MIE Exam 5 (Ch. 14-16) Makanui

online banking

Log directly into accounts to check balances, make transfers, and pay bills; 62 percent of adults list as preferred banking method

pricing long-term money

Returns from any project must cover operating costs and cost of capital used to finance the project. Most efficient and profitable companies attract lowest-cost funds--typically offer reasonable returns for low relative risk

commercial banks

The largest and oldest of all financial institutions rely mainly on checking and savings accounts as source of funds for loans to businesses and individuals

commercial certificates of deposit (CDs)

certificates of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000, which may be traded prior to maturity

secured loans

loans backed by collateral that the bank can claim if the borrowers do not repay them

unsecured loans

loans backed only by the borrowers' good reputation and previous credit rating

Nonbank Liabilities

loans from other financial institutions Can sell accounts receivable to a factor

•Money supply increases •Economic activity increases

what occurs when the Fed buys government securities

less than 12 percent

what percentage of CFO positions in finance do women occupy?

Debt-to-equity ratio

A measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company's total liabilities by owners' equity

shadow banking

Companies performing banking functions of some sort that are not regulated by banking regulators; activities are increasing

securities markets

The mechanism for buying and selling securities - In the broadest sense, stocks and bonds markets are providers of liquidity - Without liquid securities markets, investors would not risk their savings on securities

operating budget

a budget for day-to-day spending needs

start-up budget

a budget that identifies the money a new company will need to spend to launch operations

financial plan

a document that outlines the funds a firm will need for a certain period of time, along with the sources and intended uses of those funds

a factor

a finance company to which businesses sell their accounts receivable—usually for a percentage of the total face value

credit union

a financial institution owned and controlled by depositors, who usually have a common employer, profession, trade group, or religion

preferred stock

a hybrid that combines attributes of common stock and corporate bonds can be issued in several types, with different rights and obligations for the buyer and seller represents equity in the company

eurodollar market

a market for trading U.S. dollars in foreign countries

over the counter market

a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange

serial bonds

a sequence of small bond issues of progressively longer maturity

junk bonds

a special type of high interest-rate bond that carries higher inherent risks

commercial paper

a written promise from one company to another to pay a specific amount of money

lockbox

an address, usually a commercial bank, at which a company receives payments in order to speed collections from customers

National Credit Union Administration (NCUA)

an agency that regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund

line of credit

an arrangement by which a bank agrees to lend a specified amount of money to the organization upon request

Federal Deposit Insurance Corporation (FDIC)

an insurance fund established in 1933 that insures individual bank accounts. Insures personal accounts up to a maximum of $250,000 at nearly 6,000 FDIC member institutions.

definition of budget

an internal financial plan that forecasts expenses and income over a set period of time

mutual fund

an investment company that pools individual investor dollars and invests them in large numbers of well-diversified securities

Electronic funds transfer (EFT)

any movement of funds by means of an electronic terminal, telephone, computer, or magnetic tape

insurance companies

are businesses that protect their clients against financial losses from certain specified risks (death, accident, and theft, for example).

mutual savings bank

are financial institutions that are similar to savings and loan associations, but, like credit unions, are owned by their depositors. Found mostly in New England

Pension funds

are managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members

performance measure - averages

average of certain stock prices and some are weighted averages

accounts payable

bills that the company owes to its suppliers, lenders, and other parties

secured bonds

bonds that are backed by specific collateral that must be forfeited in the event that the issuing firm defaults

floating-rate bonds

bonds with interest rates that change with current interest rates otherwise available in the economy

define ledger

book or computer file with separate sections for each account

finance companies

businesses that offer short-term loans at substantially higher rates of interest than banks

transaction balances

cash kept on hand by a firm to pay normal daily expenses, such as employee wages and bills for supplies and utilities

performance measure - indexes

compares current stock prices with those in specified base period

define management accounting

concerned with preparing cost analyses, profitability reports, budgets, and other information for insiders such as management and other company decision makers

trade credit

credit extended by suppliers for the purchase of their goods and services. Most suppliers offer discounts for early payment

unsecured bonds

debentures, or bonds that are not backed by specific collateral

retained earnings

earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity belong to owners in form of equity

definition of internal auditors

employees who investigate and evaluate the organization's internal operations

brokerage firms

firms that buy and sell stocks, bonds, and other securities for their customers and provide other financial services

liquidity crisis

having insufficient cash to meet their short-term needs

monitoring cash flow

monitoring monitoring working capital accounts: accounts receivable, accounts payable, inventory, and cash

managing cash reserves

monitoring: -cash coming in -cash going out -investment options

return on assets

net income divided by assets

return on equity

net income divided by owner's equity

savings and loan associations

often called "thrifts," are financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages. Many have merged with commercial banks

project budgets

plan funding and spending for specific projects

capital budgets

plan funding for major capital investments

long-term (fixed) assets

production facilities (plants), offices, and equipment - all of which are expected to last for many years

common stock

shares of ownership that include voting rights

Treasury Bills (T-Bills)

short-term debt obligations the U.S. government sells to raise money considered risk-free

secondary market

stock exchanges and over-the-counter markets where investors can trade their securities with others

reserves

sums of money equal to a certain percentage of their deposits

automated clearinghouses (ACHs)

systems that permit payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape.

