Chapter 1
Definition
401K
A tax-sheltered retirement plan offered by some employers.
Accounting
The business function responsible for creating the historical financial statements.
Asset Manager
A professional who makes a living managing a portfolio of assets.
Asset Pricing
The process of valuing assets
Business Finance
Another word for corporate finance.
Capital Budgeting Analysis
The process of deciding what assets to buy.
Cash Management
Managing the day-to-day finance operations of a firm.
Certified Financial Planner
A professional who has passed the CFP examination.
Chief Financial Officer (CFO)
The highest ranking corporate finance officer in a firm.
Commercial Bank
A bank that focuses mostly on mid to large sized companies.
Company/Industry Analysts
Professionals who produce reports on specific firms and industries.
Consumer Bank
A bank that focuses mostly on individuals, families, and small business.
Consumer Insurance
Life and property insurance.
Corporate Finance
The finance function within a business. One of the three main areas of finance.
Corporate Insurance
Insurance sold to businesses.
Cost of Capital
How much it costs the firm (in percentage terms) to finance its operations through debt and/or equity.
CPA
A Certified Public Accountant.
Credit Analyst
A bank position which involves deciding who qualifies for a loan and who does not.
Current Market Value
What someone would pay right now for an asset.
Debt
Money lent by a creditor to provide financing for the borrower.
Discounted Cash Flow
The process of using time value of money skills and forecasting to value assets.
Dollar-Cost-Averaging
Automatically investing a fixed percentage or amount every certain period, such as a month.
Equity
Ownership in an asset such as a company.
Estates
Legal structures used in estate planning.
Fair Return
An acceptable return for a passive investor.
Fields
Specific areas within finance such as insurance, personal finance, financial planning, asset management, etc.
Finance (verb)
To pay for something.
Financial Derivatives
Financial assets that derive their value based on an underlying asset. Examples are options, futures, and forwards.
Financial Management
Another word for corporate finance.
Financial Policy Implementation
Incorporating new finance ideas within a firm.
Free Cash Flows
Cash that is left over after business operations and taxes are paid.
Hedge Funds
Lightly regulated investment funds that have fewer restrictions than mutual funds pertaining to investment choices.
Index Fund
A mutual fund that tracks an already established index such as the S&P 500.
Initial Public Offering (IPO)
An organization’s business function responsible for interacting with the organization’s employees (staff, faculty, managers, etc.)
Institutions
One of the three main areas of finance which deals with banks, insurance companies, pension funds, and the like.
Insurance Company
A firm that offers life, health, auto, etc. insurance services.
Invest
To exchange something in hope of a return.
Investment Banking
Professional banking services not regulated by federal banking regulations.
Investments
One of the three main areas of finance. As its name implies, it involves choosing which assets to invest in.
Longing
Buying an asset.
Managerial Finance
Another word for corporate finance.
Marketing
The business function responsible of generating sales.
Mergers and Acquisitions (M&As)
The market for firms that buy and sell each other.
Money Manager
Old term for an Asset Manager
Mutual Funds
Portfolios of assets professionally managed for others to invest in.
New Issues
The market for firms issuing equity or debt for the first time.
No-Load Mutual Fund
A mutual fund that does not charge a fee to get into it or to leave it.
Operations
The business function responsible for the production of the good or service being sold.
OPM
Other people’s money.
Organizational behavior/Human Relations
The business function responsible for the people-stuff in the organization.
Passive Investing Strategy
Investing without active management.
Pension Company
A firm that provides retirement investment plans.
Private Placements
Company financing without having to file the necessary public regulatory documents.
Property/Casualty Auto Insurance
Insurance required if you own a car.
Real Estate Investment Trust
Portfolios that own real estate assets such as buildings and mortgages.
Reinsurance
Insurance sold to insurance companies.
Risk Management
The area in finance that deals with insurance.
Roth IRA
A tax-sheltered retirement plan individuals can use to avoid taxes on portfolio returns.
Seasoned Equity Offering (SEO)
Any public equity offering after the IPO.
Shorting
Selling an asset.
Specialties
Another word for fields.
Strategic Management
The business function of managing the strategies and tactics of business operations.
Supply Chain Management
A subset of operations responsible for managing the value chain.
Tax Strategies
Minimizing the taxes a business pays.
Tax-Sheltered Plan
An investment plan that either defers or eliminates income tax.
Teller
An entry level bank position.
