Key Terms

Question 1

Equity (Assets - Liability)

Answer 1

Equity is the remaining value of an owner’s interest in a company after all liabilities have been deducted

Question 2

Overhead Expenses

Answer 2

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.

Question 3

Operating Expenses

Answer 3

Costs of running the business day-to-day. Includes COGS, rent, equipment, marketing. Excludes non-operating costs.

Question 4

Non-Operating Expenses

Answer 4

Extra costs not related to running the business. For example interest or depreciation.

Question 5

Drawings

Answer 5

A term used for when the owner takes cash out of the business for personal use.

Question 6

Depreciation

Answer 6

An asset such as a car using its value over time

Question 7

Current Assets

Answer 7

• 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)

Question 8

Non-current Assets

Answer 8

Investments of which the value will not be realised within the accounting year.

Question 9

Financial Decisions

Answer 9

Usually the responsibility of the CFO. Likely to include debt and equity.

Question 10

Dividend Decisions

Answer 10

Distribution of dividends and what amounts of profit to distribute as dividends

Question 11

Investment Decisions

Answer 11

Investments into both long-term assets (Capital Budgeting) and short-term assets (Working Capital Management)

Question 12

Principal-Agent Problem

Answer 12

Existence of conflicting interests between the Owners (Principal) and Managers (Agents). Where the agent does not act in the interest of the principal.

Question 13

CBA

Answer 13

(Cost Benefit Analysis) Any decision made by a firm should only go though when the marginal benefits exceed the marginal costs.

Question 14

Accrual Basis (Accounting View)

Answer 14

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.

Question 15

Cash Flow Basis (Financial View)

Answer 15

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.

Question 16

Primary Market

Answer 16

The market in which securities are initially issued. For example issuing shares for the first time.

Question 17

IPO (Initial Public Offering)

Answer 17

Issuance of private companies shares to the public market through financial institutions.

Question 18

Secondary Market

Answer 18

Where preowned securities are traded

Question 19

Efficient Market Hypothesis

Answer 19

All share prices are fair with required returns equal to expected returns. Fully reflective of all the information of the firm and its securities. Any changes will also reflect on the share price.

Question 20

Holding

Answer 20

Stocks, Property, and other financial assets in someone’s possession.

Question 21

Financial Institutions

Answer 21

Intermediaries that collect, store and distribute various holdings. By channelling savings into investments or loans.

Question 22

Going Concern

Answer 22

A company having the necessary resources to keep going for the foreseeable future.

Question 23

PEARLS (Debits, Credits)

Answer 23

Purchases, Expenses, Assets | Revenue, Liabilities, Sales

Question 24

ROI

Answer 24

(Current Share Price + Dividends received - Original Share Price)/Original Share Price