Randy's Terminology Flashcards
Accounting
The process of analyzing and justifying one’s actions to another
Trust Accounting
How a trustee explains their actions to the beneficiaries
Financial Accounting
How managers of for-profit businesses report to shareholders and others about
the management of the business (by preparing and distributing financial statements
Principal
The amount originally lent, increased to reflect subsequent additional lendings, and
decreased for payments
Interest
Paid by the borrower to the lender to compensate the lender for borrower’s use of the lender’s
funds
Amortization Schedule
The terms of a loan that control when principle is to be repaid
Compounding
Interest that is reinvested and earns interest (compounding period in the example
above is one year)
Three Concepts of Interest
- Payment of interest: When the borrower is required to provide cash to the lender
- Compounding of interest: How interest is calculated
- Earning of interest: What is owed if the borrower defaults on its obligations under the loan terms
Types of Interest
- Accrued or Economic interest: Earned interest regardless of its payment date
- Prepaid interest: Interest to be paid before it accrues
- Deferred interest: Interest to be paid after accrual
- Simple interest: Interest determined without compounding (interest to be paid as it accrues)
Time Value of Money
You would rather have a dollar today than have a dollar tomorrow because
either (i) you can enjoy it today, or (ii) put it in the bank and earn interest
Nominal or Named Rate
Stated rate dependent upon compounding
Yield
The percentage that you are actually owed (in a 10% nominal interest rate compounded yearly,
after 3 years your yield would be 33.1%)
Prepaid Interest
To an economist it is just reducing compounding; you can pay the interest
before it is due
Amortization
The rate at which you pay down a loan
Positive Amortization
Pay some of the principle plus the interest to avoid compounding
Negative Amortization
Low payments with a high interest rate which gets added to principle and
increases compounding
Debt Instrument
Proves the holder case payments at one or more specifies future times
Interest only
Interest is paid at specified intervals with all of the principle due at a specified
future date
Level payments
The same amount consisting of interest and principle is paid at the specified
intervals
Default
The failure of a borrower to fulfill an obligation, at which time the lender may impose the
sanctions specified in the lending contract.
Leverage
Borrowing to buy an asset
Short Sale
An investor borrows stock from his broker and sells it, then at a later point the investor
must return the same amount of stock as was originally borrowed (if the stock goes down or their investment goes up the investor will make money, if the stock goes up or the investment goes down they will lose money)
Leverage
By borrowing to buy you increase the risk of gains and loses, the lender gets interest and
commission
Put
Option to sell something at a fixed price at a future date (if the underlying stock goes down then
the value of the put goes up), when buying a put you are betting that something will go down, known as a short position
Call
Option to buy something at a later date at a set price (you are betting that the stock will go up) no capital is invested in the property, it is a pure bet.
Multiple
Ratio of the capitalized value to the annual future payments
Capitalizing
A stream of future payments reduced to the discounted present value
Capitalization Rate or “Cap Rate”
The interest rate used in capitalizing future payments
Ex-Dividend Day
Day on which holders of stock are locked in to receive a dividend regardless of if
they sell it before the day the dividend is actually paid, stock usually drops on this day, while retained earnings build up stock value until paid out
Profit
Measure of how much better off the owners of a business are as a result of that business’s operations over a period of time (usually a year)
Dividends
Money that the company does not need is paid out to its investors in the form of a dividend
Account
Running record of transactions affecting one item (a bank account, a building, etc.)
Asset Account
Record in respect to an asset (with student loans, as you take money out the asset goes up as you pay them back the asset goes down)
Equity
What is left over for the shareholders when the creditors are all paid off
Balance Sheet
A useful way of summarizing all the accounts at an instant in time
Three basic types of accounts:
- Asset: Shows all items affecting an associated asset (i.e. bank accounts)
- Liability: Shows all items affecting an associated liability (i.e. loans)
- Equity: Value of assets minus the value of liabilities
Debit
An adjustment in a pair of entries that increases assets or decreases liabilities or equity
Credit
An adjustment in a pair of entries that increases liabilities or equity or decreases assets A debit increases assets while a credit decreases assets, contrary to our general notion of a credit and debit since debit and credit card usage is named from the banks perspective not the customers
Left-Hand Entry
A debit, so named because asset accounts appear on the left-hand side of the balance
sheet
Right-Hand Entry
A credit, so named because the liabilities and equities appear on the right-hand
side of the balance sheet
Double-Entry Bookkeeping
Assures that the balance sheet balances by providing a limited check on
arithmetic and transcription errors but says nothing about whether the entries are correct
Book Value
Historical cost with some adjustments for things like wear and tear, obsolescence, or depreciation
Company’s Market Value
Determined by multiplying the number of shares outstanding at the end of
its most recent fiscal year, by the market price for one share on that day
Partnership
A group of people getting together, buying property together and cutting a deal of how to
split up the property use or profits
Regulations
Filing in the gaps in the statute
Defease
Release the original borrower from the debt, usually done when interest rates go up
Expenditure
Any amount incurred, some are deferred and not currently charged against revenues, expenditures not deferred are “expenses”
Deferred revenue is a liability
Deferred expense is an asset
Deferral
Cash changes hands prior to the time when revenue or expense is recognized
Magazine publishers operate by deferral, they accept payment for future delivery of the goods
Deferring
Booking a revenue or expense for the sale of goods after cash changes hands
GAAP uses accrual accounting
Accruing
Booking a revenue or expense for the sale of goods before cash changes hands
The Income Sheet
Focused on a going-concern and shows how the business is doing, it is dynamic and by showing change, suggests the future
The Balance Sheet
Has a liquidation-value perspective, it shows what the equity would be worth if the assets were sold (at book value) and the debts paid (at book value), it is a static, historical, view of business
Compensation
Only compensation not included elsewhere on the income statement (mostly
wages charged for services)
Cost Accounting
A business’s internal accounting that measures profit on a product or service line
Expense
A cost of earning revenue
Revenue
A gross amount earned from the sale of a good or service
