Finance Terms

Sole Proprietorship

A business entity that is not legally separate from its owner.

Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

Public Corporation

A company owned by a large number of stockholders from the general public.

Gross Profit

A company's revenue minus its cost of goods sold. Gross profit is a company's remaining profit after selling a product or service and deducting the cost associated with its production and sale.

Marketable Securities

A current asset that is a short term, low rate investment security held by a firm for liquidity purposes.

Bond

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.

Depreciation

A decrease in an asset's value caused by unfavorable market conditions. How much of an asset's value has been used up.

401k Plan

A defined contribution plan that is sponsored by corporate employers.

General Partnership

A form of business organization where the partners own the business together and are personally liable for legal actions and debts of the firm.

Financial Asset

A general term for securities like stocks and bonds that represent ownership in a cash flow.

Preferred stock

A hybrid security that has characteristics of both long-term debt and common stock.

Invisible Hand

A metaphor used to illustrate how an individual pursuing his own interests also tends to promote the good of the community.

Stakeholder

A person or organization that has a legitimate interest in a corporation.

Investment Analyst

A person who analyzes a company's business prospects and gives opinions about its future success.

Auditor

A person who performs an independent assessment of the fairness of a firm's financial statements.

Risk

A potential future negative impact to value and/or cash flows. It is often discussed in terms of the probability of loss and the expected magnitude of the loss.

Defined Contribution Plan

A retirement plan in which the employee contributes money and directs its investment.

Defined Benefit Plan

A retirement plan in which the employer funds a pension generally based on each employee's years of service and salary.

Common Stock

A security that represents ownership in a corporation. Holders exercise control by electing a board of directors and voting on corporate policy. They are on the bottom of the priority ladder for ownership structure. In the event of liquidation, they have rights to a company's assets only after bondholders, preferred shareholders and other debtholders have been paid in full.

Individual Retirement Account (IRA)

A self sponsored retirement program.

Unlimited Liability

A situation in which a person's personal assets are at risk from a business liability.

Double Taxation

A situation in which two taxes must be paid on the same income.

Income Taxes

A tax that governments impose on financial income generated by all entities within their jurisdiction. A key source of funds that the government uses to fund its activities and serve the public. Most countries employ a progressive income tax system in which higher income earners pay a higher tax rate compared to their lower earning counterparts.

Stock

A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

Maximization of Shareholder Wealth

A view that management should first and foremost consider the interests of shareholders in its business decisions.

Notes payable

A written promissory note. A borrower obtains a specific amount of money from a lender and promises to pay it back with interest over a predetermined time period.

Cash Flows

Amount of cash generated and used by a company in a given period.

Taxes

An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government activities.

Equity

An ownership interest in a business enterprise.

Equity

An ownership interest in a corporation in the form of common stock or preferred stock. It's the process of raising capital through the sale of shares in an enterprise. Equity financing essentially refers to the sale of an ownership interest to raise funds for business purposes.

Market Value

Assets listed at the amount the firm would get if it sold them.

Book Value

Assets listed on the balance sheet at the amount the firm paid for them.

Current Assets

Assets that will normally convert to cash within one year. Cash, marketable securities, accounts receivable, and inventory all fall into this category.

Fixed Assets

Assets with a useful life exceeding one year. Geared towards physical, aka "tangible," assets. Net Plant and Equipment falls into this category along with things like patents and trademarks.

Investment Banks

Banks that help company's and governments raise capital.

Hybrid Organizations

Business forms that have some attributes of corporations and some of proprietorships/partnerships.

Cash flows from investing activities

Cash flows associated with the purchase or sale of fixed or other long-term assets.

Cash flows from operations

Cash flows that are the direct result of the production and sale of the firm's products.

cash flows from financing activities

Cash flows that result from debt and equity financing transactions.

CEO

Chief Executive Officer. The highest-ranking corporate manager.

EBT

Earnings before tax.

ESOP

Employee stock option plan. An incentive program that grants options to employees (usually managers) as compensation.

Statement of Retained Earnings

Financial statement that reconciles (make one account consistent with another, especially by allowing for transactions begun but not yet completed) net income earned during a given period and any cash dividends paid with the change in retained earnings over the period.

Income Statement

Financial statement that reports the total revenues and total expenses over a specific period of time.

Statement of Cash Flows

Financial statement that shows the firms cash flows over a period of time.

Liabilities

Funds provided by lenders to the firm.

Stockholder's Equity

Funds provided by the firms preferred and common stock owners.

Gross vs. Net?

Gross refers to the total and Net refers to the part of the total that really matters

Taxable Income

Individuals may choose to use a standard deduction amount for a given tax year. This amount is subtracted from gross income to arrive at the final taxable income figure. Taxable income is generally described as gross income minus any deductions, exemptions or other adjustments that are allowable in that tax year.

