Module 1 Flashcards
What is Accounting?
system for collecting, analyzing, and communicating financial information
Accounting equation
Assets = Liabilities + Owners’ Equity
Calculation of the income statement
Net income = Revenues – expenses
Asset
Any resource that is expected to benefit a firm or individual (ex. Land, buildings, equipment, inventories, and payments due to the company
Liabilities
a debt that a firm owes to an outside party
Owners Equity
is the amount of money owners would receive if they sold all of a companys assets and paid all of its liabilities.
Types of Accountant
Private Accountant,Management AccountantCertifiedPublicAccountant(
Audit
Systematic examination of a company’s accounting system to determine whether its financial reports are in accordance with GAAP, including reliably representing its operations
Balance Sheet
financial statement that supplies detailed information about a firm’s assets, liabilities, and owners’ equity
income Statement (Profit-and-Loss Statement, Statement of Operations)
financial statement listing a firm’s annual or quarterly revenues and expenses so that the bottom line shows the period’s profit or loss
– Profit is also known as income or earnings
Statement of Cash Flows
– Financial statement describing a firm’s yearly or quarterly cash receipts and cash payments
– Made up of
• Operating cash flows from earnings (usually positive)
• Investing cash flows to buy new assets (usually negative)
• Financing cash flows from/to the investors (varies)
REVENUE is recorded when?
– When goods are supplied or delivered to the customer
Basic Economics
Supply, Demand and Price Discovery
Inflation
Inflation occurs when the price of goods in an economy increases
Fiscal Policies
– policies used by a government regarding how it collects and spends revenue
– Tax compared to spending
– Decided politically by Congress
– Managed by the Treasury
– Bond operations executed by the Bureau of the Fiscal Service
Monetary Policies
– policies used by a government to control the size of its money supply
– Management of money supply and interest rates
– Managed by the Federal Reserve
– Operates under more of a political consensus
CurrentAsset
– asset that can or will be converted into cash within a year
Liquidity
– ease with which an asset can be converted into cash
FixedAsset
– asset with long-term use or value, such as land, buildings, and equipment
Depreciation
– accounting method for distributing the cost of an asset over its useful life
Current Liability
– debt that must be paid within one year
Accounts Payable (Payables)
– current liability consisting of bills owed to suppliers
Long-Term Liability
– debt that is not due for at least one year
Retained Earnings
– earnings retained by a firm for its use rather than paid out as dividends
Intangible Asset
nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit
Goodwill
– amount paid for an existing business above the value of its other assets
current ratio equation
Current ratio = current assets/current liabilities
Revenues
– net assets that flow into a business from the sale of goods or services
Operating Expenses
costs, other than the cost of sales,
Gross Profit
– preliminary, quick-to-calculate profit figure calculated from the firm’s revenues minus its cost of revenues (the direct costs of getting the revenues)
Operating Income
– gross profit minus operating expenses
Net Income (Net Profit, Net Earnings)
– gross profit minus operating expenses and income taxes
Return on equity or RoE equation
RoE = Annual net income / stockholders’ equity
“DuPont Formula”
RoE = Net Profit Margin X Asset Turnover X Financial Leverage
Profit Margin equation
Profit Margin =Net Income/Net Sales
Asset Turnover equation
Asset Turnover =Net Sales/Total Assets
Financial Leverage equation
Financial Leverage =Total Assets/Stockholders Equity
What is difference between fixed and variable costs?
Fixed: costs set in stone… ex. rent , hourly pay
Variable: changing costs… ex. ingredients, supplies
Secured Loan (Asset-Backed Loan)
– Loan to finance an asset, backed by the borrower
Collateral
– Asset pledged for the fulfillment of repaying a loan – Examples of collateral • Land • Property (fixed assets • Accounts receivable (financial asset)
Unsecured Loan
loan for which collateral is not required
Loan Principal
amount of money that is loaned and must be repaid
Interest
– Periodic payments that must be made on a loan or bond
Corporate Bond
formal pledge obligating the issuer (the company) to pay interest periodically (usually every 6 months) and repay the principal at maturity
Bond Indenture (Bond contract)
– legal document containing complete details of a
bond issue
Maturity Date (Due Date)
– future date when repayment of a bond principal is due from the bond issuer (borrower
Face Value (Par Value)
– amount of money that the bond buyer (lender) will
receive on the maturity date
Default
– failure of a borrower to make payment (of interest or principal) when due to a lender
• Bondholders’ Claim
– request for court enforcement of a bond’s terms of payment
Angel Investors
Outside investors who provide new capital for
firms in return for a share of equity ownership
– In general, “angels” tend to invest smaller sums than…
Venture Capital (“VC”)
– Private funds from wealthy individuals seeking
investment opportunities in new growth companies
– May be managed by professional investors as a VC fund
Initial Public Offering (IPO)
First sale of a company’s stock to the general public
what is Stock valued based on?
