Principles of Finance

Controller

Directs the preparation of financial reports that summarize and forecast the organization's financial position, oversees accounting, audit, and budget departments

Historical Cost Principle

Requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities

Revenue Recognition Principle

Requires companies to record when revenue is 1. realized or realizable 2. earned , not when cash is received

Moral Hazard

The prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk

Ethics

The set of moral principles that guide a person's behavior

Market Value

The total value of the company as traded in the market. Calculated by multiplying the number of shares outstanding by the price per share

Valuation

The process of estimating the market value of a financial asset or liability

Money Markets

What market is used for short-term finance?

Income statement

A calculation that shows the profit or loss of an accounting unit during a specific period of time, providing a summary of how the profit or loss is calculated from gross revenue and expenses aka P&L

Values

A collection of guiding principles; What ones deems to be correct; important and desirable in life, especially regarding personal conduct

Board of Directors

A body of elected or appointed member who jointly oversee the activities of a company or organization

Income Bond

A debt instrument where coupon payments are only made if the issuer can afford it

Primary Market

A division within the capital markets that buy newly formed (issued) securities

Bond

A documentary obligation to pay a sum or to perform a contract; a debenture

SEC

A federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States

Statement of Cash Flows

A financial document that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities

Security

A fungible, negotiable financial instrument that holds some type of monetary value

Return

A gain or loss from an investment

Secondary Market

A market that offer trades of securities that providing a continuous and regular market for the buying and selling of securities

Debtor

A person or firm that owes money; one in debt; one who owes a debt

Entrepreneur

A person who organizes and operates a business venture and assumes much of the associated risk

Exchange

A place for conducting trading

Investment

A placement of capital in expectation of deriving income or profit from its use

Value

A standard by which an individual determines what is good or desirable; a measure of relative worth or importance

Financing

A transaction that provides funds for a business

Sarbanes-Oxley Act

An act passed into law by Congress in 2002 to establish strict accounting and reporting rules that set new or enhanced standards for all US public company boards, management, and public accounting firms

Securities Exchange Act of 1934

An act that regulates the trading of securities such as stocks and bonds in the secondary market

Fundamental Analysis

An analysis of a business with the goal of financial projections in terms of the income statement, financial statements and health, management and competitive advantages, and competitors and markets

Partnership

An association of two or more people to conduct a business

Fair Market Value

An estimate of the market value of a property, based on what knowledgeable willing and unpressured buyer would probably pay to a knowledgable willing and unpressered seller

LIability

An obligation, debt, or responsibility owed to someone

Liability

An obligation, debt, or responsibility owed to someone

Deferred Tax Liabilities

Arise where tax relief is provided in advance of an accounting expense, or income is accrued but not taxed until received

liquidity

Availability of cash over sort term ability to service short-term debt

Maturity

Date when payment is due

SG&A Selling, General and Administrative Costs

Combined payroll costs, except for what has been included as direct labor

Expected Return

Considering the magnitude and likelihood of exogenous events, the average yield that an investor predicts will be earned

Feedback

Critical Assement on information produced

Matching Principle

Expenses are recognized when obligations are 1. Incurred (usually when goods are transferred or services rendered )2. offset against recognized revenues which were generated from those expenses, no matter when cash is paid out

Savings and Loans Associations

Financial institutions that are mutually held and provide no more than 20% of total lending to businesses

Insurance Company

Financial institutions that help individuals transfer risk of loss

Derivatives

Financial instruments whose value depends on the valuation of an underlying asset; such as a warrant, an option, etc.

Net Income

Gross profit minus operating expenses and taxes

Net income

Gross profit minus operating expenses and taxes aka Net earnings or net profit

Net Profit

Gross revenue minus all expenses

Nine

How many major types of financial institutions are there?