Angel Investors

Individuals who provide small amounts of capital and expert business advice to small firms in exchange for an ownership stake in the firm.

Security

It's a financial instrument. Stocks, bonds, and options fall into this category.

Cash

Legal tender or coins that can be used in exchange goods, debt, or services. Sometimes also including the value of assets that can be converted into it immediately, as reported by a company.

Limited Liability

Limitation of a person's financial liability to a fixed sum or investment.

Income

Money received through work or investments.

Perks

Non-wage compensation like a company car, golf club membership, etc.

Long Term Debt

Obligations of the firm that are due in more than one year.

Long-Term Debt

Obligations of the firm that are due in more than one year. Long-term loans and bonds with maturities fall into this category.

Current Liabilities

Obligations of the firm that are due within one year. Accrued wages, taxes, accounts payable, and notes payable all fall into this category.

Real Assets

Physical property like gold, machinery, equipment, or real estate.

principal

Refers to the face amount of a debt instrument, for example the face value of a bond, or an amount of money borrowed.

EBIT (Earnings Before Interest and Taxes)

Represents the profit earned from the sale of the product without any financing cost or tax considerations.

Net sales

Sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed.

Venture Capitalists

Similar to angel investors except that they are organized as groups of investors and can provide larger amounts of capital.

Financial Statement

Statement that provides an accounting-based picture of a firm's financial position.

Accrue

The ability for something to accumulate over time. In finance, "accrue" is most commonly used when referring to interest, income and expenses of an individual or business. Interest in your savings account accrues so that over time the total amount in your account grows.

Gross Income

The actual amount of money you make on a job before taxes and insurance are deducted. Net income is the actual amount of money you take home weekly/monthly after all taxes, insurance, 401k, medical insurance...etc have been deducted.

Marginal Tax Rate

The amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low income earners being taxed at a lower rate than higher income earners.

Investment

The analysis and process of choosing securities and other assets to purchase.

Net income

The bottom line on the income statement. The phrase commonly used to refer to a company's "profit." It represents how much money the company has left over, if any, after it's paid the costs of doing business — payroll, raw materials, taxes, interest on loans, etc. Basically, what remains after expenses and taxes are subtracted from revenue. X = Revenue − Expenses.

Free cash flows

The cash that is actually available for distribution to the investors in the firm after the investments that are necessary to sustain the firm's ongoing operations are made.

Interest Expense

The cost incurred (to become liable or subject to through one's own action) by an entity for borrowed funds.

Retained Earnings

The cumulative earnings the firm has reinvested rather than pay out as dividends.

Net working capital

The difference between a firm's current assets and current liabilities. Indicates whether a company has enough short term assets to cover its short term debt.

Agency Problem

The difficulties that arise when a principal hires an agent and cannot fully monitor the agent's actions.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs.

Liquidity

The ease of conversion of an asset into cash at a fair value.

Balance Sheet

The financial statement that reports a firm's assets, liabilities, and equity at a particular point in time.

Board of Directors

The group of directors elected by stockholders to oversee management in a corporation.

Outstanding

The number of stocks that a company actually has issued.

Option

The opportunity to buy stock at a fixed price over a specific period of time.

Financial Institutions and Markets

The organizations that facilitate the flow of capital between investors and companies.

Average Tax Rate

The percentage of income owed as taxes, so basically it's the ratio of taxes paid to taxable income.

Financial Markets

The places and processes that facilitate the trading of financial assets between investors.

Real Markets

The places and processes that facilitate the trading of real assets.

EPS (Earnings Per Share)

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

Retained Earnings

The portion of company profits that are kept by the company rather than distributed to the stockholders as cash dividends.

Stock Price

The price of a share of stock trading on a stock market.

Paid-In surplus

The price paid by investors per share at issue minus the par value per share, times the number of shares issued. The result of selling capital stock (or issuing stock) at a price greater than par or stated value.

Financial Management

The process for and the analysis of making financial decisions in the business context.

Inventory

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.

Corporate Governance

The sets of laws, policies, incentives and monitors designed to handle the issues arising from the separation of ownership and control.

Finance

The study of applying specific value to things we own, services we use, and decisions we make.

Net change in cash and marketable securities

The sum of the cash flows from operations, investing activities, and financing activities.

Time Value of Money (TVM)

The theory and application of valuing cash flows at various points in time.

International Finance

The use of finance theory in a global business environment.

Preferred Stock vs. Common Stock

There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated. Here are two main differences. First, preferred stockholders have a greater claim to a company's assets and earnings. Secondly,the dividends of preferred stocks are different from and generally greater than those of common stock.

Accrued wages and taxes

These are liabilities found on a company's balance sheet that represent wages and taxes owed but not yet paid out by the company.

Investors

Those who buy securities or other assets in hopes of earning a return and getting more money back in the future.

Accounts Payable

money owed by a company to its creditors.

Accounts Receivable

money owed to a company by its debtors.