marketable securities

temporary investments of "extra" cash by organizations for up to one year in U.S. Treasury bills, certificates of deposit, commercial paper, or eurodollar deposits

•NASDAQ was traditionally electronic market and NYSE was traditionally floor-traded market

the difference between NASDAQ and NYSE

prime rate

the interest rate a bank charges its best loan customers

primary market

the market where firms raise financial capital

Accounts Receviable

the money owed to the firm by its customers

reserve requirement

the percentage of deposits that banks must set aside, to influence the money supply

capital budgeting

the process of planning and managing a firm's long-term investments

discount rate

the rate that member banks pay when they borrow funds from the Fed

investment banking

the sale of stocks and bonds for corporations

diversified firms

traditionally nonfinancial firms that have expanded into financial field

New York Stock Exchange (NYSE) NASDAQ

two biggest US stock markets •Both publicly traded organizations, no longer not-for-profit •Both bought or merged with electronic exchanges

investment banker

underwrites new issues of securities for corporations, states, and municipalities

revenue from sales investment income revenue from selling assets

what are internal sources of funds?

•Decisions to buy or sell investments in open market •Buying securities increases money in supply and vice versa

what are open market operations?

convenience, safety, and potential interest earnings; to businesses: decreased check-processing expenses and increased employee productivity

what are some advantages of direct deposits

less volatile than common greater claim to assets

what are some advantages to preferred stocks?

•Attracting new owners (equity financing) •Long-term liabilities (debt financing)

what are some common sources for long-term funds?

credit cards, trade credit, secured loans, unsecured loans, commercial paper, factoring, leases, corporate bonds, equity

what are some external sources of funds?

•Hiring separate senior leaders for cybersecurity risk management plans •Incorporating cybersecurity defenses into business units •Maintaining offline storage of data •Reporting data breaches within 72 hours

what are some proposals for increasing cyberstandards

1) develop and implement a financial plan 2) monitor cash flow 3) manage cash reserves

what are the 3 ways to understand financial management?

•National check processing through check clearinghouses

what are the Fed's check clearing functions?

•Establishes and enforces banking rules that affect monetary policy and competition •Has authority to approve bank mergers

what are the Fed's regulatory functions?

1) the opportunity to realize significant capital gains, or increases in the value of the stock, over time. 2) receiving regular income in the form of dividends. However, not all stocks pay dividends, and for those that do, management is under no legal obligation to keep paying dividends. 3)the right to vote on certain major corporate decisions, including electing the board of directors.

what are the advantages of common stock?

meaning 1 percent discount given if paid in 10 days, and full amount due in 30 days

what does "1/10 net 30" mean?

it increases the money supply and decreases federal funds rate

what occurs when the Fed buys treasuries?

Raising it slows down the economy because banks have less money to lend; lowering it boosts the economy

what occurs when the Fed raises the reserve requirement? lowers/

•Money supply decreases •Economic activity slows down

what occurs when the Fed sells government securities?

it decreases the money supply and increases federal funds rate

what occurs when the Fed sells treasuries?

discourages loans and therefore tightens the money supply encourages lending and expands the money supply

what occurs when the discount rate is raised? lowered?

automated teller machine (ATM)

which dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another

owner's equity

•Corporate owners own shares of company •Stockholders' equity includes common stock, preferred stock, and retained earnings

current ratio

•Current assets divided by current liabilities

Greenleaf Trust

•Offers wealth management, estate administration, and administration of company retirement plans •Regulated by Federal Reserve and Federal Deposit Insurance Corporation •Has 9 billion dollars in assets •Benefits such as 100 percent of health care premiums and paid time off to volunteer

define ratio analysis

calculations that measure an organization's financial health •Brings complex information the income statement and balance sheet into sharper focus •Can measure and compare productivity, profitability, and financing mix with other similar entities

define liabilities

debts that a firm owes to others

define internal auditors

employees who investigate and evaluate the organization's internal operations and data to determine whether they are accurate and whether they comply with GAAP, federal laws, and industry regulations

define statement of cash flows

explains how the company's cash changed from the beginning of the accounting period to the end how much cash the company generated over time and where it went

•Showed another ex. of failure in accounting reporting •Firms attempted to exploit loopholes & manipulate accounting processes •Banks & other financial institutions held assets off their books by manipulating accounts

how did the recent financial crisis and recession relate to accounting

through the monetary policy

how does the Fed control the amount of money available in the economy?

