Intro to Business Ch.15
Blink Credit Card
"Blink" technology uses a computer chip that sends radio frequency signals in place of magnetic strips that have been embedded in credit cards for the past 30 years. the "contactless" payment system lets consumers wave the card in front of a merchant's terminal at a gas pump or in a department store without waiting to swipe and sign.
Firms meet their capital needs through two sources:
1. Debt Financing (from outside the firm) or 2. Equity Financing (putting owners' capital to work).
after determining the desired risk-return balance, they then achieve in two ways:
1. Diversification: means buying several different kinds of investments rather than just one. the risk of loss is reduced by spreading the total investment across different kinds of stocks because although any one stock may tumble, the chance are less that all of them will fall at the same time. 2: Asset Allocation: is the proportion (the relative amounts) of funds invested in (or allocated to) each of the investment alternatives.
Ratios (Comparative Numbers) are grouped into 3 major classifications:
1. Solvency Ratios: for estimating short-term and long-term risk. borrower's ability to repay debt. provides measures of a firm's ability to meet its debt obligations. 2. Profitability Ratios: for measuring potential earnings. earnings power for owners. 3. Activity Ratios: for evaluation management's use of assets. how effectively is the firm using its resources>
Accounting Equation
Assets = Liabilities + Owners' Equity after each financial transaction (ex. payments to suppliers, sales to customers, wages to employees), the accounting equation must be in balance. if it isn't, then an accounting error has occurred.
The Two Fields of Accounting
Financial and Managerial Accounting and can be distinguished by the users they serve: those outside the company and those within.
Full Disclosure Principle
GAAP requires that financial statements also include management's interpretations and explanations of those numbers. the idea of requiring input from the manager is known as the full disclosure principle. because they know about events inside the company, managers prepare additional information to explain certain events or transactions or to disclose the circumstances behind certain results.
Working Capital
Working Capital = Current Assets - Current Liabilities. positive working capital means the firm's current assets are large enough to pay off current liabilities.
Default
a bond is said to be in default if the borrower fails to make payment when due to lenders.
Stock Split
a company can restore shares to the desire lower range by a stock split, a stock dividend paid in additional shares to shareholders.
Accounting
a comprehensive system for collecting, analyzing, and communicating financial information to a firm's owners and employees, to the public, and to various regulatory agencies.
Financial Accounting
a firm's financial accounting system is concerned with external information users: consumer groups, unions, stockholders, suppliers, creditors, and government agencies. it prepares reports such as incomes statements and balance sheets that focus on the activities of the company as a whole rather than on individual departments or divisions.
Stock
a portion of the ownership of a corporation. the company's total ownership is divided into small parts called shares that can be bought and sold to determine how much of the company (how many shares of stock) is owned by each shareholder. this widespread of ownership has become possible because of the availability of different types of stocks and because markets have been established that enable individuals to conveniently buy and sell them.
Market Capitalization (Market Cap)
a widely used measure of corporate size and value. the total dollar value of all the company's outstanding shares, calculated as the current stock price multiplied by the number of shares outstanding.
The Tools of the Fed
according to the Fed's original charter, its primary duties were to supervise banking and to manage the nation's currency. the duties of the Fed have evolved to include an emphasis on the broad economic goals, especially growth and stability. to control the money supply, the Fed uses: -reserve requirements -interest rate controls -open-market operations
Insurance Companies
accumulate money from premiums charged for coverage. they invest these funds in stocks, real estate, and other assets. earnings pay for insured losses, such as death benefits, automobile damage, and healthcare expenses.
Automated Teller Machines (ATMs)
allow customers to withdraw money, make deposits, transfer funds between accounts, and access information on their accounts.
Market Indexes
although not indicative of the status of individual securities, market indexes provide useful summaries of overall price trends, both in specific industries and in the stock market as a whole. they reveal bull and bear market trends.
Check
an order instructing a bank to pay a given sum to a payee. checks are usually, but not always, accepted because they are valuable only to specified payees and can be exchanged for cash.
Venture Capital
angel investors help many firms grow rapidly by providing what is known as venture capital, private funds from wealthy individuals or companies that seek investment opportunities in new growth companies.
Assets
any economic resource that is expected to benefit a firm or an individual who owns it. assets for accounting purposes include land, buildings, equipments, inventories, and payments due the company (accounts receivable).
Long-Term Liabilities
are debts that are not due for at least a year. these normally represent borrowed funds on which the company must pay interest.
Current Liabilities
are debts that must be paid within one year. these include ACCOUNTS PAYABLE (PAYABLES), unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year.
Checking Accounts (Demand Deposits)
are money because their funds may be withdrawn at any time on demand.
Mortgage-Backed Securities (MBS)
became a trillion-dollar investment industry during the pre-2007 housing market boom. financial institutions bundled home mortgages into packages and resold them as securities to eager investors who trusted in the securities' risk rating given by Moody's, Standard & Poor's, and Fitch. each MBS is a group of mortgages bundled together to form a debt obligation (a bond) that entitles the holder (the investor) to the cash that flows in from the mortgages.
NASDAQ Composite Index
because it considers more stocks, some Wall Street observers regard this as one of the most useful of all market indexes. all NASDAQ-listed companies, not just a selected few, are included in the index for a total of approximately 3,100 firms, mostly in the United States but in other countries as well.
Bondholder's Claim
bondholders may then file this, a request for court enforcement of the bond's terms of payment.
The Board of Governors
consists of seven members appointed by the U.S. president for overlapping terms of 14 years. the chair of the board serves on major economic advisory committees and works actively with the administration to formulate economic policy. the board plays a large role in controlling the money supply. it alone determines the reserve requirements, within statutory limits, for depository institutions. it also works with other members of the Fed to set discount rates and handle the Fed's sale and purchase of government securities.
Monetary Policy
controlling the money supply. the Fed is responsible for the conduct of U.S. monetary policy, the management of the nation's economic growth by managing the money supply and interest rates. by controlling these two factors, the Fed influences the ability and willingness of banks throughout the country to loan money. the Fed, with its goal of economic stability, uses the money supply to avoid extreme inflation or deflation. because commercial banks are the main creators of money, much of the Fed's management of the money supply takes the form of regulating the supply of money through commercial banks.
Budget
for planning, controlling, and decision making, the most important internal financial statement is the budget, a detailed report on estimated receipts and expenditures for a future period of time. although that period is usually one year, some companies also prepare three- or five-year budgets, especially when considering major capital expenditures. the budge differs from other statements in that budgets are not shared outside the company; hence the "internal financial statement".
Smart card
has an embedded computer chip that can be programmed with "electronic money". also known as electronic purses and stored-value cards, smart cards have existed for more than a decade. they are the most popular in gas-pump payments, followed by prepaid phone service, ATMs, self-operated checkouts, vending machines, and automated banking services.
Electronic Communication Networks (ECNs)
in 1998, the SEC authorized the creation of ECNs, electronic trading systems that bring buyers and sellers together outside traditional stock exchanges by automatically matching buy and sell orders at specified prices. ECNs gained rapid popularity because the trading procedures are fast and efficient, often lowering transaction costs per share to mere pennies. they also allow after-hours trading (after traditional markets have closed for the day) and protect traders' anonymity. ECN must register with the SEC as broker-dealers.
The Functions of the Fed
in addition to chartering national banks, the Fed serves as the federal government's bank and the "bankers' bank," regulating a number of banking activities. most important, it controls the money supply.
Generally Accepted Accounting Principles (GAAP)
independent auditors who do not work for the company must ensure that clients' accounting systems follow Generally Accepted Accounting Principles (GAAP), which are formulated by the Financial Accounting Standards Board (FASB) of the AICPA and govern the content and form of financial reports.
Money Market Mutual Funds
investments companies buy a collection of short-term, low-risk financial securities. ownership of and profits (or losses) from the sale of these securities are shared among the fund's investors.
Liability
is a debt that a firm owes to an outside party.
Price Appreciation
is an increase in the dollar value of an investment.
Stock Exchange
most of the buying and selling of stocks, historically, has been handled by organized stock exchanges, an organization of individuals coordinated to provide an institutional auction setting in which stocks can be bought and sold.
Long-Term Solvency
stakeholders are also concerned about long-term solvency. a firm that can't meet its long-term debt obligations is in danger of collapse or takeover, a risk that makes creditors and investors quite cautious.long-term solvency is calculated by dividing DEBT (total liabilities) by owners' equity. the lower a firm's debt, the lower the risk to investors and creditors. high debt not only can be acceptable but also desirable. borrowing funds gives a firm LEVERAGE, the ability to make otherwise unaffordable investments. in LEVERAGED BUYOUTS, firms have willingly taken on sometimes huge debts to buy out other companies.
Insider Trading
the SEC also enforce laws agains insider trading, the use of special knowledge about a firm for profit or gain. unfair advantage over other investors. illegal.
Annual Percentage Rate (APR)
the amount of interest owed depends on the APR that is agreed on between the lender and borrower.
Loan Principal
the amount of money that is loaned and must be rapid.
Wise Investments
the key to growing your money, especially if you are seeking to accumulate a capital to start your own business or simply as a cushion for a sound financial future.
M-1
the spendable money supply. the oldest and most basic measure, M-1, counts only the most liquid, or spendable, forms of money-cash, checks, and checking accounts. debit cards are included in this.
Capital Gain
this profit, realized from the increased market value of an investment.
Blue-Chip Stocks
those issued by the strongest, well-established, financially sound and respected firms, such as Coca-Cola and ExxonMobil, have historically provided investors steady income through consistent dividend payouts.
who helps to finance international trade?
two United Nations agencies, the World Bank and the International Monetary Fund
CPA Services
virtually all CPA firms, whether large or small, provide: - auditing, - tax, and -management services. larger firms get much of their revenue from auditing services, though consulting (management advisory) services constitute a major growth area. smaller firms earn most of their income from tax and management services.
The Bankers' Bank
individual banks that need money can borrow from the Fed and pay interest on the loans. in addition, the Fed provides storage for commercial banks, which are required to keep funds on reserve at a Federal Reserve Bank.
Russell 2000 Index
investors in the U.S. small-cap market are interested in this, a speciality index that measures the performance of the smallest U.S. companies based on market capitalization. as the most quoted index focusing on the small-cap portion of the U.S. economy, its stocks represent a range of sectors.
Credit Union
is a nonprofit, cooperative financial institution owned and run by its members. its purpose is to promote thrift, careful management of one's money or resources, and to provide members with a safe place to save and borrow at reasonable rates. members pool their funds to make loans to one another. each credit union decides whom it will serve, such as a group of employees, people in a particular community, or members of an associations. the credit unions of many universities and the U.S. Navy, for example, are among the nation's 6,900 credit unions.
Automated Clearing House (ACH) Network
is an electronic funds transfer system that provides interbank clearing of electronic payments for the nation's financial institutions. it allows businesses, government, and consumers to choose and electronic-over-paper alternative for payments; the system is green, safe, and efficient. the ACH system is governed by NACHA, the Electronic Payments Association, which administers and enforces the association's strict NACHA Operating Rules for sound risk management practices. ACH payment include the following: -Internet-initiated debit and credit payments by business and consumers. -Business-to-business (B2B) electronic payments -Direct deposit payroll, Social Security benefits, and tax refunds -Federal, state, and local tax payments -E-checks -Direct payment of consumer bills: mortgages, loans, utility bills, and insurance premiums -E-commerce payments
The Federal Open Market Committee
is responsible for formulating the Fed's monetary policies to promote economic stability and growth by managing the nation's money supply. its members include the Board of Governors, the president of the Federal Reserve Bank of New York, and the presidents of four other Reserve Banks, who serve on a rotating basis.
Securities and Exchange Commission (SEC)
is the U.S. government agency that legally enforces accounting and auditing rules and procedures.
Portfolio
is the combined holdings of all the financial investments- stocks, bonds, mutual funds, real estate- of any company or individual.
Users of Accounting Information
-Business Managers: use it to develop goals and plans, set budgets, and evaluate future prospects. -Employees and Unions: use it to plan for and receive compensation and such benefits as health care, vacation time, and retirement pay. -Investors and Creditors: use it to estimate returns to stockholders, determine growth prospects, and decide whether a firm is a good credit risk. -Tax Authorities: use it to plan for tax inflows, determine to tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time. -Government Regulatory Agencies: rely on it to fulfill their duties toward the public. the Securities and Exchange Commission (SEC), for example, requires firms to file financial disclosures so that potential investors have valid information about their financial status.
3 Types of Assets:
-Current Assets: include cash and assets that can be converted into cash within a year. the act of converting something into cash is called Liquidating. assets are normally listed in order of LIQUIDITY, the ease of converting them into cash. a company that is not "liquid" may be forced to sell assets at reduced prices or even to go out of business. cash is completely liquid. MARKETABLE SECURITIES purchased as short-term investments are slightly less liquid but can be sold quickly (including stocks or bonds of other companies, government securities, and money market certificates). other nonliquid assets such as merchandise inventory, the cost of merchandise that's been acquired for sale to customer and is still on hand. -Fixed Assets: (such as land, buildings, and equipment) have long-term use or value, but as buildings and equipment wear out or become obsolete, their value decreases. accountants use DEPRECIATION to spread the cost of an asset over the years of its useful life. to reflect decreasing value, accountants calculate and asset's useful life in years, divide its worth by that many years, and subtract the resulting amount each year. every year, the remaining value (or net value) decreases on the books. -Intangible Assets: their worth is hard to set, they have monetary value in the form of expected benefits, which may include fees paid by others for obtaining rights or privileges (including patents, trademarks, copyrights, and franchises) to your products. GOODWILL is the amount paid for an existing business beyond the value of its other assets.
