Finance

Question 1

Rate of interest

Answer 1

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

Question 2

Inflation

Answer 2

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

Question 3

assets

Answer 3

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)

Question 4

liabilities

Answer 4

Company’s financial debts or obligations that arise during the course of business operations. EX: wages, taxes and account payables. (WHAT COMPANY OWES)

Question 5

Stockholders equity

Answer 5

the total amount invested in the company by its owners plus accumulated profits of the business. (NET WORTH)

Question 6

total assets - total liabilities=

Answer 6

stockholder’s equity

Question 7

Principal financial statements

Answer 7

• balance sheets
• the income statement
• statement of cash flow

Question 8

balance sheet

Answer 8

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.

Question 9

the income statement

Answer 9

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.

Question 10

statement of cash flow

Answer 10

cash generated and spent during a specific period of time

Question 11

total liabilities+stockholder equity=

Answer 11

total assets

Question 12

balance sheet model

Answer 12

• current assets
• fixed assets
• current liabilities
• long term liabilities
• stockholder equity

Question 13

current assets

Answer 13

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

Question 14

Cash and cash equivalents

Answer 14

cash, checking accounts, savings accounts. If needed, they can be spent almost immediately

Question 15

Account receivable

Answer 15

amounts due from customers as a result of sales made on credit( customers will pay in a short time, 30-60 days)

Question 16

Allowance for bad debts

Answer 16

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)

Question 17

Inventory

Answer 17

Production materials, products purchased, or products manufactured and held by the company until sold:
Raw materials
Work in progress
Finished Goods.

Question 18

Prepaid expenses

Answer 18

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

Question 19

fixed assets

Answer 19

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

Question 20

other assets

Answer 20

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

Question 21

current liabilities

Answer 21

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

Question 22

Accounts payable

Answer 22

all the unpaid bills from all the company’s suppliers and service providers.

Question 23

Accrued payroll

Answer 23

amount earned by employees but not yet paid to them

Question 24

Other accrued liabilities

Answer 24

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.

Question 25

Notes payable and other bank debt

Answer 25

loans from banks and other lenders that represent borrowed money, and not simply trade accounts with suppliers

Question 26

Current portion of long-term debt

Answer 26

the portion of long-term debt that must be repaid within the next 12 months.

Question 27

Long-term liabilities

Answer 27

• lease contracts
• long-term debt
• loans from stockholders

Question 28

Lease contracts

Answer 28

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.

Question 29

Long-term debt

Answer 29

Company’s loans and other liabilities that will not become due within one year of the balance sheet date.

Question 30

Loans from Stockholders

Answer 30

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.

Question 31

Stockholder’s equity

Answer 31

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.

Question 32

Capital Stock and Contributed Capital

Answer 32

The total amount formally contributed by owners and investors to finance the company.

Question 33

Capital stock

Answer 33

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.

Question 34

Contributed Capital

Answer 34

The amount paid into the company by investors to purchase stock, above its par value

Question 35

Retained Earnings

Answer 35

Profit can be distributed to its owners in the form of cash dividends or remain in the company (retained earnings)