Key Terms Flashcards
Equity (Assets - Liability)
Equity is the remaining value of an owner’s interest in a company after all liabilities have been deducted
Overhead Expenses
Fixed Ongoing costs of running the business. Can be Semi-variable. Static costs to general business functions, such as paying accounting personnel and facility costs.
Operating Expenses
Costs of running the business day-to-day. Includes COGS, rent, equipment, marketing. Excludes non-operating costs.
Non-Operating Expenses
Extra costs not related to running the business. For example interest or depreciation.
Drawings
A term used for when the owner takes cash out of the business for personal use.
Depreciation
An asset such as a car using its value over time
Current Assets
- Held primary for trading purpose
- Expected to be realised within 12 months of the statement of financial positions date
- Cash or cash equivalent (i.e. a short term investment, such as a 30-day bond)
Non-current Assets
Investments of which the value will not be realised within the accounting year.
Financial Decisions
Usually the responsibility of the CFO. Likely to include debt and equity.
Dividend Decisions
Distribution of dividends and what amounts of profit to distribute as dividends
Investment Decisions
Investments into both long-term assets (Capital Budgeting) and short-term assets (Working Capital Management)
Principal-Agent Problem
Existence of conflicting interests between the Owners (Principal) and Managers (Agents). Where the agent does not act in the interest of the principal.
CBA
(Cost Benefit Analysis) Any decision made by a firm should only go though when the marginal benefits exceed the marginal costs.
Accrual Basis (Accounting View)
Recognizes revenue at the time of sale and Recognizes expenses when they are incurred.
Notes down future gains made by a firm even if the value will not be realised until the next accounting term.
Cash Flow Basis (Financial View)
Recognizes revenues and expenses only with respect to actual inflows and outflows of cash. Meaning upcoming inflows are not recorded and are not considered valuable at the time.
