Midterm Flashcards
Present value (PV)
The current value of one or more future amounts.
Loan Payment
A loan payment consists of a principal and interest payment, the amount owed for interest is processed first and the remaining amount of the payment is applied to the principal balance.
Owner Equity
Owner Equity represents the owner’s investment in the business minus the owner’s withdrawals from the business plus the net income (or minus the net loss) since the business began. Mathematically, the amount of owner’s equity is the amount of assets (valued at book value (net)) minus the amount of liabilities at one point in time.
Liabilities
Liabilities are future financial obligations. Liabilities are used to finance asset purchases and are generally obtained from creditors including banks, suppliers or credit unions but can also be provided via individual. The
firm obtains the money from creditors and promises to pay the original amount back plus interest and thus this obligation represents a creditors’ claims against assets.
Non-Cash costs
Costs that do not require an outlay of funds during the planning period. For example, depreciation is a non-cash cost.
Discounting
The reverse of compounding. Finding the present value of a future value by deducting the interest.
Book Value
This is a method for estimating the value ofan asset’s worth at one point in time based upon what the asset originally cost less the value (portion) of the asset used up during on-going business activities of the firm (e.g., produce products or services). The method for calculating the specific amount of the asset that is used up each year is called depreciation. The depreciation method and amount is dictated by accounting rules. These accounting rules will be discussed later in the net worth and balance sheet section.
Compounding
Compounding is the process of the exponential increase in the value of an investment due to earning interest on both principal and accumulated interest. In finance, compounding is used to develop a future value. Example: $10,000 present value with 10% interest compounded for two years is equal to a future value of $12,100.
Accumulated Depreciation Value
This value is the sum of all the annual depreciation values since the asset was purchased. In other words, this value represents the portion of asset cost that is estimated to have been used up. This value shows up in the balance sheet.
Payback period
The length of time (i.e. number of years) it takes for the accumulated net returns earned from an investment to equal the original investment. For example, a $1,000 investment that returns $200 per year has a payback period of 5 years.
Planning period
The time period over which the budget is relevant (e.g. one year, one production period).
Profitability
Profitability is a fundamental goal of a business. A firm is considered profitability when their revenue less expenses during a specific period of time is positive and non-profitable when the value is negative.
Principal Payment
A payment toward the amount of principal owed. This is how a business owner pays off a loan.
Net Income
Net income is calculated during a period of time as the firm’s revenue less expense.
Non-Capital asset
Assets such as cash, inventory, supplies, or partially made goods that are held by a firm for less than a year and are not depreciated. These assets flow through the firm.
Capital Asset
Capital assets are property, plant and equipment with a useful life longer than one year that are used by the firm provide future benefit (produce goods and eventually revenue). Capital assets are used up to make products/revenue and thus the amount of the asset that is used up is shown as an expense basis the matching principle ofGAAP. The specific amount used up is calculated using the depreciation method.
Net Accrued Income Statement
This statement presents the revenues, expenses and net income associated with the operating activities (e.g., core and on-going business activities) of the business during a period of time. This statement measures profitability.
Contribution Margin
Total Revenue Less Total Variable Cost OR on a per unit basis as price per unit less Variable Cost per unit. Provides the value that is left to contribute toward fixed cost. Useful when a business has more than one product or service.
Variable costs
These are costs that change in direct proportion to changes in volume or product produced. Variable costs can be avoided by not producing any goods. For example, the cost of apples, pie crust and sugar are variable costs for making frozen pies and thus the more pies made the proportional increase in inputs is required and if no pies are made the variable cost is zero.
Tangible Asset
This is a capital or non-capital asset that has a physical form. Examples: machinery, buildings, inventory, supplies and cash.
Balance Sheet Statement
This statement provides a snapshot of the firm’s assets and liabilities at one point in time. Assets and liabilities are valued at book value. This statement measures financial progress.
Profit
The value that remains after all expenses except opportunity costs have been subtracted from revenue. Same as “net income.”
Depreciation expense
A non-cash expense that indicates the portion of the asset used up in a specific time period to make products/revenue for a business. Must be calculated to meet the GAAP matching requirement.
Financial Risk
Financial risk results from the use of debt and having a fixed financial obligation associated with debt financing. This risk can be eliminated by eliminating debt. Measure by the leverage ratio (e.g., debt to equity).
Goods or Product Inventory
A complete listing and value of final products (e.g., frozen pies for sale) or near finished products that will be made for sale at a point in time (e.g. January 1.).
Unearned Revenue
This is a prepayment for goods or services that a firm is expected to provide to the purchaser in the future. Example: prepayment for one-year subscription of magazine or one-year prepayment for technical support. Given that a firm has unearned revenue, they then owe a service or product. Thus, at the point in time when the balance sheet statement is made, the firm needs to show a current liability equal to the revenue earned until delivery of the good or service has been made.
Efficiency
Efficiency is a measure of a firm’s performance in managing their resources to make profit.
Cash Sales
These are sales of goods or services that are paid for in cash. This item shows up as revenue in the both the accrual and cash net income statement.
Risk management
The use of various management practices to reduce the production, financial and other risks of the business. Commonly used practices include diversification, purchasing insurance, hedging or forward contracting, maintaining cash reserves and maintaining flexibility in the operation.
Prepaid expense
A payment made for an input or service (e.g., insurance, rent) prior to the accounting period in which it will be used.
GAAP
Commonly followed set of accounting principles, standards and procedures for financial reporting.