Intangible Assets

Identifiable non-monetary assets that cannot be seen, touched, or physically measured, and are created through time and effort and are identifiable as a separate asset

Capital

Money and wealth; the means to acquire goods and services, especially in a non-barter system

the National Association of Securities Dealers Automated Quotations

NASDAQ (an electronic stock market)

Conflicts of interest

Occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in another

Agent

One who acts for, or in place of, another (the principal), by authority; one entrusted with the business of another; substitute; a deputy; a factor

Principal (Def1)

One who directs another (the agent) to act on ones behalf

Shareholder

Ones who owns shares of stock

Digital Bank

Online-only platforms affiliated with traditional banks

Proprietor

Owner

Equity

Ownership, especially in terms of monetary value of a business

Stakeholders

People or organizations with legitimate interest in a given situation action or enterprise

Dividends

Pro rata payments of money of a company to its shareholders, usually made periodically (such as quarterly or annually

Neobank

Purely digital bank with no affiliation to any bank by themselves

Taxable Income

Refers to the base upon which an income tax system imposes tax

Asset

Something or someone of any value; any portion of one's property or effects so considered

Full Disclosure Principle

Suggests the amount and kinds of information disclosed should be decided based on a trade-off analysis, since a larger amount of information costs more to prepare and use

Norms

The laws that govern society's behaviors.

Liquidity

The availability of cash over short term ability to service short-term debt

Business Ethics

The branch of ethics that examines questions or moral right and wrong arising in the context of the business practice or theory

Expenses

The cost of assets consumed or services used in the process of earning revenue. They are incurred for the purpose of earning revenue

Agency Costs

The deviation from the principal's interest by the agent

Gross Profit

The difference between net sales and the cost of goods

Gross profit

The difference between net sales and the cost of goods sold

Amortization

The distribution of the cost of an intangible asset, such as an intellectual property right, over the projected useful life

Central Banks

The financial institutions responsible for the oversight and management of all other banks

Securities Act of 1933

The first major law regarding the sale of securities. It required that companies register their securities sold to the public with the SEC and that investment bankers must provide full and accurate information related to new securities issues to potential investors.

Depreciation

The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned extraordinary decline in value of assets

Net present value

The present value of a project or investment decision determined by summing the discounted incoming and outgoing future cash flows resulting from the decision

Leverage

The use of borrowed funds with a contractually determined return that increases the ability of a business to invest and earn an expected higher return (usually at high risk)

Fungible

This is able to be substituted for something of equal value or utility; interchangeable, exchangeable, replicable

Investment Banks and Companies

This type of bank does not take deposits but instead helps individuals, businesses, and governments raise capital through the issuance of securities (aka Mutual Fund Companies)

Brokerage Firm

This type of bank helps assist individuals and institutions in buying and selling securities among available investors

Stakeholder

Those affected by an organizations activities

Capital Budgeting

To allocate resources between competing opportunities (projects)

Incorporate

To form into a legal company

Finance

To provide or obtain funding for a transaction or undertaking; to back; to support

Capital Markets, Derivative Markets, Money Markets, and Currency Markets

What are examples of financial markets?

Financial markets, Financial institution, Financial Management

What are the 3 main areas of finance?

Managers, Shareholders, and Bondholders.

What are the 3 parties that are key to the functioning of a corporation?

assets, liabilities, equity

What are the 3 parts of the balance sheet?

1. Central Banks 2. Retail and commercial Banks 3. Internet Banks 4. Credit Unions 5. Savings and Loan Associations 6. Investment Banks 7. Brokerage Firms 8. Insurance Companies 9. Mortgage companies

What are the major categories of financial institutions

Time value of money; Risk

What are the two main drivers of finance?

Digital, Neobanks

What are the two types of internet bank

Stocks, Bonds

What are two types of capital markets?

Federal Reserve Bank

What is the USA's central bank?

Prospectus

What is the document through which an issuer's securities are marketed to a potential investor as part of the registration statement?

Conducting monetary policy and supervision and regulation of financial institutions

What is the federal reserve bank responsible for?

Trades of stocks, bonds, mutual funds, EFTs, and some other alternative investments

What kind of assistance does a brokerage firm offer to its customers?

Controllers, Treasurers, Credit Managers, Cash Managers, Risk Managers and Insurance Managers)

What kind of positions fill the role of a financial manager?

Capital Markets

What market is used for long-term use?

Insider Trading

When members outside of an establishment are given information that not available to the public as a whole and use it to increase their wealth

Left side

Which side of the balance sheet is the assets on?

Off-balance-sheet

aka incognito leverage, usually means an asset or debt or financing activity not on the company's balance sheet.

Private Placements

aka non-public offering, this is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors