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143 Cards in this Set
- Front
- Back
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Accounting
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the process of measuring, interpreting, and communicating financial information to support internal and external business decision making
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Open book management
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Believes that allowing employees to view financial information helps them beter understand how their work contributes to the company's success, which, in turn, benefits them.
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Business activities involving accounting
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Financing activities (provide necessary funds to start and expand a business)
Investing activities (provide valuable assets) Operating activities (focus on selling goods and services) |
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Classifications for accounting professionals
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Public
Management Government Not-for-profit |
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Public accountant
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provides accounting services to individuals or business firms for a fee
1) Auditing, or examining, financial records 2) Tax preparation, planning, and related services 3) Management consulting |
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Big Four accounting firms
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Deloitte & Touche
Ernst & Young KPMG PricewaterhouseCoopers (PWC) |
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Certified public accountants (CPAs)
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Demonstrate their accounting knowledge by meeting state requirements for education and experience and successfully completing a number of rigorous tests in accounting theory and practice, auditing, law, and taxes
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Management accountant
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An accountant employed by a business other than a public accounting firm
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Certified management accountant (CMA)
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A title an accountant can get through experience and passing a comprehensive examination
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Government & not-for-profit accountants
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Primarily determine how efficiently the organizations accomplish their objectives
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Generally accepted accounting principles (GAAP)
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Principles that encompass the conventions, rules, and procedures for determining acceptable accounting practices at a particular time
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Four basic principles on which GAAP standards are based
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Consistency
Relevance Reliability Comparability |
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Financial Accounting Standards Board (FASB)
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The board primarily responsible for evaluating, setting, or modifying GAAP. Has 7 members
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SEC's accounting authority
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Establish financial accounting and reporting standards for publicly held companies. But they rely on the accounting industry for this function, as long as they believe the private sector is operating in the public interest
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Financial Accounting Foundation
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Appoints the seven members of FASB, who are all experienced accounting professionals and serve five-year terms
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Public Accounting Oversight Board
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a five-member board that has the power to set audit standards and to investigate and sanction accounting firms that certify the books of publicly traded firms. Members are appointed by the SEC
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Sarbanes Oxley Act (SOX)
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created the Public Accounting Oversight Board and added reporting requirements for publicly traded companies: CEO and CFO have to certify that financial info is correct
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accounting cycle
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set of activities involved in converting information and individual transactions into financial statements
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asset
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anything of value owned by a firm
Land Buildings Supplies Cash Accounts receivable Marketable securities |
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Owners' equity
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Funds contributed by owners plus profits not distributed to workers in the form of cash dividends
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Accounting equation
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Assets = liabilities + owners' equity
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Double-entry bookkeeping
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The process by which accounting transactions are recorded. Each transaction always has an offsetting transaction.
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Balance sheet
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Statement of a firm's financial position: what it owns and claims against its assets-- at a particular point in time.
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Income statement
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Financial record of a company's revenues and expenses, and profits over a period of time. Sometimes called P&L (profit and loss statement)
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Statement of owners' equity
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Record of the change in owners' equity from the end of one fiscal period to the end of the next
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Statement of cash flows
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Statement showing the sources and uses of cash during a period of time
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Accrual accounting
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Accounting method that records revenues and expenses when they occur, not necessarily when cash actually changes hands
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Cash flow
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The lifeblood of every organization.. evidenced by business failure rate
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Ratio analysis
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One of the most commonly used tools for measuring the firm's liquidity, profitability, and reliance on debt financing, as well as the effectiveness of management's resource utilization
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Liquidity ratios
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Measure a firm's ability to meet its short-term obligations when they must be paid
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Current ratio
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Current assets / current liabilities
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Quick (Acid-test) ratio
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Current assets - inventory / current liabilities
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Inventory turnover
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Cost of good sold / average inventory
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Receivables turnover
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Credit sales / Average accounts receivable
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Total asset turnover
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Revenue or sales / average total assets
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Debt ratio
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Total liabilities / total assets
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Net profit margin
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Net profit / revenue or sales
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Return on equity
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Net profit / average owners' equity
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Activity ratios
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Ratios that measure the effectiveness of management's use of the firm's resources [inventory turnover, receivables turnover, total asset turnover]
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Profitability ratios
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Ratios that measure the organization's overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses [Gross profit margin, net profit margin, return on equity]
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Leverage ratios
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Ratios that measure the extent to which a firm relies on debt financing [Debt ratio, long-term debt to equity]
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Debt ratio
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Total liabilities / total assets
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Long term debt to equity
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Long-term debt / Owners' equity
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Budget
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An organization's plans for how it will raise and spend money during a given period
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Cash budget
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Tracks the firm's cash inflows and outflows; indicates months in which the firm will need temporary loans
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International Accounting Standards Board (IASB)
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Board to promote worldwide consistency in financial reporting practices
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International Financial Reporting Standards (IFRS)
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The standards and interpretation adopted by the IASB
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How does IFRS differ from GAAP?