future earnings expectations
Market Capitalization (Market Cap)
total dollar value of all the company’s outstanding shares
= share price x number of shares outstanding
Dividend
cash payment paid by company to the stockholder for each share they hold
Money
object that is portable, divisible, durable, and stable, and that serves as a medium of exchange, a store of value, and a measure of worth
M-1
measure of the money supply that includes only the most liquid (spendable) forms of money
Currency (Cash)
government-issued paper money and metal coins
Check
demand deposit order instructing a bank to pay a given sum to a specified payee
Checking Account (Demand Deposit)
– bank account funds, owned by the depositor, that may be withdrawn at any time by check or cash
M-2
– measure of the money supply that includes all the components of M-1 plus the forms of money that can be easily converted into spendable forms
Time Deposit
– bank funds that have a fixed term of time to maturity and cannot be withdrawn earlier or transferred by check
Money Market Mutual Fund
– fund of short-term, low-risk financial securities purchased with the pooled assets of investor- owners
Commercial Bank
– company that accepts deposits that it uses to make loans, earn profits, pay interest to depositors, and pay dividends to owners
Savings and Loan Association (S&L)
– financial institution accepting deposits and making loans primarily for home mortgages
• Mutual Savings Bank
– financial institution whose depositors are owners sharing in its profits
Credit Union
– nonprofit, cooperative financial institution owned and run by its members, usually employees of a particular organization
Pension Fund –
nondeposit pool of funds managed to provide retirement income for its members
Insurance Company
– nondeposit institution that invests funds collected as premiums charged for insurance coverage
Prime Rate
– interest rate available to a bank’s most creditworthy customers
Bank Run
A bank run is when depositors lose faith in a bank or a or financial institution’s ability to repay their money.. They all run to the bank to try to get cash out of their accounts at the same time
Full (or 100%) Reserve Banking
a 100% reserve banking system, a banker would only be able to make a 5 year loan, if there was a 5 year fixed term savings
– The banker would effectively be charging a “markup”
– The funds from checking accounts would not be used for lending but would be kept intact
• 100% reserve banking has no risk of bank runs, but is more costly, so it is not used
Federal Deposit Insurance Corporation (FDIC)
Preserves confidence by supervising banks and insuring deposits in banks and thrift institutions
•Commercial banks pay membership fees to FDIC
•Guarantees the safety of all deposits (CDs, checking and savings*) of every account owner up to the current maximum of $250,000 per bank
Federal Reserve System (The Fed)
– central bank of the United States, which acts as the government’s bank, serves member commercial banks, and controls the nation’s money supply
Present Value, Future Value formulas
PV = FV / (1+r)t
FV = PV x (1+r)t
Time Value of Money Formula
PV = FVn / (1+r)^n
Reserve Requirement
– percentage of its deposits that a bank must hold in cash or on deposit with the Fed
Discount Rate
– interest rate at which member banks can borrow money from the Fed
Federal Funds Rate (Key Rate)
– interest rate at which commercial banks lend reserves to each other, usually overnight
Open-Market Operations
– the Fed’s sale and purchase of securities in the open market
Government Intervention
– Assistance in Bank Reorganizations
– Government Emergency Investment
– Assurances of Repayment
Quantitative Easing
– Create money to buy assets rather than using the cash that banks deposits under the reserve requirements
– Buy a much wider range of securities in particular mortgage backed securities (MBS)
– QE ended in October 2014
Automated Clearing House
– electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions
– network allows businesses, government, and consumers to choose an electronic-over-paper alternative for payments
Point-of-Sale (POS) Terminal
– electronic device programmed with electronic money that transfers funds from the customer’s bank account to pay for retail purchases
Smart Card
– Plastic card with an embedded computer chip that can be programmed with electronic money or used as credit card – Commonly used in Europe and being adopted in USA but….
Exchange Rate
– the value of one currency compared to the value of another, e.g. $/Euro
World Bank
– UN agency that provides a limited scope of financial services, such as funding improvements in underdeveloped countries
International Monetary Fund (IMF)
– UN agency consisting of about 150 nations that have combined resources to promote stable exchange rates, provide temporary short-term loans, and serve other purposes
Contribution or cost
– sum of money paid in by employee and/or company during the working life of the employee
Pension
– income paid to the retired employee after they have retired
Portfolio
– combined holdings of all the financial investments of any company or individual
• Diversification
purchase of several different kinds of investments rather than just one - see asset allocation
– Purchase of different securities within a category
Key Economic Indicator
Gross Domestic Product
•GNP – Gross National Product
GDP is the total value of all goods and services produced within a given period by a national economy through domestic factors of production
Contribution Margin (CM) and Business Viability equation
Profit = Unit CM x units – Fixed costs
Key understanding for market and bond prices
: market rates go down => bond prices go up and vice versa, rates up => prices down
capitalism
an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.
private accountant
Business hired account for their finances they can be CPAs or Non CPAs
Forensic accountants
the use of accounting for legal purposes… ex. investigating, litigation
Who is the President of the European Central Bank? a) Mario Draghi
b) AngelaMerkel
c) Silvio Berlusconi
d) Jacob Lew
Mario Draghi
President of the World Bank Group
Jim Yong Kim