Interest Rate Controls
-Discount Rate: as the bankers' bank, the Fed loans money to banks. the interest rate on these loans is known as the discount rate. if the Fed wants to reduce the money supply, it increases the discount rate, making it more expensive for banks to borrow money and less attractive for them to loan it. low rates encourage borrowing and lending and expand money supply. =Federal Funds Rate (or Key Rate): more familiar to consumers, this reflects the rate at which commercial banks lend reserves overnight to each other. although the Fed can't actually control this rate, which is determined by the supply and demand of bank reserves, it can control the supply of those reserves to create a desire rate.
Example Areas Targeted for Aligning U.S. GAAP and IASB
-In Valuing Assets: (reported on the balance sheet), U.S. GAAP allows an asset to be written down if for some reason its value decreases. however, the value cannot later be written up, even if its actual value has increased. IASB standards do allow such write-ups reflecting increased market value of a company's assets can be quite different, depending on the chosen accounting system. -In Revenue Recognition: when revenues from customers should be recognized (reported), and in what amounts on the income statement, the U.S. GAAP and IASB procedure differ from each other. a current joint proposal, if approved, would remove existing inconsistencies and provide a single standard that recognizes revenues at the time the goods and services are transferred to the customer, and in the amounts that are expected to be received (or are received) from the customer. -In Devaluing of Financial Assets: such as writing down bad loans in the financial crisis, both U.S. GAAP and IASB currently use the same procedure: after a loss occurs (but not until after the fact), the loan's value can be written down in the firm's financial statements, reflecting its lower value. both groups, however, believe and "expected loss model" that recognizes (and reports) likely loan loses ahead of time will provide more timely information for investors and financial planners. a joint proposal for such a procedure has been presented. -In Fair Value Disclosure: the FASB and IASB jointly propose new standards for improving the comparability of fair value disclosures in financial statements. unlike dissimilar disclosure practices among many local GAAP, both groups want the reported "fair value" for an asset, a liability, and an item in shareholders' equity to have the same meaning under both FASB and IASB procedures. the disclosure should identify the techniques and inputs used to measure fair value so that users can more clearly asses and compare financial statements.
Pension and Trust Services
-Individual Retirement Accounts (IRAs): are tax-deferred pension funds that wage earners and their spouses can set up to supplement other retirement funds. -Trust Services: many commercial banks offer these, the management of funds left in the bank's trust. in return for a fee, the trust department will perform such tasks as making your monthly bill payments and managing your investment portfolio. trust departments also manage the estates of deceased persons.
The Major Stock Exchanges
-New York Stock Exchange(NYSE): the largest. founded in 1792, the NYSE is the model for exchanges worldwide. the merger between Euronext in 2007 formed NYSE Euronext, bringing together marketplaces across Europe and the United States, representing 1/3 of stock trading worldwide. only firms meeting certain minimum requirements- earning power, total value of outstanding stock, and number of shareholders- are eligible for listing on the NYSE. hybrid market that uses both floor and electronic trading. -Global Stock Exchanges: as recently as 1980, the U.S. market accounted for more than half the value of the world market in traded stocks. market activities, however, have shifted as the value of shares listed on foreign exchanges continues to grow.
Owners' Equity (Shareholders' Equity) broken down into:
-Paid-In Capital: is money invested by owners. -Retained Earnings: are net profits kept by a firm rather than paid out as dividend payments to stockholders. they accumulate when profits, which cane be distributed to shareholders, are kept instead for the company's use.
Management Accountants and Certified Management Accountant (CMA)
-although private accountants may be either CPAs or non-CPAs, most are management accountants who provide services to support managers in various activities (marketing, production, engineering, and so forth). -many hold the Certified Management Accountant (CMA) designation, awarded by the Institute of Management Accountants (IMA), recognizing qualifications of professionals who have passed IMA's experience and examination requirements. more than 65,000 worldwide members, IMA is dedicated to supporting accounting professionals to create quality internal controls and financial practices in their companies.
Short-Term Solvency Ratios (Current Ratio)
-measure a company's liquidity and its ability to pay immediate debts. -Current Ratio or "Banker's Ratio" is the most commonly used of these. this ratio measures a firm's ability to generate cash to meet current obligations through the normal, orderly process of selling inventories and collecting revenues from customers. it is calculated by dividing current assets by current liabilities. the higher a firm's current ratio, the lower the risk to investors. a current ratio is satisfactory at 2:1 or higher, a smaller ratio may indicate that a firm will have trouble paying its bills.
Balance Sheets
-supply detailed information about the accounting equation items: assets, liabilities, owners' equity. because they also show a firm's financial condition at one point in time, they are sometimes called Statements of Financial Position. the balance sheet for any company is a barometer for its financial condition at one point in time. by comparing the current balance sheet with those of previous years, creditors and owners can better interpret the firm's financial progress and future prospects in terms of changes in assets, liabilities, and owners' equity.
3 Important Investment Banking Services
1. Advise companies on the timing and financial terms of new issues. 2. Underwrite- buy and assume liability for- new securities, thus providing the issuing firms with 100% of the money (less commission). the inability to resell the securities is a risk that the banks must bear. 3. Create distribution networks for moving new securities through groups of other banks and brokers into the hands of individual investors.
Prediction of Future Values of your Money become possible by
1. Understanding how money is created 2. Understanding how the Federal Reserve controls the supply of money.
Money serves 3 functions:
1. It is a medium of exchange. without money, we would be bogged down in a system of barter. 2. It is a store of value. money can be used for future purchases and therefore "stores" value. 3. It is a measure of worth. money lets us measure the relative values of goods and services. it acts as a measure of worth because all products can be valued and accounted for in terms of money.
Stock Values are usually expressed in two different ways:
1. Market Value: A stock's real value is its market value, the current price of a share in the stock market. Market value reflects the amount that buyers are willing to pay for a share of the company's stock. 2. Book Value: for a share of common stock is determined as the firm's owners' equity (from the balance sheet) divided by the number of common shares owned by all shareholders. book value is used as a comparison indicator because the market value for successful companies is usually greater than its book value. thus, when market price falls to near book value, some profit-seeking investors buy the stock on the principle that it is underpriced and will increase in the future.
M-2
M-1 plus the convertible money supply. a second measure of the money supply, is often used for economic planning by businesses and government agencies. M-2 includes everything in M-1 plus other forms of money that are not quite as liquid, for example, short-term investments that are easily converted to spendable forms, including time deposits, money market mutual funds, and savings accounts. it measures the store of monetary value available for financial transactions by individuals and small businesses. as this overall level increases, more money is available for consumer purchases and business investments. when the supply is tightened, less money is available; financial transactions, spending, and business activity slow down.
Currency (Cash)
paper money and metal coins issued by the government and widely used for small exchanged. U.S. law requires creditors to accept it in payment of debts.
Dividend
a payment to shareholders, on a per-share basis, from the company's earnings. dividend payments are optional and variable; the corporation's board of directors decided whether and when a dividend will be paid, as well as the amount that is best for the future of the company and its shareholders. many companies distribute between 30 and 70 % of their profits to shareholders.
