Business Basics Chapter 2

Residual Claim

A Residual Claim is the claim of the equityholder, and it includes both the net income (after-tax income attributable to equityholders) and the net assets (assets remaining after liabilities are paid).

Creditor

A creditor is one who is owed a debt or obligation from a company, and thus is the person holding the claim associated with the firm's liabilities.

Liability

A liability is a probable future sacrifice of economic benefits arising from a past transaction or event.

Additional Paid in Capital (APIC)

APIC is the amount of consideration paid to a company in a stock issuance that exceeds the par value of the stock. For example, if a company issues stock at a price of $10.00 per share, and the par value is $0.01 per share, APIC is $9.99. The par value and APIC are recorded separately in the balance sheet as "common stock" or "stock" or "capital" for aggregate par value, and commonly additionally paid in capital" for APIC.

Equityholder

An equityholder is the holder of the equity. Equityholders have various names depending on the specific business organization: for example, shareholders, partners and members.

Asset

Asset is a probable future economic benefit obtained from a past transaction. An asset is distinguished from a liability.

Balance Sheet Formula

Assets= Liabilities + Equity

Book Value

Book value refers to the value of the equity as stated in the balance sheet. Sometimes, book value is used more generally to describe the value of an asset or liability as stated in the financial statement.

Capital Assets

Capital Assets are long-term assets that are used to generate earnings and that should be funded by long-term capital, either debt or equity or a combination of both.

Common Stock

Common Stock is the security in a corporation representing the equity interest, which is the residual claim in the corporation's earnings and assets.

Current (short-term) Assets

Current (short-term) Assets are cash and other assets that a firm expects to turn into cash within a firm's operating cycle or a year. These assets include cash, receivables and inventory.

Current (short-term) Liabilities

Current (short-term) Liabilities are debt or other obligations that a firm must discharge within a firm's operating cycle or a year. These liabilities include payables and the current portion of long-term debt.

Equity

Equity is the concept of a residual claim on a firm's earnings and assets remaining after other contractual claimants, such as employees and creditors, have been paid. It is considered the owner's economic interest in a firm. In the context of business organizations, it refers to the economic claim of the equityholders such as shareholders, partners and members.

Historical Cost

Historical cost is the cost at which an asset is purchased.

Intangible Asset

Intangible Assets are assets' non-physical form. Such assets include intellectual property, goodwill, leases, rights and permits. This distinguished from tangible assets.

Long-term Debt

Long-term Debt is a non-current debt obligation, which is a liability from the issuance of debt that is not expected to mature within a year. In the financial market, long-term debt typically refers to debt obligations with maturities that are longer than several years.

Marked-to-Market

Marked-to-Market is a process of valuation and accounting where assets, securities or financial transactions are periodically revalued at market prices. This is distinguished from historical cost.

Market Capitalization ("Market Cap")

Market Capitalization is the market value of equity securities, which is calculated as stock price multiplied by shares outstanding.

Fair Market Value ("market value")

Market value is the market value of an asset, liability or equity as determined by the market prices of assets and liabilities. It is distinguished from book value.

Member's Interest

Member's Interest is the equity held by the members of the LLC.

Negative Equity (Negative Net Worth)

Negative Equity is the difference between liabilities and assets when the value of liabilities exceeds the value of assets. Negative equity is possible because the balance sheet equation states that assets must always equal liabilities plus equity.

Net Asset Value (NAV)

Net Asset Value (NAV) refers to the value of net assets. It is sometimes referred to NAV per share.

Net Working Capital

Net Working Capital is a measure of a firm's liquidity and is calculated as the difference of current assets minus current liabilities.

Net Assets

Net assets is synonymous with equity and net worth. It is assets net of liabilities.

Net Worth

Net worth is synonymous with equity and net assets. It is worth net of liabilities.

Noncurrent (long-term) Assets

Noncurrent (long-term) Assets are assets that a firm does not expect to turn into cash within a firm's operating cycle or a year. They are assets held for the long-term.

Noncurrent (long-term) Liabilities

Noncurrent (long-term) Liabilities are liabilities that are debts or obligations who maturities are beyond one year.

Par Value

Par value has two definitions: For stocks, it is the arbitrary designation of value that must remain on the balance sheet as permanent capital. Par value is anachronism, a relic from older practices in corporation law that aimed to protect creditors. For bonds and preferred stock, it is the value of the security stated on the security certificate. In the case of bonds, it typically refers to the principal amount from which the coupon interest rate is calculated.

Partner's Capital Account

Partner's Capital Account is the account item in a partnership that keeps track of each partner's equity capital in the partnership.

Partner's Capital

Partner's Capital is the equity in a partnership that is owned by partners.

Price to Book Ratio (P/B)

Price to Book Ratio (P/B) is the ratio of market capitalization to book value.

Property, Plant and Equipment (PP&E)

Property, Plant and Equipment (PP&E) are long-term tangible assets that are used in a business.

Retained Earnings

Retained Earnings are the net profits that have not been distributed to shareholders and thus are retained by the company. It is an equity component in the balance sheet.

Shareholders' Equity

Shareholders' Equity is the equity in a corporation.

Tangible Asset

Tangible Assets are assets having a physical form. This is distinguished from intangible assets.

Treasury Stock

Treasury Stock is stock that was issued but has been bought back by the issuing corporation and thus it is stock that has been issued but is no longer outstanding.

Working Capital

Working capital refers to a firm's current assets and current liabilities, and the difference of the two is called net working capital.