Finance Flashcards
Rate of interest
how much they are charging you to loan you the money (price of money). An interest rate is often expressed as an annual percentage of the principal
Inflation
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
assets
An asset is a resource that has some economic value to a company and can be used in a current or future period to generate revenues. Ex: cash, buildings, machines (WHAT THE COMPANY OWNS)
liabilities
Company’s financial debts or obligations that arise during the course of business operations. EX: wages, taxes and account payables. (WHAT COMPANY OWES)
Stockholders equity
the total amount invested in the company by its owners plus accumulated profits of the business. (NET WORTH)
total assets - total liabilities=
stockholder’s equity
Principal financial statements
- balance sheets
- the income statement
- statement of cash flow
balance sheet
summarize a company’s financial condition, with all its assets (where the company is using the money) and liabilities, as a given date: the end of the month, a quarter or a year.
the income statement
accounting of revenue, expenses and profit for a given accounting period usually a month, a quarter or a year. AKA Profit and Loss (P&L) statement, statement of income and expenses, and operating statement.
statement of cash flow
cash generated and spent during a specific period of time
total liabilities+stockholder equity=
total assets
balance sheet model
- current assets
- fixed assets
- current liabilities
- long term liabilities
- stockholder equity
current assets
Those assets that either are cash or are expected to become cash “currently”, that is, within the next 12 months:
- Cash and cash equivalents
- Account receivable
- Allowance for bad debts
- Inventory
- Prepaid expenses
Cash and cash equivalents
cash, checking accounts, savings accounts. If needed, they can be spent almost immediately
Account receivable
amounts due from customers as a result of sales made on credit( customers will pay in a short time, 30-60 days)
Allowance for bad debts
this is a reserve, an estimated amount the company sets aside for the possibility that some customer balances will never be collected. (this is minus in the balance sheets since it is negative)
Inventory
Production materials, products purchased, or products manufactured and held by the company until sold:
Raw materials
Work in progress
Finished Goods.
Prepaid expenses
They will never, except in rare cases be turned into cash. They are expenses that have been paid in advance and therefore won’t have to be paid again. EX: insurance, property taxes or even marketing materials
fixed assets
assets that the company uses to conduct its business: computers, machines, buildings, land, trucks etc. are not considered sources of liquidity. They are “fixed” in place until they are no longer useful. Then, they are either sold or discarded and then replaced. → during their period of use, their value declines substantially, often to zero by the end of their useful life (exception: land). To recognize that reduction in value, a company will depreciate the cost of each fixed asset (except land) over the period that it’s used in the business
other assets
company holdings that are neither current nor fixed. Assets in this category are not expected to become cash in the next 12 months, and they are not real state, machines or equipment used in the company’s business operations. → they may not even be directly related to the company’s business. EX: a deposit paid to a landlord, an investment in another company etc
current liabilities
All the debts the company expects to pay within the next 12 months:
- Accounts payable
- Accrued payroll
- Other accrued liabilities
- Notes payable and other bank debt
- Current portion of long-term debt
Accounts payable
all the unpaid bills from all the company’s suppliers and service providers.
Accrued payroll
amount earned by employees but not yet paid to them
Other accrued liabilities
are expenses the company has incurred but for which it has not received an invoice to record. EX: large purchases for which the company has not yet invoiced the company or interest on a loan that doesn’t get invoiced but for which the bank will automatically charge the company.
Notes payable and other bank debt
loans from banks and other lenders that represent borrowed money, and not simply trade accounts with suppliers
Current portion of long-term debt
the portion of long-term debt that must be repaid within the next 12 months.
Long-term liabilities
- lease contracts
- long-term debt
- loans from stockholders
Lease contracts
Commitments made by the company in order to lease equipment or other assets at favourable payment terms are usually followed by a modest buyout option at the end of the contract.
Long-term debt
Company’s loans and other liabilities that will not become due within one year of the balance sheet date.
Loans from Stockholders
For some privately-owned companies, this is how owners put money into the company when it needs cash and take it out when it´s not needed.
Stockholder’s equity
The owners´ stake in the business. It includes what they have invested to launch, finance or refinance the company plus what the company has earned in profits since it was founded.
Capital Stock and Contributed Capital
The total amount formally contributed by owners and investors to finance the company.
Capital stock
The amount paid into the company by investors to purchase stock at some nominal amount per share; the par value printed on each share of stock.
Contributed Capital
The amount paid into the company by investors to purchase stock, above its par value
Retained Earnings
Profit can be distributed to its owners in the form of cash dividends or remain in the company (retained earnings)