Pension Fund
a pool of funds that is managed to provide retirement income for its members. -Public Pension Funds in the United States include Social Security and the more than $3.9 trillion in retirement programs for state and local government employees. -Private Pension Funds, operated by employers, unions, and other private groups, cover about 36 million people and have total assets of $24.7 trillion, up from $13 trillion during the 2008 recession.
Mutual Savings Banks
all depositors are considered owners of the bank. all profits are divided proportionately among depositors, who receive dividends. about 600 U.S. mutual savings banks attract most of their funds in the form of savings deposits, and funds are loaned out in the form of mortgages.
Member Banks
all nationally chartered banks and some state-charted banks are members of the Fed. the accounts of all member bank depositors are automatically covered by the FDIC.
Other Depository Institutions
although many state-charted banks, credit unions and S_Ls do not belong to the Fed, they are subject to its regulations, pay deposit insurance premiums, and are covered by the FDIC or the National Credit Union Administration (NCUA), an independent federal agency that supervises and insures federal credit unions.
The "Big Four" Public Accounting Firms
although thousands of CPA companies of various sizes, ranging from small local operations to large multinationals, are active in the United States, about 1/2 of their total revenues go to the four biggest CPA firms (listed with their headquarters): -Deloitte Touche Tohmatsu (United States) -Ernst & Young (United Kingdom) -PricewaterhouseCoopers, PwC (United Kingdom) -KPMG (Netherlands) international operations are important to these companies. each of the Big Four Firms has more than 150,000 employees worldwide.
Certified Public Accountants (CPAs)
among public accountants, they are licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants (AICPA). preparation for certification begins with majoring in a college program studying the theory, practices, and legal aspects of accounting. in addition to the CPA exam, certification in most states requires some practice, varying up to two years, in a private company or government entity under the direction of a CPA. once certified, the CPA can perform services beyond those allowed by non-CPAs. whereas some CPAs work as individual practitioners, many form or join existing partnerships or professional corporations. the auditing of a firm's financial statements is one of the services that can be performed only be a CPA. ultimately, the CPA performing the audit will certify whether the client's reports comply with GAAP.
International Monetary Fund (IMF)
another U.N. agency, is a group of some 150 nations that have combined resources for the following purposes: -to promote the stability of exchange rates -to provide temporary, short-term loans to member countries -to encourage members to cooperate on international monetary issues -to encourage development of a system for international payments. they make loans to nations suffering from temporary negative trade balance. some nations have declined IMF funds rather than accept the economic changes that the IMF's requirement that they cut back social programs and spending to bring inflation under control.
Bull Markets
are periods of rising stock prices, generally lasting 12 months or longer; investors are motivated to buy, confident they will realize capital gains.
Management Advisory Services
as consultants, accounting firms provide management advisory services ranging from personal financial planning to planning corporate mergers. other services include production scheduling, information systems studies, AIS design, and even executive recruitment. the staffs of the largest CPA firms sometimes include engineers, architects, mathematicians, and psychologists, all of whom are available for consulting.
Exchange-Traded Fund (ETF)
as with an index mutual fund, an Exchange-Traded Fund (ETF) is a bundle of stocks (or bonds) that are in an index that tracks the overall movement of a market. unlike a mutual fund, however, an EFT can be traded like a stock. each share of an ETF rises and falls as market prices change continuously for the market being tracked. ETFs offer 3 areas of advantage over mutual funds: 1. they can be traded throughout the day like a stock, they have low operating expenses, and they do not require high initial investments. because they are traded on stock exchange (hence, "exchange traded"), ETFs can be bought and sold-priced continuously- any time throughout the day. this intraday trading means you can time your transaction during the day to buy or sell when (or if) the market reaches a desired price. mutual fund shares, in contrast, are priced once daily, at the end of the day. thus, when you buy or sell during the day, you don't find out the share price until after the day has ended. 2. whereas many mutual funds pass the costs of expensive active management onto shareholders, and ETF is bound by a rule that specifies what stocks will be purchased and when; once the rule is established, little or no active human decision are involved. the lower annual operating expenses mean that, for the buy-and-hold investor, annual fees for ETFs are as low as 0.04 % of assets; annual fees for mutual funds average 1.4 %. 3. unlike mutual funds, ETFs require no minimum investment, meaning they offer ease of entry for investors getting started without much money. on the other hand, because ETFs must be bought and sold through a broker, they require payment of a brokerage commission (transaction fees). traders who buy and sell frequently can end up paying more in transactions fees, even surpassing a mutual fund's high management expenses.
Corporate Raider
at an extreme, a corporate raider, an investor conducting a type of hostile (unwanted) takeover, buys shares on the open market, attempting to seize control of the company and its assets. the raider then sells of those assets at a profit, resulting in the company's disappearance. a company is ripe for raiding when its stock price falls so shares can be cheaply bought, although its assets still have high value.
Interest
borrowers also pay the lender an additional fee, interest, for the use of the borrowed funds. found by multiplying the APR by the loan principal.
Accounting Information System (AIS)
because businesses engage in thousands of transactions, ensuring consistent, dependable financial information is mandatory. this is the job of the Accounting Information System (AIS), an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports. the system includes all of the people, reports, computers, procedures, and resources that are needed to compile financial transactions.
The Trading Floor
brokers at an exchange trade face-to-face on the trading floor (also called the outcry market). the electronic market, on the other hand, conducts trades electronically among thousands of dealers in remote locations around the world. trading floors today are equipped with vast arrays of electronic communications equipment for displaying buy and sell orders or confirming completed trades.
Corporate Bond
corporations can raise capital by issuing bonds. a formal pledge (an IOU) obligating the issuer to pay interest periodically and repay the principal at maturity (a preset future date) to the lender. the federal government also issues bonds to finance projects and meet obligations, as do state and local governments (called municipal bonds) for financing the building of schools , roads and sewage disposal systems. short-term bonds <5 years. intermediate term 5-10 years. long-term >10 years (riskier).
Earnings Per Share
defined as net income divided by the number or shares of common stock outstanding, earnings per share determines the size of the dividend that a firm can pay shareholders.as an indicator of a company's wealth potential, investors use this ratio to decide whether to buy or sell the firm's stock. as the ratio goes up, stock value increases because investors know that the firm can better afford to pay dividends. net income/ net of common share outstanding = earnings per share.
Bons Indenture
each new bond issue has specific terms and conditions spelled out in a bond indenture, a legal document identifying the borrower's obligations and the financial returns to lenders.
Risk-Return (Risk-Reward) Relationship
each type of investment has this: safer investments tend to offer lower returns; riskier investments tend to offer higher returns (rewards).
International Accounting Standards Board (IASB)
established in 2001 and housed at London, England the International Accounting Standards Board (IASB) is an independent, nonprofit organization responsible for developing a set of global accounting standards and for gaining the support and cooperation of the world's various accounting organizations to implement those standards. IASB's 14 board members from various countries are full-time accounting experts with technical and international business experience. the board's task is a long-term process that requires working with various countries to design proposed standards. 138 countries adopted IASB's accounting practices, over 50 countries use their national GAAP.
