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