Defining_Financial_Terms

Defining Financial Terms Sarah Martin FIN 370 October 20, 2010 Judith Vandenberg Defining Financial Terms The control of money; money required, money somebody has, provided money, decisions on how money is spent, money used to pay, and how much money you have are all parts of finance. Finance studies money and its management. It explores the allocation of resources in a world of uncertainty (Mayo, 2007). In business, there are four financial statements used; Income Statement, Retained Earnings Statement, Balance Sheet, and Statement of Cash Flow. These four financial statements are prepared in this order. Each statement takes something from the previous statement. Net income is calculated first (revenues – expenses = net income/loss), using the Income Statement. This is needed to determine the ending balance in the Retained Earnings Statement (beginning retained earnings – dividends paid + net income/loss = ending retained earnings). To complete the Balance Sheet you need the ending retained earnings. This financial uses the basic financial formula (assets = liabilities + capital). The cash amount from the Balance Sheet is the amount of cash at the end of the period on the Statement of Cash Flow (cash from operating activities – cash spent on operations + cash from financing + cash at beginning of period = cash at end of period). If these numbers do not match up, there was something recorded wrong. These statements help determine where it might be. A security is a fungible, negotiable instrument representing financial value. There are two security categories, debt securities, and equity securities. Debt securities include banknotes, bonds, and debentures. Equity securities include common stocks; and derivative contracts, such as forwards, futures, options and swaps (Wikipedia: The Free Encyclopedia, 2010). Efficient Market is a market in which the values of securities at any instant in time fully reflect all available information, which results in the market value and the intrinsic value being the same (Keown, Martin, Petty, & Scott Jr, 2005). A Primary Market is a market in which new, as opposed to previously issued, securities are traded (Keown, Martin, Petty, & Scott Jr, 2005). The only time that an issuing firm receives money is during the primary market. It is the first opportunity that investors have to buy a newly issued security. Next we have Secondary Market. When someone has previously bought stock and then wants to resell it, they would do this in a secondary market. It is where investors buy securities from other investors instead of from the issuing company. In studying capital-budgeting techniques, we refer to risk as the likely variability associated with expected revenue or income streams (Keown, Martin, Petty, & Scott Jr, 2005). It is the possibility of loss in an investment or speculation. Financial risk is the risk involved in borrowing money to buy a company while relying of the same company to make enough profit to pay the interest of the loan. Stock represents equity in a corporation (Mayo, 2007) and is a kind of equity. A balance sheet shows all equity. Those with common stock have voting rights. They help make corporate decisions. Preferred stockholders do not carry voting rights. Before other shareholders receive their dividends, preferred stockholders are legally entitled to receive a certain level of dividend payments (Wikipedia: The Free Encyclopedia, 2010). A certificate issued by a government or company promising to pay back borrowed money at a fixed rate of interest on a specified date is a bond. All bonds share a number of characteristics. The principle is the amount owed, the interest is the payment for the use of the principal, and the maturity date is the day on which the debt must be repaid. Yield is a return on an investment or bond. One can express yield as a current yield or yield to maturity. Current yield is when you take the interest and divide it by the current price of the bond. Yield to maturity is the return earned from holding the bond until it matures (Mayo, 2007). Money that can be used to produce further wealth is capital. It is the owner’s investment in the business (Weygandt, Kimmel, & Kieso, 2008). There is also working capital. It is the excess of current assets over current liabilities (Weygandt, Kimmel, & Kieso, 2008). Capital is a form of equity and is reported on the balance sheet. When one owes an amount of money, they have debt. It is money that has been borrowed and must be repaid at some predetermined date. It consists of such sources as credit extended by suppliers or a loan from a bank (Keown, Martin, Petty, & Scott Jr, 2005). Accounts payable is an account that a business would record borrowed money. It is a liability recorded on the balance sheet. The amount of income generated by investment is rate of return, expressed as a percentage of the total sum invested. The amount of profit that a company makes is expressed as a percentage of the amount they originally invested. Return on investment is the profit from an investment as a percentage of the amount invested. The patter of income and expenses, and its consequences for how much money is available at a given time is cash flow. It is the prediction or assessment of a company’s income and expenses of a period of time (Weygandt, Kimmel, & Kieso, 2008). References Keown, A. J., Martin, J. D., Petty, J. W., & Scott Jr, D. F. (2005). Financial Management: Principles and Applications (10th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Mayo, H. B. (2007). Basic Finance: An Introduction to Financial Institutions, Investments, and Management (9th ed.). Mason, OH: Thomson Higher Education. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial Accounting (6th ed.). Hoboken, NJ: John Wiley & Sons, Inc.. Wikipedia: The Free Encyclopedia. (2010, August). Security (finance). Retrieved from http://en.wikipedia.org/wiki/Financial_security Wikipedia: The Free Encyclopedia. (2010, October 18). Stock. Retrieved from http://en.wikipedia.org/wiki/Stock