Audit
examines a company's AIS to determine whether financial reports reliably represent its operations. organizations must provide audit reports when applying for loans, selling stock, or when going through a major restructuring.
Financial Statements
fall into 3 broad categories: balance sheets, incomes statements, and statements of cash flows. together, these reports indicate the firm's financial health and what affected it.
Sarbanes-Oxley Act of 2002 (Sarbox or SOX)
federal regulations, in particular the Sarbanes-Oxley Act of 2002 (Sarbox or SOX), have been enacted to restore and maintain public trust in corporate accounting practices. SOX restricts the kinds of nonaudit services that CPAs can provide. under the SOX law, for example, a CPA firm can help design a client's financial information system, but not if it also does the client's auditing. (because of companies like Enron). by prohibiting auditing and nonauditing services to the same client, SOX encourage audits that are independent and unbiased. SOX imposes new requirements on virtually every financial activity in publicly traded corporations, as well as severe criminal penalties for persons committing or concealing fraud or destroying financial records. CFOs and CEOs have to pledge that the company's finances are correct and must vouch for the methods and internal controls used to get those numbers. companies have to provide a system that is safe for all employees to anonymously report unethical accounting practices and illegal activities without fear of retaliation.
Commercial Banks
federally insured commercial banks accept deposits, make loans, earn profits, and pay interest and dividends. bank liabilities, or holdings owed to others, include checking accounts and savings accounts. U.S. banks hold assets totaling more than $14 trillion, consisting of a wide variety of loans to individuals, businesses, and governments. Company that accepts deposits that it uses to make loans, earn profits, pay interest to depositors, and pay dividends to owners
Code of Professional Conduct
for public accountants in the United States is maintained and enforced by the AICPA.the institute defines 6 ethics-related areas with which accountants must comply to maintain certification.the IMA maintains a similar code to provide ethical guidelines for the management accounting profession. in reading the AICPA's code, you can see that it forbids misrepresentation and fraud in financial statements. misleading statements destroys the public's confidence in the accounting profession and in business in general. the code prohibits such abuses, its success depends, ultimately, on its acceptance and use by the professionals it governs. -Responsibilities as a Professional -Serving the Public Interest -Maintaining Integrity -Being Objective and Independent -Maintaining Technical and Ethical Standards Through Due Care -Professional Conduct in Providing Services
The Rule of 72
how long does it take to double an investment? a handy rule of thumb is called the "Rule of 72". you can find the number of years needed to double your money by dividing the annual interest rate (in percent) into 72. can also calculate how much interest you must get if you double your money in a given number of years: simply divide 72 by the desired number of years to get the interest rate. the lesson for the investor is clear: seek higher interest rates because money will double more frequently.
Tax Services
include assistance not only with tax-return preparation but also with tax planning. a CPA's advice can help a business structure (ore restructure) operations and investments and perhaps save millions of dollars in taxes.staying abreast of tax-law changes is no simple matter. some critics charge that the changing of tax regulations has become a full-time vocation among some state and federal legislators who add increasingly complicated laws and technical corrections on taxation each year.
Savings Institutions (Thrift Institutions)
include mutual savings banks and savings and loans associations. (because they were established decades ago to promote the idea of saving among the general population.
Reserve Requirements
is the percentage of its deposits that a bank must hold, in cash or on deposit, with a Federal Reserve Bank. high requirements means that banks have less money to lend and the money supply is reduced. low requirements permit the supply to expand.
Income Statement (Profit-and-Loss Statement)
its description of revenues and expenses results in a figure showing the firm's annual profit or loss. Profit (or Loss) = Revenues - Expenses. popularly known as the Bottom Lime, profit or loss is probably the most important figure in any business enterprise. shows the financial results that occurred during a period of time, such as a month, quarter, or year. divided into 4 main categories: 1. Revenues: the funds that flow into a business from the sale of goods or services. 2. Cost of Revenues (Cost of Goods Sold): shows the costs of obtaining the revenues from other companies during the year. (income statements for manufacturing firms use the corresponding category, Cost of Goods Sold, which are the costs of obtaining materials to make physical products sold during the year.) GROSS PROFIT: a preliminary, quick-to-calculate profit figure that considers two pieces of data-revenues and cost of revenues(the direct costs of getting those revenues)- from the income statement. to calculate gross profit, subtract the cost of revenues from revenues obtained by selling the firm's products. 3. Operating Expenses: general expenses ranging from pencils to the CEO's salary. resources that must flow out of a company if it is to earn revenues. (Research and Development Expenses result from exploring new services and technologies for providing them to customers. Selling Expenses result from activities related to selling goods or services, such as sales-force salaries and advertising expenses. Administrative and General Expenses, such as management salaries and maintenance costs, are related to the general management of the company.) 4. Net Income (Operating Income): Operating Income compares the gross profit from operations against operating expenses. Subtracting income taxes from operating income reveals Net Income (Net Profit or Net Earnings)
Reasons for Investing
its relatively easy to open a mutual fund account online or by phone. there are numerous funds that meet any chosen financial objectives. the funds vary in their investment goals; different funds are designed to appeal to the different motives and goals of investors. 3 of the most common objectives are: 1. Financial Stability (Stability and Safety): funds stressing safety seek only modest growth with little fluctuation in principal value regardless of economic conditions. they include money market mutual funds and other funds that preserve the fund holders' capital and reliably pay current income. typical assets of these funds include lower-risk U.S. corporate bonds, U.S. government bonds, and other similarly safe short-term securities that provide stable income from interest and dividends. 2. Conservative Capital Growth: mutual funds that stress preservation of capital and current income but also seek some capital appreciation are called Balanced Funds. typically, these funds hold a mixture of long-term municipal bonds, corporate bonds, and common stock with good dividend-paying records for steady income. the common stocks offer potential for market appreciation (higher market value), though there is always the risk of price declined if the general stock market falls. 3. Aggressive Growth: Aggressive Growth Funds seek maximum long-term capital growth. they sacrifice current income and safety by investing in stocks of new (and even troubled) companies, firms developing new products and technologies, and other higher-risk securities. they are designed for investors who can accept the risk of loss inherent in common stock investing with severe price fluctuations but also the potential for superior returns over time.
Savings and Loan Associations (S&Ls)
like commercial banks, accept deposits, make loans, are are owned by investors. most S&Ls were created to encourage savings habits and provide financing for homes; they did not offer check services. today, they have ventured into a variety of other loans and services.
Debt Financing
long-term borrowing from sources outside the company via loans or the sale of corporate bonds is a major component in most U.S. firms' financial planning. -Long-term loans are attractive for several reasons: the number of parties involved is limited, loans can often be arranged quickly; the firm need not make public disclosure of its business plans or the purpose for which it is acquiring the loans (in contrast, the issuance of corporate bonds requires such disclosure). disadvantages: borrowers may have trouble finding lenders to supply large sums; long-term borrowers may also face restrictions as conditions of the loan. -Corporate bonds: attractive when firms need large amounts for long periods of time. the issuing company gains access to large numbers of lenders through nationwide bond markets. bonds entail high administrative and selling costs. may require stiff interest payments, especially if issuing company has a poor credit rating. impose binding obligations on the firm, in many cases for up to 30 years, to pay bondholders a stipulated sum of annual or semiannual interest, even in times of financial distress.