"near" money

Traveler's checks, money orders, cashier's check; guaranteed as cash

•Create trust •Understand financial position of organization or entity •Make financial decisions that will benefit the organization

how is integrity in accounting crucial?

places assets on left side and liabilities and owners' equity on right

how is the traditional format of a balance sheet setup?

has assets on top followed by liabilities and owners' equity

how is the vertical format of a balance sheet set up?

•best examined in conjunction with asset utilization ratios because high turnover ratios imply cash is flowing through very quickly

how should liquidity ratios be viewed?

define current assets

include cash and other items that will or can become cash within the following year

debt to total assets ratio

indicates how much of the firm is financed by debt and how much by owners' equity

define financial accounting

is concerned with preparing financial statements and other information for outsiders such as stockholders and creditors (people or organizations that have lent a company money or have extended them credit)

define fixed assets

long-term investments in buildings, equipment, furniture and fixtures, transportation equipment, land, and other tangible property used in running the business

profit margin

net income divided by sales

define long-term liabilities

obligations that are due one year or more after the date of the balance sheet

define current liabilities

obligations that will have to be met within one year of the date of the balance sheet

define balance sheet

presents a "snapshot" of an organization's financial position at a given moment •Takes its name from reliance on accounting equation: assets must equal liabilities plus owners' equity

M1

primarily of currency (paper money) held by the public and demand deposits, money held in checking accounts and other accounts that allow accountholders to withdraw funds immediately, on demand

debt utilization ratios

ratios that measure how much debt an organization is using relative to other sources of capital, such as owners' equity -debt-to-assets -debt-to-equity -times interest earned

asset utilization ratios

ratios that measure how well a firm uses its assets to generate each $1 of sales -inventory turnover -accounts receivable turnover -total asset turnover

define profitability ratios

ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners' equity, and sales -profit margin -return on assets -return on equity

define liquidity ratios

ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt -current -quick

define gross income or profit

revenues minus the cost of goods sold required to generate the revenues

definition of an annual report

summary of financial information, products, and growth plans; audited financial statements are signed off on by certified public accountant

define cost of goods sold

the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies

Federal Reserve

the central banking system of the United States which is responsible for regulating banks and implementing monetary policy

definition of bookkeeping

the clerical function of recording the economic activities of a business

define expenses

the costs that have arisen in generating revenues

definition of cash flow

the movement of money through an organization over a daily, weekly, monthly, or yearly basis

define retained earnings

the portion of shareholders' equity that is not distributed to its owners in the form of dividends

define depreciation

the process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used

federal funds rate

the rate that member banks charge each other to borrow money overnight from the funds they keep in the Federal Reserve accounts

define accounting

the recording, measurement, and interpretation of financial information the system a business uses to identify, measure, and communicate financial information to others, inside and outside the organization.

define finance

the study of how money is managed by individuals, companies, and governments

define revenue

the total amount of money received from the sale of goods or services, as well as from other related business activities

define net income

the total profit (or loss) after all expenses, including taxes, have been deducted from revenue

per share data

used by investors to compare the performance of one company with another on an equal, per share basis -earnings per share -dividends per share

•Anonymous employee hotlines •Watch for employee lifestyle changes

what are some methods to curb fraud?

•Controls money supply with monetary policy •Regulate financial institutions •Manage regional & national checking account procedures •Supervise federal deposit insurance of commercial banks in Federal Reserve System

what are the Fed's major functions?

Acceptability Divisibility Portability Stability Durability Difficult to counterfeit

what are the characteristics of money?

a network of 12 regional banks that oversee the nation's banks a board of governors that determine policy

what are the federal reserve's two components?

1.Examining source documents 2.Recording transactions in accounting journal 3.Posting recorded transactions 4.Preparing financial statements

what are the four steps of the accounting cycle?

medium of exchange (bartering) measure of value store of value (accumulate wealth)

what are the functions of money?

internal auditors certified public accountants certified management accountants

what are the types of private accountants?

required firms to be more rigorous in their accounting and reporting practices

what did the Sarbanes-Oxley Act do?

high ratios may satisfy creditor's need for safety, but may indicate company is not using current assets efficiently

what do high liquidity ratios tell you?

equals assets minus liabilities and reflects historical values

what does owner's equity equal?

