stockholder or creditor who potentially has a claim on the cash flows of the firm
Assets
= liabilities + stockholders equity
Balance sheet
An accountant snapshot of a firm’s accounting value on a particular date as though the firm stood momentarily still. The balance sheet only shows the book value of a firm.
Liquidity
The ease and quickness with which assets can be converted to cash without significant loss in value
Current assets
The most liquid and include cash and assets that will be turned into cash within a year from the date of the balance sheet
Accounts receivable
Amounts not yet collected from customers for goods or services sold to them
Inventory
Composed of raw materials to be used in production, work in progress, and finished goods
Fixed assets
The least liquid kind of assets. Tangible fixed assets include property plant and equipment. Some fixed assets are intangible. Intangible assets have no physical existence but can be very valuable. Examples of intangible assets are the value of a trademark or the value of a patent.
Liabilities
Obligations of a firm that require a payout of cash within a stipulated period.
Carrying value
Book value
Gaap
Generally accepted accounting principles
Market value
Price at which willing buyers and sellers would trade the assets
Income statement
Measures performance over specific period.
Revenue - expenses = income
Non-cash items
Expenses against revenues but did not affect cash flows (depreciation)
Average tax rate
=Taxes owed / total income
Marginal tax rate
The tax you would pay if you earned one more dollar