Equity Financing
looking inside the company for long-term funding, is sometimes preferable. includes either issuing common stock or retaining the firm's earnings. -Common Stock: can be expensive because paying dividends is more expensive than paying bond interest. interest paid to bondholders is a business expense and therefore a tax deduction for a firm. payments of cash dividends to shareholders are not tax deductible. -Retained Earnings: are net profits retained for the firm's use rather than paid out in dividends to stockholders. if a company uses retained earnings as capital, it will not have to borrow money and pay interest. mean smaller dividends for shareholders.
Check 21
making the paper check go away. the Check Clearing for the 21st Century Act (Check 21), which became federal law in 2004, allows a receiving bank to make an electronic image of a paper check and electronically send the image to the paying bank for instant payment instead of waiting days for the paper check to wind its way back to the sender. more banks are adopting check image processing (Check 21) and benefitting from its speed and cost efficiency: less paper handling, reduced reliance on physical transportation, faster collection times, and elimination of expensive float.
Controller (Chief Accounting Officer)
manages a firm's accounting activities by ensuring that the AIS provides the reports and statements needed for planning, decision making, and other management activities. this range of activities requires different types of accounting specialists.
Noncertified Public Accountants (Non-CPAs)
many small businesses, individuals, and even larger firms rely on these non-CPAs from income-tax preparation, payroll accounting, and financial-planning services so long as they abide by local and state laws. they often put together financial statements that are used in the firm for internal purposes, based on information provided by management. these statements include a notification that auditing methods were not used in their preparation.
Secure Loan (Asset-Backed Loan)
money to purchase new equipment often comes in the form of loans from commercial banks. the borrower guarantees repayment of the loan by pledging the asset as collateral to the lender.
Mutual funds
mutual funds and exchange-traded funds are popular alternatives to stocks because they offer attractive investment opportunities for various financial objectives and often do not require large sums of money for entry.in addition, the simple and easy transaction process make them accessible to the public. -Mutual funds: are created by companies such as T. Rowe Price and Vanguard that pool cash investments from individuals and organizations to purchase bundles of stocks, bonds, and other securities. the bundles are expected to appreciate in market value and otherwise produce income for the mutual fund and its investors. thus, investors, as part owners, expect to receive financial gains as the fund's assets become increasingly valuable. -No-Load Funds: investors in no-load funds are not charged sales commissions when they buy into or sell out of funds. -Load Funds: investors in load funds generally pay commissions of 2 % to 8 %.
Secondary Securities Market
new securities, however, represent only a small portion of traded securities. existing stocks and bonds are sold in the much larger secondary securities market, which is handled by suck familiar bodies as the New York Stock Exchange and by online trading with electronic communication networks.
Primary Securities Market
new stocks and bonds are bought and sold by firms and governments. sometimes, new securities are sold to single buyers or small groups of buyers. these private placements are desirable because they allow issuers to keep their plans confidential.
Public Accountants
offer accounting services to the public and are distinguished by their independence from the clients they serve. they typically work for an accounting firm providing services for outside client firms in which the public accountant has no vested interest, thus avoiding and potential biases in conducting their professional services.
Forensic Accounting
one of the fastest-growing areas in accounting is forensic accounting, the use of accounting for legal purposes. sometimes known as "the private eyes of the corporate culture," forensic accountants must be good detectives. they look behind the corporate facade instead of accepting financial records at face value. in combining investigative skills with accounting, auditing, and the instincts of a bloodhound, they assist in the investigation of business and financial issues that may have application to a court of law. may be called on by law enforcement agencies, insurance companies, law firms, private individuals, and business firms for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. they may conduct criminal investigations of Internet scams and misuse of government funds. civil cases often require investigating and quantifying claims of personal injury loss as a result of negligence and analyzing financial issues in matrimonial disputes. forensic accountants also assist business firms in tracing and recovering lost assets from employee business fraud or theft.
Maturity date
one of the most important details is the maturity date (or due date), when the firm must repay the bond's face value (par value, or the amount purchased) to the lender.
Certified Fraud Examiner (CFE)
one specific area within forensic accounting, the Certified Fraud Examiner (CFE) designation, is administers by the ACFE. The CFE's activities focus specifically on fraud-related issues, such as fraud detection, evaluating accounting systems for weaknesses and fraud risk, investigating white-collar crime on behalf of law enforcement agencies, evaluating internal organizational controls for fraud prevention, and expert witnessing. the CFE examination covers four areas: 1. Fraud Prevention and Deterrence: includes why people commit fraud, theories of fraud prevention, and professional code of ethics. 2. Financial Transactions: examines types of fraudulent financial transactions incurred in accounting records. 3. Fraud Investigation: pertains to tracing illicit transactions, evaluating deception, and interviewing and taking statements. 4. Legal Elements of Fraud: includes rules of evidence, criminal and civil law, and the rights of the accused and accuser. eligibility to take the exam includes both educational and experience requirements. although a minimum of a bachelor's degree is requires, it does not have to be in accounting or any other specific field of study. candidates without a bachelor's degree, but with fraud-related professional experience, may substitute two years of experience for each year of academic study. experience requirements for certification include at least 2 years in any of several fraud-related areas, such as auditing, criminology, fraud investigation, or law.
Angel Investors
outside individuals who provide such capital for growth, once a business has been successfully launched. they may also want a formal say in how the company is run; Outside investors who provide new capital for firms in return for a share of equity ownership
Federal Reserve System (the Fed)
perched atop the U.S. financial system and regulating many aspects of its operation is the Fed, the nation's central bank, established by Congress in 1913.
Time Value of Money
perhaps the single most important concept in business finance, recognizes the basic fact that, when it's invested over time, money grows by earning interest or yielding some other form of return.
Bear Markets
periods of falling stock prices, usually 20 % off peak prices; investors are motivated to sell, anticipating further falling prices.
Electronic Funds Transfer (EFT)
provides for payments and collections by transferring financial information electronically. PayPal offers online payments and money transfers among businesses and individuals, nationally and internationally, in various currencies, requiring only that recipients have an e-mail address. consumers using debit cares and mobile devices instead of writing personal checks enjoy EFT's convenience and speed at the checkout. EFT systems provide automatic payroll deposit, ATM transactions, bill payment, and automatic funds transfer.
Open-Market Operations
refer to the Fed's sale and purchase of securities (usually U.S. Treasury notes and short-term bonds) in the open market, as directed by the Fed's Open-Market Committee. Open-Market operations are particularly effective because they act quickly and predictably on the money supply. the Fed buys government securities from a commercial dealer, whose bank account is credited for the transaction, this giving that bank more money to lend, so this transaction expands the money supply. selling treasury securities to investors allows the U.S. government to raise money and contract the money supply. these securities may include Treasury bills (t-bills), T-notes, and T-bonds with maturity dates ranging from short-tern (a few weeks) to long-term (up to 30 years). treasury securities are highly liquid because they are actively traded on national securities markets, and traditionally have been considered a risk-free investment because they are backed by the U.S. government.