CPAs review a client's financial records to determine whether the statements that summarize these records have been prepared in accordance with GAAP then auditors summarize their findings in a report attached to the client's published financial statements

what occurs during an external audit?

economic recession slowdown of price increase too little growth in money supply

what results due to disinflation?

too little money rapid price increases

what results due to inflation?

all accounting information must be accurate objective consistent over time comparable to information supplied by other companies

what things must accounting information be to be useful?

profit-and-loss-statement

what's another term for income statement?

cash flow

what's management's single greatest concern?

•Assets = Liabilities + Owners' Equity

what's the accounting equation?

A movement is underway to bring U.S. accounting practices more in line with international standards by merging GAAP with the International Financial Reporting standards (IFRS) overseen by the London-based International Accounting Standards Board

what's the shift taking place regarding accounting practices standards?

work for a business work for a government agency work for a nonprofit

where do private accountants work?

public accountants

who conducts external audits?

work under the supervision of the organization's controller

who supervises private accountants?

to determine how well the company is doing financially

why do investors look at the annual report?

to aid in internal planning and control; for external purposes such as reporting to the Internal Revenue Service, stockholders, creditors, customers, employees, and other interested parties

why do managers and owners use financial statements?

minimizes errors reduces fraud

why is double-entry bookkeeping helpful?

to strengthen oversight of financial institutions

why was the Dodd-Frank Act passed?

debit card

works like a check; using it results in direct, immediate, electronic payment from the cardholder's checking account to a merchant or third party

how cash from operating activities is calculated

•Calculated by combining changes in revenue, expense, current assets, and current liability accounts

define cash from financing activities

•Calculated from changes in long-term liability accounts and contributed capital accounts in owners' equity

define cash from investing activities

•Calculated from changes in long-term or fixed asset accounts

receivables turnover

•Sales divided by accounts receivable

total asset turnover

•Sales divided by total assets

inventory turnover

•Sales divided by total inventory

•Nonprofit institutions •Money goes back to members as dividends •More attractive rates on mortgages and more •Higher customer satisfaction •Free checking and lower penalty fees

What are some advantages of credit unions over banks?

•Consumers must meet requirements to become members •Less diverse products and fewer resources •Fewer rewards for paying off balances each month

What are some disadvantages of using credit unions over banks?

M2

a broader measure, incorporating M1 plus savings accounts, balances in retail money market mutual funds, and time deposits—money held in interest-paying accounts that may restrict the owner's right to withdraw funds on short notice.

money supply

a certain amount of money in circulation at any given point in time affects interest rates, inflation, and other vital aspects of the economy's health

define income statement

a financial report that shows an organization's profitability over a period of time

define assets

a firm's economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things

definition of an audit

a formal evaluation of a company's accounting records and processes to ensure the integrity and reliability of a company's financial statements

define double-entry bookkeeping

a system of recording and classifying business transactions that maintains the balance of the accounting equation a system that requires two entries for every transaction affecting assets, liabilities, or owners' equity

definition of forensic accounting

fit for legal review; analyzes financial documents in search of fraudulent entries or financial misconduct; function as much like detectives as accountants; used since 1930s, but booming since accounting scandals of early 2000s; root out evidence of "cooked books" for federal agencies

checking account

(also called a demand deposit) is money stored in an account at a bank or other financial institution that can be withdrawn without advance notice

quick ratio

(also known as the acid test) is a far more stringent measure of liquidity that eliminates inventory current assets minus inventory divided by current liabilities

Savings accounts

(also known as time deposits) are accounts with funds that usually cannot be withdrawn without advance notice

False. Different types of firms (service, manufacturing, financial, etc.) use their own accounting principles, for which the profession has agreed. These are called generally accepted accounting principles (GAAP). One way in which the format differs is in the slightly different terminology used in the financial statements.

Are the income statements of all corporations in the same format?

define journal

Time-ordered list of account transactions

definition of certified public accountants

accountants that have passed a rigorous state-certified licensing exam

definition of certified management accountants

accountants that must pass a two-day exam

define "Generally Accepted Accounting Principles (GAAP)"

aim to give a fair and true picture of a company's financial position and enable outsiders to make confident analyses and comparisons

Money market accounts

are accounts that offer higher interest rates than standard bank rates but with greater restrictions

definition of a public accountant

are independent of the businesses, organizations, and individuals they serve. Most are employed by public accounting firms that provide a variety of accounting and consulting services to their clients

Credit cards

are means of access to pre approved lines of credit granted by a bank or finance company. Some pay off monthly, while others make monthly payments

Certificates of deposit (CDs)

are savings accounts that guarantee a depositor a set interest rate over a specified interval of time as long as the funds are not withdrawn before the end of the period—six months or one year, for example