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IFRS gives a picture of the real value of a firm's assets because it reports plant, property, and equipment as current market value (as opposed to historical cost minus depreciation)
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Financial system
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process by which funds are transferred from those having excess funds (savers) to those needing additional funds (users)
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Securities
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Financial instruments such as stocks and bonds
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Money market instruments
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short-term debt securities issued by governments, financial institutions, and corporations
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Government bonds
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bonds sold by the US Department of the Treasury. Least risky
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Municipal bonds
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Bonds issued by state or local governments
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Revenue bond
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a municipal bond whose proceeds are to be used to pay for a project that will produce revenue--such as a toll road or bridge.
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General obligation bond
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A municipal bond whose proceeds are to be used to pay for a project that will not produce any revenue
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Collateral
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the property pledged by the borrower that backs the bond
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Debentures
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Unsecured bonds backed only by the financial reputation of the issuing corporation
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Mortgage pass-through security
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Securities backed by a pool of mortgage loans purchased from lenders, such as savings banks
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Subprime mortgages
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Loans made to borrowers with poor credit ratings... triggered the credit crisis
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Bond rating
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A tool used to assess the risk of a bond... lowest level of risk = AAA
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investment-grade bonds
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Bonds with ratings of BBB and above
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Speculative or junk bonds
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Bonds with ratings of BB or below -- offer high interest rates but also high risk
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Call provision
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allows the issuer to redeem the bond before its maturity at a specified price -- issuers tend to call bonds when market interest rates are declining
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Common stock
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Ownership claims in corporations -- holders vote on major company decisions, and receive dividends
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Preferred stock
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stock whose holders receive preference in the payment of dividends, holders rarely have any voting rights and the dividend they are paid is fixed
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Convertible securities
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Securities that gives the stockholder the right to exchange the bond or preferred stock for a fixed number of shares of common stock
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Financial markets
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market in which securities are bought and sold
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Primary market
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financial market in which new security issues are first sold
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initial public offering (IPO)
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When a company offers stock for sale to the general public for the first time
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Underwriting
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Institutions purchase the issue from the government or firm and then resell the issue to investors
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Secondary market
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A collection of financial markets in which previously issued securities are traded among investors
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Stock market (Exchange)
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market in which common stocks are traded, such as the New York Stock Exchange
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NASDAQ
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National Association of Securities Dealers Automated Quotation System: second-largest stock market where firms tend to be smaller and less well-known
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AMEX
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American Stock Exchange: focuses on the stocks of smaller firms and is tiny compared to NASDAQ and NYSE
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London Stock Exchange
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One of the largest stock exchanges outside the USA
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fourth market
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the direct trading of exchange-listed stocks off the floor of the exchange
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electronic communications networks (ECNs)
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Buyers and sellers meet in a virtual stock market and trade directly with one another
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market order
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Type of order that instructs the broker to obtain the best possible price (highest when selling and lowest when buying)
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limit order
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An order that sets a price ceiling when buying or a price floor when selling
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Financial institution
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intermediary between savers and borrowers, collecting funds from savers and then lending the funds the individual, businesses, and governments
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Federal Deposit Insurance Corporation (FDIC)
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government agency that insures deposits at commercial and savings banks
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premium
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A payment made to an insurance company
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Mutual funds
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Financial intermediaries that raise money from investors by selling shares
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Federal Reserve System (Fed)
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the central bank of the United States that is an important part of the nation's financial system
1) regulates commercial banks 2) performs banking-related activities for the US Dept of the Treasury 3) provides services for banks 4) sets monetary policy **US is divided into 12 federal reserve districts |
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Federal Open Markets Committee (FOMC)
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The part of the Fed that sets most policies concerning monetary policy and interest rates
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Fed buys government securities
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Money supply up
Economic activity up |
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Fed sells government securities
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Money supply down
Economic activity down |
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Fed raises discount rate
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Interest rates increase
Money supply down Economic activity down |
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Fed lowers discount rate
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Interest rates down
Money supply up Economic activity up |
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Fed increases reserve requirement
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Banks make fewer loans
Money supply down Economic activity down |
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Fed decreases reserve requirement
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Banks make more loans
Money supply up Economic activity up |
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Fed relaxes credit controls
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People make major purchases
Economic activity up |
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Fed restricts credit controls
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People don't make major purchases
Economic activity down |
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Open market operations
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Fed's technique of controlling the money supply growth rate by buying or selling US Treasury securities
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Federal funds rate
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the rate at which banks lend money to one another overnight
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Insider trading
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Use of material nonpublic information to make investment profits
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Finance
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Planning, obtaining, and managing the company's funds to accomplish its objectives as effectively and efficiently as possible
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Financial manager
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Executive who develops and implements the firm's financial plan and determines the most appropriate sources and uses of funds
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Risk-return trade-off
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The process of maximizing the wealth of the firm's shareholders by striking the optimal balance between risk and return
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Financial plan
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A document that specifies the funds needed by a firm for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds
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Asset intensity
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Determining how many assets are needed to support sales
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Marketable securities
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Low-risk securities that either have short maturities or can be easily sold in secondary markets
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Capital investment analysis
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The process by which decisions are made regarding investments in long-lived assets
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Balance sheet hedge
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Creates an offsetting liability to the non-dollar-dominated asset; reduces or even eliminates the risk associated with changes in the value of the dollar relative to the pound
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Debt capital
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funds obtained through borrowing
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Equity capital
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Funds provided by the firm's owners then they reinvest earnings, make additional contributions, liquidate assets, issue stock to the general public, or raise capital from outside investors
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Capital structure
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The mix of a firm's debt and equity capital
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Leverage
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increasing the rate of return on funds invested by borrowing funds
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Trade credit
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extended by suppliers when a firm receives goods or service, agreeing to pay for them at a later date
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Factoring
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A short-term financing option where the business sells its accounts receivable to either a bank or finance company (called a factor) at a discount
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Underwriting
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Process by which most companies sell securities publicly through investment bankers
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private placements
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Stock or bond issues are sold to a small group of major investors such as pension funds and insurance companies
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Venture capitalists
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A firm that raises money from wealthy individuals and institutional investors and invests the funds in promising businesses
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Private equity funds
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Investment companies that raise funds from wealthy individuals and institutional investors and use those funds to make large investments in both public and privately held companies
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Sovereign wealth fund
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Companies owned by governments and invest in a variety of financial and real assets, such as real estate
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Tender offer
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an offer made by a firm to the target firm's shareholders
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Synergy
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the notion that the combined firm is worth more than the buyer and target are individually
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Leveraged buyout (LBO)
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A transaction in which public shareholders are bought out and the firm reverts to private status
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Divestiture
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Sale of assets by a firm (reverse of merger)
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Sell-off/spin-off
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Sell off is where assets are sold by one firm to another; spin off is where assets sold form a new firm.
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Managerial reporting
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Internal accounting: management planning and control, budgeting
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Financial reporting
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External accounting: information for investors and creditors, tax preparation
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Current asset
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an asset that can be converted to cash within one year; is "liquid"
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Fixed asset
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an asset that accumulates depreciation
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Book value of an asset
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Original cost of asset - depreciation
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Financial statement that does the best job of showing the financial health of a company because it has a cumulative running in the retained earnings part
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Balance sheet
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Profit margin
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Net income / net sales
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Return on assets
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Net income / assets
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Debt to total assets ratio
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Total debt / Total assets
[want smaller] |
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Times interest earned
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Income before interest and taxes / Interest expense
[want bigger] |
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Which ratio is going to be bigger: current or quick?
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Current ratio is going to be bigger than the quick ratio.
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If accounts receivable are not being paid on time, what's going to happen to the receivables turnover?
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It's going to go down.
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Earnings per share (EPS)
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Net income / number of shares outstanding
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Dividends per share
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Total dividends / Number of shares outstanding
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Financial management
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Managing the assets, liabilities, and owner's equity.
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Financial goals
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1) increase return on assets
2) minimize cost of capital 3) maximize owner's equity |
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Managing current assets (working capital)
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Put idle cash to work
Incentives for quick payment of accounts receivable Maximize inventory turnover without hurting sales |
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Managing fixed assets
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PP&E (plant, property & equipment)
Capital budgeting: deciding what's worth it and what's not |
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What category do prepaid expenses fall under?
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Assets because it's a service receivable. (ex. insurance)
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Gross profit margin
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Gross profit / net sales
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Nominal vs. real GDP
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Nominal GDP is the actual number while real GDP is adjusted for inflation.
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Monetarists
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"Expansionist" monetary policies will lead to inflation yet won't stimulate real growth or employment. The market should be free of regulation and govt interference
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Keynesians
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Government interference can have a positive effect on the economy
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