Book-Entry Ownership
relief has come from book-entry ownership. historically, shares of stock have been issued as physical paper certificates; now they are simply recorded in the companies' books, thereby eliminating the costs of storing, exchanging, and replacing certificates.
Full-Service Brokers
remain an important resource, both for new, uninformed investors and for experienced investors who don't have time to keep up with all the latest developments. Full-Service Brokers, like Merrill Lynch Wealth Management, offers clients consulting advice in personal financial planning, estate planning, and tax strategies, along with a wider range of investment products.
Managerial Accounting
serves internal users. managers at all levels need information to make departmental decisions, monitor projects, and plan future activities. other employees also need accounting information. engineers must know certain costs, for example, before making product or operation improvements, purchasing agents use information on materials costs to negotiate terms with suppliers, and to set performance goals, and salespeople need past sales data for each geographic region and for each of its products.
Discount Brokers
such as E*TRADE and Scottrade, offer well-informed individual investors who know what they want to buy or sell a fast, low-cost way to participate in the market. sales personnel receive fees or salaries, not commissions.
Stock Brokers
some of the people on the trading floor are employed by the stock exchange. others are trading stock for themselves. many, however, are stock brokers who earn commissions by executing buy and sell orders for outside customers. although they match buyers with sellers, brokers do not own securities. they earn commissions from the individuals and organizations for whom they place orders.
Finance Companies
specialize in making loans to businesses and consumers. -Commercial Finance Companies lend to businesses needing capital or long-term funds. -Consumer Finance Companies devote most of their resources to providing small noncommercial loans to individuals.
Securities
stocks, bonds, and mutual funds are known as securities because they represent secured, or financially valuable claims on the part of investors.
Securities Investment Dealers (Brokers)
such as Merrill Lynch and A. G. Edwards Inc., buy and sell stocks and bonds for client investors. they also invest in securities by buying stocks and bonds for their own accounts in hopes of reselling them later at a profit. these companies hold large sums of money for transfer between buyers and sellers.
Federal Deposit Insurance Corporation (FDIC)
supervises banks and insures deposits in banks and thrift institutions. the FDIC is a government agency, created by President Franklin D. Roosevelt to restore public confidence in banks during the Depression era. more than 99 % of the nation's commercial banks and savings institutions pay fees for membership in the FDIC. in return, the FDIC guarantees the safety of all accounts- checking, savings, and CDs- of every account owner up to the maximum of $250,000. to ensure against multiple bank failures, the FDIC maintains the right to examine the activities and accounts of all member banks.
International Services
suppose a U.S. company wants to buy a product from a Chinese supplier. for a fee, it can use one or more of three services offered by its bank: 1. Currency ExchangeL it can exchange U.S. dollars for Chinese yuan to pay the supplier. 2. Letters of Credit. it can pay its bank to issue a letter of credit, a promise by the bank to pay the Chinese firm a certain amount if specified conditions are met. payable only after certain conditions are met. 3. Banker's Acceptances: it can pay its bank to draw up a banker's acceptance, which promises that the bank will pay some specified amount at a future date. this requires payment by a particular date.
Core Competencies for Accounting
the CPA Vision Project identifies a unique combination of skills, technology, and knowledge, called core competencies for accounting, that will be necessary for the future CPA. the AICPA summarizes the projects core purpose as follows "CPAs...Making sense of a changing and complex world." skills, which include communication, critical thinking, and leadership, go far beyond the ability to "crunch numbers".the CPA Vision Project foresees CPAs who combine specialty skills with a broad-based orientation to communicate more effectively with people in a wide range of business activities.
Check Clearing
the Fed also clears checks for commercial banks to ensure that cash is deducted from the check writer's bank account and deposited into the check receiver's account. with electronic payments the number of paper checks processed is declining. the Fed now has just one full-service check-processing site, instead of the 45 locations needed as recently as 2003.
Reserve Banks
the Fed consists of 12 districts. each Federal Reserve Bank folds reserve deposits from and set the discount rate for commercial banks in its geographic region. reserve banks also play a major role in the nation's check-clearing process.
The Structure of the Fed
the Fed consists of a board of governors, a group of reserve banks, and member banks. as originally established by the Federal Reserve Act of 1913, the system consisted of 12 relatively autonomous banks and a seven-member committee whose powers were limited to coordinating the activities of those banks. by the 1930s, however, both the structure and function of the Fed had changed dramatically.
The Government's Bank
the Fed produces the nation's paper currency and decided how many bills to produce and destroy. it also lends money to the government by buying bonds issued by the Treasury Department to help finance the national deficit.
Prospectus
the SEC regulates the public offering of new securities by requiring that all companies file prospectuses before proposed offering commence. to protect investors from fraudulent issues, a prospectus contains pertinent information about both the offered security and the issuing company. false statements are subject to criminal penalties; Registration statement filed with the SEC, containing information for prospective investors about a security to be offered and the issuing company
Statement of Cash Flows
the SEC requires all firms whose stock is publicly traded to issue this third report, which describes yearly cash receipts and cash payments. because it provides the most detail about how the company generates and uses cash, some investors and creditors consider it one of the most important statements of all. it shows the effects on cash of 3 aspects of a business: -Operating Activities: cash transactions involved in buying and selling goods and services. -Investing Activities: reports net cash used in or provided by investing. includes cash receipts and payments from buying and selling stocks, bonds, property, equipment, and other productive assets. these sources of cash are not the companies main line of business. -Financial Activities: reports net cash from all financing activities. includes cash inflows from borrowing or issuing stock, as well as outflows for payment of dividends and repayment of borrowed money.
S&P 500
the Standard and Poor's Composite Index, is a broader report, considered by many to be the best single indicator of the U.S. equities market. it consists of 500 large-cap stocks, including companies from various sectors for a balanced representation of the overall large-cap equities market.
Owners' Equity (Net Worth)
the amount of money that owners would theoretically receive it they sold all of the company's assets at their presumed value and paid all of its liabilities. Assets - Liabilities = Owners' Equity -Net Worth: the difference between what a firm owns (assets) minus what is owes (liabilities) is its net worth, or owners' equity. -Assets > Liabilities the owners' equity is positive. if the company goes out of business, the owners will receive some cash (a gain) after selling assets and paying off liabilities; -Liabilities > Assets the owners' equity is negative. assets are insufficient to pay off all debts, and the firm is bankrupt. if the company goes out of business, the owners will get no cash, and some creditors won't be paid. -owners' equity is meaningful for both investors and lenders. before lending money to owners lenders want to know the amount of owners' equity in a business. a larger owners' equity indicates greater security for lenders. owners' equity consists of 2 sources of capital: 1. The amount that the owners originally invested. 2. Profits (also owned by the owners) earned by and reinvested in the company. -when a company operates profitability, it assets increase faster than its liabilities. owners' equity, therefore, will increase if profits are retained in the business instead of paid out as dividends to stockholders. also increased if owners invest more of their money to increase assets. owners' equity will shrink if the company operates at a loss or if owners withdraw assets.
