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