Trusts
Legal structures used in estate planning.
Value Chain
The chain of suppliers and customers the business relies on.
Vault.com
A website with valuable career information.
Venture Capital
High risk, usually early stage professional financing.
Wills
Legal documents used in estate planning.
Chapter 2
Definition
Accounts Payable
A current liability that represents any money the firm owes suppliers and other firms. Typically the firm does not pay interest on accounts payable.
Accounts Receivable
A type of current asset which represents any money owed to the firm for services rendered.
Accrual Accounting
Accounting system based on recording accounts based on historical prices and the matching principle.
Accruals
Non-cash accounting accounts representing money either owed or due, typically in the short term.
Accrued Wages
Wages that the company owes to employees, but has not paid yet.
Additional PIC
A type of equity on the balance sheet which equals the proceeds from a stock offering minus the common stock (par) portion.
Balance Sheet
One of the three main financial statements. It is a snapshot of the firm’s assets, liabilities, and equity at any point in time.
Balance Sheet Equation
Assets = Liabilities + Equity
Book Value
The accounting value recorded on the balance sheet.
Cash
Most liquid current asset on the balance sheet.
Cash Flow from Financing
One of the three parts of the cash flow statement.
Cash Flow From Investing
One of the three parts of the cash flow statement.
Cash Flow from Operations
One of the three parts of the cash flow statement.
Common Stock
A type of equity on the balance sheet which represents equity sold to common share holders at par value.
Contra-Asset Account
An account on the asset side of the balance sheet that reduces the value of the asset, such as accumulated depreciation.
Cost of Good Sold (COGS)
The cost of raw materials for operations, typically the second line of the income statement.
Cost of Services
Similar to cost of goods sold, but applies to service companies.
Current Assets
Assets that are expected to be liquidated within a year.
Current Liabilities
Liabilities on the balance sheet with a short life span (typically less than one year).
Depreciation
A non-cash expense used to approximate the decrease in value of an asset.
Earnings
Another word for net income.
Earnings Management
Using accrual accounting to make earnings look better or worse than they should.
EBIT
Stands for “Earnings Before Interest and Taxes”. EBIT is found on the income statement.
FASB
Federal Accounting Standards Board.
FIFO
First in, first out inventory system.
Financial Statement Analysis
The process of examining the three financial statements using financial skills.
Fixed Assets
Assets on the balance sheet with a lifespan greater than a year.
GAAP
Generally accepted accounting principles.
Gross Profit
Typically the third line of the income statement which equals Sales - COGS
Historical Cost Principle
Accrual accounting principle to recorded assets, liabilities, and equity at historical levels.
Income Statement
One of the three main financial statements. It covers a period of time and starts with sales, takes out expenses, and ends with net income.
Interest Expense
Amount owed to creditors that appears on the income statement between EBIT and earnings before taxes.
Inventories
A current asset that is typically viewed as the least-liquid current asset. Includes raw materials, work-in-process, and finished goods.
Investing Activities
What type of projects a firm decides to take.
LIFO
“Last in, first out” inventory system.
Liquidity
The ability to convert an asset to cash quickly without losing significant value.
Marketable Securities
Very liquid current asset on the balance sheet such as money markets, t-bills, etc.
Matching Principle
Accrual accounting principle to match revenues and expenses in the same period.
Net Income
Typically last line of the income statement, also known as earnings.
Non-Cash Expense
Any expense that is not an actual cash flow, but is recorded in the financial statements. An example is depreciation.
Notes Payable
A current liability that represents money borrowed for the short term, typically under 5 years.
Operating Accounts
Financial statement accounts which generate operating expenses.
Operating Expenses
The expenses on an income statement that fit between gross profit and EBIT
Percentage of Completion Method
A type of revenue recognition system where the firm books sales as they complete certain milestones of the service rendered.
PP&E
Property, plant, and equipment, a part of fixed assets on the balance sheet.
Retained earnings
Money plowed back into the company from prior earnings (net income).
Retained Earnings Forecasting
Predicting the amount of retained earnings that will carry from the income statement to the balance sheet in the future.
Revenue Recognition
Accrual accounting permits firms to time the recognition of sales based on certain rules.
Revenues, Sales
The top line of the income statement. The total amount of money a business brings in (before subtracting out any costs).
Sell-Lease Back
A technique used to reduce the amount of assets and especially debt on a firm’s books.