Unsecured Loan
the borrower does not have to put up collateral. in many cases, however, the bank requires the borrower to maintain a compensating balance; the borrower must keep a portion of the loan amount on deposit with the bank in a non-interest-bearing account. access to such loans require good credit history.
Investment Bank
the firm also relied, traditionally, on the services of an investment bank, a financial institution that specialized in issuing and reselling new securities.
Initial Public Offerings (IPOs)
the first sale of a company's stock to the general public, are a major source of funds that fuel continued growth for many firms and introduce numerous considerations inherent in running a public company.
Financial Institutions
the main function is to ease the flow of money from users with surpluses to those with deficits by attracting funds into checking and savings accounts. U.S. consumers have access to more than 90,000 U.S. branches and offices of commercial banks, savings institutions, credit unions, and various nondeposit institutions.
Securities Market
the markets in which stocks and bonds are sold. by facilitating the buying and selling of securities, the securities markets provide the capital that companies rely on for survival. mutual funds are not bought and sold on securities markets but are managed by financial professionals in the investment companies that create, buy, and sell the funds.
Common Stock
the most prominent. a share of common stock is the most basic form of ownership in a company. individuals and other companies purchase a firm's common stock in the hope that it will increase in value and provide dividend income; in addition, each common share has a vote on major issues that are brought before the shareholders. among the riskiest of all investments. uncertainties about the stock market itself can quickly change a given stock's value. common stock offers high growth potential; when a company's performance brightens, because of public acceptance of a hot new product share price can sharply increase. historically, stock values generally rise with the passage of time.
Dow Jones Industrial Average (DIJA)
the oldest and most widely cited U.S. market index. it measures the performance of the industrial sector of the U.S. stock markets by focusing on just 30 blue chip, large-cap companies as reflectors of the economic health of the many similar U.S. firms. the Dow is an average of the stock prices for these 30 large firms, and traders and investors use it as a traditional barometer of the market's overall movement.
Current Dividend Yield (Current Interest Yield)
the rate of return from dividends paid to shareholders (in the case of interest from a loan) and is calculated by dividing the yearly dollar amount of dividend income by the investment's current market value. larger dividend yields are preferred to smaller returns.
Revenue Recognition
the reporting of revenue inflows, and the timing of other transactions, must abide by accounting principles that govern financial statements. Revenue Recognition is the formal recording and reporting of revenues at the appropriate time.earnings are not reported until the earnings cycle is completed. this cycle is completed under 2 conditions: 1. The sale is complete and the product is delivered. 2. The sale price has been collected or is collectible (accounts receivable). this practice ensures that the statement gives a fair comparison of what was gained (revenues) in return for the resources that were given us (cost of materials, labor, and other production and delivery expenses) for the transaction.
Total Return
the sum of an investment's current dividend (interest) yield and capital gain. cannot be accurately evaluated until its compared to the investment that was required to get that return. as a % divide by original investment X 100.
Exchange Rate
the value of one currency compare to the value of another, reveals how much of one currency must be exchanged for another. at any one time, then, some currencies are "strong"- selling at a higher price and worth more-whereas others are "weak". rates of exchange among currencies are published daily in financial media around the world and at online foreign currency exchange (forex) markets.
The National Association of Securities Dealers Automated Quotation (NASDAQ) System
the world's oldest electronic stock market, was established in 1971. whereas buy and sell orders to the NYSE are gather on the trading floor, NASDAQ orders are gathered and executed on a computer network connecting 500,000 terminals worldwide.
The Characteristics of Money
theoretically just about anything portable, divisible, durable, and stable can serve as money. -Portability: modern currency is light and easy to handle. -Divisibility: modern currency is easily divisible into smaller parts with fixed values- for example, a dollar for 10 dimes. -Durability: modern currency, however, neither dies nor spoils, and if it wears out, it can be replaced. it is also hard to counterfeit- certainly harder than cattle breeding. -Stability: the value of our paper money also fluctuates, but is considerably more stable and predictable.
Compound Growth
time value stems from the principle of compound growth, the cumulative growth from interest paid to the investor over given time periods. with each additional time period, an investment grows as interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment.
U.S. Securities and Exchange Commission (SEC)
to bring a new security to market, the issuing firm must get approval from the U.S. SEC, the government agency the regulates U.S. securities markets.
Private Accountants
to ensure integrity in reporting, CPAs are always independent of the firms they audit. however, many businesses also hire their own salaried employees, private accountants, to perform day-to-day activities. perform numerous jobs, with duties such as hiring and training, assigning projects, and evaluating performance of accounting personnel. large businesses employ specialized accountants in such areas as budgeting, financial planning, internal auditing, payroll, and taxation. in small businesses, a single person may handle all accounting tasks.
What is the purpose of ethics in accounting?
to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession. without ethics, all of accounting's tools and methods would be meaningless because their usefulness depends, ultimately, on veracity in their application.
Bookkeeping
to perform these functions, accountants keep records of taxes paid, incomes received, and expenses incurred, a process historically called bookkeeping, and they assess the effects of these transactions on business activities. by sorting and analyzing such transactions, accountants can determine how well a business is being managed and assess its financial strength.
Prime Rate
traditionally, banks only offered the lowest rate, or prime rate, to their most creditworthy commercial customers. most commercial loans are set at markups over prime, like prime +1, which means 1 % over the prime rate. to remain competitive with lower-interest foreign banks, U.S. banks offer some commercial loans at rates below prime.
Nondeposit Institutions
unlike commercial banks, these use inflowing funds for purposes other than earning interest for depositors. 4 of the most important are: -Pension Funds -Insurance Companies -Finance Companies -Securities Investment Dealers
Debit Cards
unlike credit cards, debit cards do not increase the funds at an individual's disposal but allow users only to transfer money between accounts to make retail purchased. they are used more than credit cards as payment for U.S. consumer transactions. -Point-of-Sale (POS) terminals: many retailers that accept debit cards stores use point-of-sale (POS) terminals to communicate relevant purchase information with a customer's bank.
Time Deposits
unlike demand deposits, time deposits, such as certificates of deposits (CDs), have a fixed term, are intended to be help to maturity, cannot be transferred by check, and pay higher interest rates than checking accounts. time deposits in M-2 include only accounts less than $100,000 that can be redeemed on demand, with penalties for early withdrawal.
World Bank
unlike true banks, the World Bank (technically, the International Bank for Reconstruction and Development), provides only a limited scope of services. for instance, it funds national improvements by making loans to build roads, schools, power plants, and hospitals. the resulting improvements eventually enable borrowing countries to increase productive capacity and international trade.
Bankruptcy
when a financially distressed company cannot pay bondholders, it mat seek relief by filing for bankruptcy, the court-granted permission not to pay some or all debts (GM).