Accounting glossary
Basic small business accounting and bookkeeping terms and how-tos. Check out our definitions that won’t hurt your brain. And find related terms and resources.
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Accounting Information System (AIS)...
An accounting information system (AIS) involves the collection, storage, and processing of financial and accounting data used by internal users to report information to investors, creditors, and tax authorities. It is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. An AIS combines traditional accounting practices, such as the use of Generally Accepted Accounting Principles (GAAP), with modern information technology resources.
How an Accounting Information Systems (AIS) is Used.
An accounting information system contains various elements important in the accounting cycle. Although the information contained in a system varies among industries and business sizes, a typical AIS includes data relating to revenue, expenses, customer information, employee information, and tax information. Specific data includes sales orders and analysis reports, purchase requisitions, invoices, check registers, inventory, payroll, ledger, trial balance, and financial statement information.
How an Accounting Information Systems (AIS) is Used.
An accounting information system contains various elements important in the accounting cycle. Although the information contained in a system varies among industries and business sizes, a typical AIS includes data relating to revenue, expenses, customer information, employee information, and tax information. Specific data includes sales orders and analysis reports, purchase requisitions, invoices, check registers, inventory, payroll, ledger, trial balance, and financial statement information.
Introduction.
Above par is a way of describing a bond’s price when it trades above its face value. Generally, a bond trades at the above par when its returns are greater than those of other bonds presently available on the market. It happens because interest rates have fallen in such a way that newly issued bonds bear lower coupon rates.
Understanding Above Par…
The main reason for the opposite relationship is that a current bond yield must suit the yield of a new bond issued in a market with high or low-interest rates that exist. An investor purchasing a bond which is trading over par will earn higher interest payments. That’s because the coupon rate was established in a market of higher existing interest rates. If the bond is taxable, the buyer may choose to offset taxable interest income by amortizing the bond premium. Unless the bond yields tax-exempt interest, the lender must amortize the premium under IRS law.
The above par movement for a non-callable bond is contingent on the duration of the bond. The longer the duration, the greater the sensitivity to interest-rate changes. On the other hand, the price increase above par is limited because when interest rates fall for a callable bond, the borrower will very likely be repaid by it. The issuer would leave those old bonds and reissue lower-coupon new bonds.
Accounting Standard
An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices.
Understanding Accounting Standard.
Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted Accounting Principles form the set of accounting standards widely accepted for preparing financial statements.
International companies follow the International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board and serve as the guideline for non-U.S. GAAP companies reporting financial statements. Generally Accepted Accounting Principles are heavily used among public and private entities in the United States. The rest of the world primarily uses IFRS. Multinational entities are required to use these standards. The IASB establishes and interprets the international communities’ accounting standards when preparing financial statements.
Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted Accounting Principles form the set of accounting standards widely accepted for preparing financial statements.
International companies follow the International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board and serve as the guideline for non-U.S. GAAP companies reporting financial statements. Generally Accepted Accounting Principles are heavily used among public and private entities in the United States. The rest of the world primarily uses IFRS. Multinational entities are required to use these standards. The IASB establishes and interprets the international communities’ accounting standards when preparing financial statements.
Accounts payable (AP) is an account within the general ledger that represents a company’s obligation to pay off a short-term debt to its creditors or suppliers. Another common usage of “AP” refers to the business department or division that is responsible for making payments owed by the company to suppliers and other creditors.
Understanding Accounts Payable.
A company’s total accounts payable (AP) balance at a specific point in time will appear on its balance sheet under the current liabilities section. Accounts payable are debts that must be paid off within a given period to avoid default. At the corporate level, AP refers to short-term debt payments due to suppliers. The payable is essentially a short-term IOU from one business to another business or entity. The other party would record the transaction as an increase to its accounts receivable in the same amount.
AP is an important figure in a company’s balance sheet. If AP increases over a prior period, that means the company is buying more goods or services on credit, rather than paying cash. If a company’s AP decreases, it means the company is paying on its prior period debts at a faster rate than it is purchasing new items on credit. Accounts payable management is critical in managing a business’s cash flow.