Salvage value
The market value of a depreciable asset at the end of its useful life and thus removed from service. Example: salvage value for a machine could be scrap metal value.
Investing activities
These refer to investment from the perspective of the firm and are transactions that increase and decrease long-term capital assets such as land, equipment or equipment and investment of profit or extra cash in financial markets.
Expenses
Expenses are costs incurred during a specific period of time in order to produce products or services and earn revenue associated with a firm’s operating activities.
Accrued Net Income
This statement recognizes revenue when it is earned and/or realizable (revenue recognition GAAP) regardless of when the money is received and expenses are matched to revenues regardless when those expenses are paid (matching expenses GAAP). Includes depreciation expense.
Breakeven selling price
The price needed to recover the total costs (cash and non-cash) associated with producing the product.
Accrual method of accounting
This method follows the GAAP rules and recognizes revenue when it is earned and/or realizable (revenue recognition GAAP) regardless of when the money is received and expenses as those associated with the production of those products (recognized revenue) regardless of when the expenses are paid (matching principle GAAP).
Account receivable
Asset resulting from selling goods or services on credit (on account). Results when product has been sold to a customer but the payment has not yet been received.
Perpetuity
An annuity that continues forever.
Net Present Value (NPV)
The present value of a series of future net cash flows that will result from an investment, less the amount of the original investment.
Loan
A sum of money provided by a firm (i.e., bank, individual or credit union) that is expected to be paid back with interest. Classified as a liability because it is a creditor’s claim against assets.
Intangible Asset
An asset that is not physical in nature. Example: Corporate intellectual property (items such as software code, patents, trademarks, copyrights, business methodologies), brands, goodwill)
Cash Flow Statement
This statement details the timing and amount of cash inflow and outflow of the business associated with the operating, financial and investment activities during a period of time. This statement measures the liquidity of the firm.
Operating activities
These are inflows and outflows or revenue and expenses associated with the core activities of the business.
Return on equity (ROE)
The value represented by net income divided by the value of owner’s equity (or average value of owner equity).
Enterprise budget
A projection or estimate of all revenue and expenses associated with a one particular product or service of a business – called an enterprise. It is used to estimate the profitability of the enterprise and to compare the profitability of various enterprises in a firm.
Supplies
Listing ofthe number, value and type items used for input to make final products (e.g., sugar, fruit packaging, flour) at a point in time (e.g. May1.).
Assets
Assets are resources that are owned and controlled by a business, government or individual for producing future economic benefits. Specifically, the economic benefit is obtained via the use of the assets t produce products and/or services that will be sold to provide revenue to the firm.
Return on assets (ROA)
The value represented by net income plus interest expense divided by the value of total assets (or average value of assets).
Revenue
Revenues are the money received during a specific period of time from normal business activities such as the sale of products produced or service provided. Revenue is calculated as the price (P) at which the products or services sold multiplied by the quantity (Q) of units sold.
Cash accounting
An accounting system that recognizes revenue when it is received and expenses when they are paid rather than when they are earned or incurred. Does not follow GAAP.
Appreciation
The increase in the value of an asset due to varying economic or inflationary conditions.
Fiscal Year
This is the period of time used to develop financial statements and is usually either the calendar year or a quarter. Once a firm defines a fiscal period they need to use this same timing unless there is a major reason to change.
Time value of money
The concept that a dollar in the present is worth more valuable than a dollar in the future basis it’s interest earning potential. Fundamental concept of capital budgeting, financing and investment.
Accrued expense
An expense that has been incurred, sometimes accumulating over time, but has not been paid. An example is interest that has accumulated on a loan but is not yet due or wages that have accrued but have not yet been paid to the employee. In both these cases the expense has accumulated but because it is not yet due is has not been paid. If a balance sheet was being developed at a point in time and a firm had an accrued expense, then this amount would need to be shown as a current liability (e.g., accrued wage expenses of 12,000 would show up on the balance sheet as a $12,000 wage payable to show skills were used of an employee wages still have to be paid – that $12,000 amount is owing to the employee as of the date of the balance sheet and thus this amount is a claim against the firm’s assets).
Account payable
amount a company owes for supplies or services purchased on credit. This account is often referred to as trade payables.
Capital Budgeting
Process by which a firm determines whether projects (long term and large capital investment such as buying land, investing in R&D, opening a new branch, replacing a machine) are worth pursuing. A project is worth pursuing if it increases the value of the company. Determined via various techniques such as net present value and internal rate of return.
Business Risk
Business risk results from exposure to price and production variation. The source of price risk is the variability of prices of product/service & costs of inputs while the source for production risk is the variation in production due to factor beyond management control such as weather, pests, genetic variation, and changes of regulations. Business risk can be managed but not mitigated.
Sensitivity analysis
A procedure for assessing the variability of net income or contribution margin when price and/or quantity changes.
Opportunity costs
The cost of using a resource based on what it could have earned if used for the next best alternative. For example, the opportunity cost of working in your own business is the amount you could have received by working for UBC.
Depreciation
A systematic method dictated by accounting and tax regulations for allocating the cost of capital assets over the useful life of the assets. More specifically, the method converts the purchase price of the capital asset to usage expense over time.
Financing activities
These refer to activities related to how a firm is financing their assets and involves transactions that increase and decrease liabilities and/or owner’s equity.
Principal Loan Amount
The original amount borrowed, or the part of the
amount borrowed which remains outstanding (excluding interest).
Annuity due
A series of equal cash flows occurring at the beginning of each equal time interval. Example: $1000 rent for an office space due at beginning of month.
