Randy's Terminology

Question 1

Accounting

Answer 1

The process of analyzing and justifying one’s actions to another

Question 2

Trust Accounting

Answer 2

How a trustee explains their actions to the beneficiaries

Question 3

Financial Accounting

Answer 3

How managers of for-profit businesses report to shareholders and others about
the management of the business (by preparing and distributing financial statements

Question 4

Principal

Answer 4

The amount originally lent, increased to reflect subsequent additional lendings, and
decreased for payments

Question 5

Interest

Answer 5

Paid by the borrower to the lender to compensate the lender for borrower’s use of the lender’s
funds

Question 6

Amortization Schedule

Answer 6

The terms of a loan that control when principle is to be repaid

Question 7

Compounding

Answer 7

Interest that is reinvested and earns interest (compounding period in the example
above is one year)

Question 8

Three Concepts of Interest

Answer 8

1. Payment of interest: When the borrower is required to provide cash to the lender
2. Compounding of interest: How interest is calculated
3. Earning of interest: What is owed if the borrower defaults on its obligations under the loan terms

Question 9

Types of Interest

Answer 9

1. Accrued or Economic interest: Earned interest regardless of its payment date
2. Prepaid interest: Interest to be paid before it accrues
3. Deferred interest: Interest to be paid after accrual
4. Simple interest: Interest determined without compounding (interest to be paid as it accrues)

Question 10

Time Value of Money

Answer 10

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

Question 11

Nominal or Named Rate

Answer 11

Stated rate dependent upon compounding

Question 12

Yield

Answer 12

The percentage that you are actually owed (in a 10% nominal interest rate compounded yearly,
after 3 years your yield would be 33.1%)

Question 13

Prepaid Interest

Answer 13

To an economist it is just reducing compounding; you can pay the interest
before it is due

Question 14

Amortization

Answer 14

The rate at which you pay down a loan

Question 15

Positive Amortization

Answer 15

Pay some of the principle plus the interest to avoid compounding

Question 16

Negative Amortization

Answer 16

Low payments with a high interest rate which gets added to principle and
increases compounding

Question 17

Debt Instrument

Answer 17

Proves the holder case payments at one or more specifies future times

Question 18

Interest only

Answer 18

Interest is paid at specified intervals with all of the principle due at a specified
future date

Question 19

Level payments

Answer 19

The same amount consisting of interest and principle is paid at the specified
intervals

Question 20

Default

Answer 20

The failure of a borrower to fulfill an obligation, at which time the lender may impose the
sanctions specified in the lending contract.

Question 21

Leverage

Answer 21

Borrowing to buy an asset

Question 22

Short Sale

Answer 22

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)

Question 23

Leverage

Answer 23

By borrowing to buy you increase the risk of gains and loses, the lender gets interest and
commission

Question 24

Put

Answer 24

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

Question 25

Call

Answer 25

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.

Question 26

Multiple

Answer 26

Ratio of the capitalized value to the annual future payments

Question 27

Capitalizing

Answer 27

A stream of future payments reduced to the discounted present value

Question 28

Capitalization Rate or “Cap Rate”

Answer 28

The interest rate used in capitalizing future payments

Question 29

Ex-Dividend Day

Answer 29

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

Question 30

Profit

Answer 30

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)

Question 31

Dividends

Answer 31

Money that the company does not need is paid out to its investors in the form of a dividend

Question 32

Account

Answer 32

Running record of transactions affecting one item (a bank account, a building, etc.)

Question 33

Asset Account

Answer 33

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)

Question 34

Equity

Answer 34

What is left over for the shareholders when the creditors are all paid off

Question 35

Balance Sheet

Answer 35

A useful way of summarizing all the accounts at an instant in time

Question 36

Three basic types of accounts:

Answer 36

1. Asset: Shows all items affecting an associated asset (i.e. bank accounts)
2. Liability: Shows all items affecting an associated liability (i.e. loans)
3. Equity: Value of assets minus the value of liabilities

Question 37

Debit

Answer 37

An adjustment in a pair of entries that increases assets or decreases liabilities or equity

Question 38

Credit

Answer 38

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

Question 39

Left-Hand Entry

Answer 39

A debit, so named because asset accounts appear on the left-hand side of the balance
sheet

Question 40

Right-Hand Entry

Answer 40

A credit, so named because the liabilities and equities appear on the right-hand
side of the balance sheet

Question 41

Double-Entry Bookkeeping

Answer 41

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

Question 42

Book Value

Answer 42

Historical cost with some adjustments for things like wear and tear, obsolescence, or depreciation

Question 43

Company’s Market Value

Answer 43

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

Question 44

Partnership

Answer 44

A group of people getting together, buying property together and cutting a deal of how to
split up the property use or profits

Question 45

Regulations

Answer 45

Filing in the gaps in the statute

Question 46

Defease

Answer 46

Release the original borrower from the debt, usually done when interest rates go up

Question 47

Expenditure

Answer 47

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

Question 48

Deferral

Answer 48

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

Question 49

Deferring

Answer 49

Booking a revenue or expense for the sale of goods after cash changes hands
GAAP uses accrual accounting

Question 50

Accruing

Answer 50

Booking a revenue or expense for the sale of goods before cash changes hands

Question 51

The Income Sheet

Answer 51

Focused on a going-concern and shows how the business is doing, it is dynamic and by showing change, suggests the future

Question 52

The Balance Sheet

Answer 52

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

Question 53

Compensation

Answer 53

Only compensation not included elsewhere on the income statement (mostly
wages charged for services)

Question 54

Cost Accounting

Answer 54

A business’s internal accounting that measures profit on a product or service line

Question 55

Expense

Answer 55

A cost of earning revenue

Question 56

Revenue

Answer 56

A gross amount earned from the sale of a good or service