Source of Cash
A decrease of an asset (including cash) or the increase in a liability.
Statement of Cash Flows
One of the three main financial statements. It includes cash flow from operations, investing, and financing.
Tax Expense
Typically second to the last line of the income statement right before net income, represents income taxes paid by the firm.
Use of Cash
An increase of an asset (including cash) or the decrease of a liability.
Chapter 3
Definition
Accounting Profit
Typically net income. A profit that does not account for opportunity costs.
Acid Test Ratio
Another word for Quick Ratio.
Agency Costs
The costs that result from the principle-agent problem.
AR Turnover
Credit Sales/AR, a liquidity ratio.
Average Collection Period
AR/Daily Credit Sales, a liquidity ratio.
CAPEX
Capital Expenditures, how much the firm spends on fixed assets.
Capital Structure
The portion of a firm’s assets that are financed by either liabilities (debt), or by equity. The mix of debt and equity is referred to as the capital structure.
Costly Capital
All interest-bearing debt plus all equity.
Cross-sectional Analysis
One of the three ways to use ratios by comparing the firm to other firms’ ratios or industry averages.
Current Ratio
CA/CL, a liquidity ratio.
Debt Ratio
D/A, a financing ratio.
Debt-to-Equity Ratio
D/E, a financing ratio.
DuPont Formula
A mathematical break-down that breaks ROE into multiple components: profitability, efficiency, and leverage typically.
Earnings
Another word for Net Income.
Economic Profit
Accounting profit minus opportunity costs.
Efficiency Ratios
One of the four classifications of ratios designed to see how well the firm is using its assets and investments.
Equity Multiplier
A/E, the third part of the DuPont Formula.
EVA
Economic value added, a measure of economic profit.
Financial Leverage
The portion of a firm’s asset that are financed by debt. The more debt a company holds, the great its financial leverage.
Financing Ratios
One of the four classifications of ratios designed to measure how the firm finances its operations.
Fixed Asset Turnover
Sales/Fixed Assets, an efficiency ratio.
Free Cash Flow to Equity
Cash left over after operations, taxes, and debt/interest payments available to shareholders.
Free Cash Flow to the Firm
Cash left over after operations and taxes available to creditors and shareholders.
Goal of the Firm
Traditionally to maximize shareholder wealth.
Gross Margin
Gross Profit/Sales, a profitability ratio.
High-Growth Firms
Firms expected to experience high growth. These types of firms typically have a market-to-book equity ratio greater than 1.
Industry Analysis
A type of cross-sectional analysis.
Inventory Turnover
COGS/Inventory, a liquidity ratio.
JIT Inventory
A system of inventory where the needed inventory shows up just in time.
LBO
Leveraged buyout. This is when a firm is purchased with a ton of debt.
Liquid Asset
An asset that can be converted into cash quickly without the loss of significant value.
Liquidity Ratios
One of the four classifications of ratios designed to measure the ability of a firm to pay its near-term obligations.
Net Margin
NI/Sales, a profitability ratio.
NWC
Net Working Capital. Calculated by subtracting Current Liabilities from Current Assets (CA- CL).
OIROI
Operating Income Return on Investment. Operating income/Total Assets, an efficiency ratio.
Operating Margin
EBIT/Sales, a profitability ratio.
Opportunity Costs
Non-cash costs found from asking, “What could the firm have done with the money instead?”.
Optimal Debt Ratio
The amount of debt that minimizes the firm’s cost of capital.
Principle-Agent Problem
When the agent (worker or manager) doesn’t act in the best interest of the principle (owner).
Profitability Ratios
One of the four classifications of ratios designed to measure the profitability of the firm.
Quick Ratio
(CA-Inventory)/CL, a liquidity ratio.
Ratio Analysis
Process of using financial analysis to determine the health of a firm.
ROA
Return on Assets = NI/A, a profitability ratio.
ROE
Return on Equity = NI/E, a profitability ratio.
Seasonal Firms
Firms whose performance varies according to the season.
Time Series Analysis
Same as trend analysis.
Times Interest Earned (TIE)
EBIT/Interest Expense, a financing ratio.
Total Asset Turnover
Sales/Total Assets, an efficiency ratio. Sometimes written as “TAT.”
Trend Analysis
One of the three ways to use ratios by comparing a firm’s ratios across time.
WACC
Weighted average cost of capital. The average cost of financing a firm in percentage terms.