Accounts Payable Turnover Ratio
The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover shows how many times a company pays off its accounts payable during a period.
Accounts payable are short-term debt that a company owes to its suppliers and creditors. The accounts payable turnover ratio shows how efficient a company is at paying its suppliers and short-term debt.
A Decreasing AP Turnover Ratio.
A decreasing turnover ratio indicates that a company is taking longer to pay off its suppliers than in previous periods. The rate at which a company pays its debts could provide an indication of the company’s financial condition. A decreasing ratio could signal that a company is in financial distress. Alternatively, a decreasing ratio could also mean the company has negotiated different payment arrangements with its suppliers.
An Increasing Turnover Ratio.
When the turnover ratio is increasing, the company is paying off suppliers at a faster rate than in previous periods. An increasing ratio means the company has plenty of cash available to pay off its short-term debt in a timely manner. As a result, an increasing accounts payable turnover ratio could be an indication that the company managing its debts and cash flow effectively.
However, an increasing ratio over a long period could also indicate the company is not reinvesting back into its business, which could result in a lower growth rate and lower earnings for the company in the long term. Ideally, a company wants to generate enough revenue to pay off its accounts payable quickly, but not so quickly the company misses out on opportunities because they could use that money to invest in other endeavors.
A Decreasing AP Turnover Ratio.
A decreasing turnover ratio indicates that a company is taking longer to pay off its suppliers than in previous periods. The rate at which a company pays its debts could provide an indication of the company’s financial condition. A decreasing ratio could signal that a company is in financial distress. Alternatively, a decreasing ratio could also mean the company has negotiated different payment arrangements with its suppliers.
An Increasing Turnover Ratio.
When the turnover ratio is increasing, the company is paying off suppliers at a faster rate than in previous periods. An increasing ratio means the company has plenty of cash available to pay off its short-term debt in a timely manner. As a result, an increasing accounts payable turnover ratio could be an indication that the company managing its debts and cash flow effectively.
However, an increasing ratio over a long period could also indicate the company is not reinvesting back into its business, which could result in a lower growth rate and lower earnings for the company in the long term. Ideally, a company wants to generate enough revenue to pay off its accounts payable quickly, but not so quickly the company misses out on opportunities because they could use that money to invest in other endeavors.
Accounts Receivable (AR)
Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.
Understanding Accounts Receivable.
Accounts receivable refers to the outstanding invoices a company has or the money clients owe the company. The phrase refers to accounts a business has the right to receive because it has delivered a product or service. Accounts receivable, or receivables represent a line of credit extended by a company and normally have terms that require payments due within a relatively short time period. It typically ranges from a few days to a fiscal or calendar year.
Companies record accounts receivable as assets on their balance sheets since there is a legal obligation for the customer to pay the debt. Furthermore, accounts receivable are current assets, meaning the account balance is due from the debtor in one year or less. If a company has receivables, this means it has made a sale on credit but has yet to collect the money from the purchaser. Essentially, the company has accepted a short-term IOU from its client.
Understanding Accounts Receivable.
Accounts receivable refers to the outstanding invoices a company has or the money clients owe the company. The phrase refers to accounts a business has the right to receive because it has delivered a product or service. Accounts receivable, or receivables represent a line of credit extended by a company and normally have terms that require payments due within a relatively short time period. It typically ranges from a few days to a fiscal or calendar year.
Companies record accounts receivable as assets on their balance sheets since there is a legal obligation for the customer to pay the debt. Furthermore, accounts receivable are current assets, meaning the account balance is due from the debtor in one year or less. If a company has receivables, this means it has made a sale on credit but has yet to collect the money from the purchaser. Essentially, the company has accepted a short-term IOU from its client.
Accounts Receivable Financing
Accounts receivable (AR) financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable. Accounts receivable financing agreements can be structured in multiple ways usually with the basis as either an asset sale or a loan.
Understanding Accounts Receivable Financing.
Accounts receivable financing is an agreement that involves capital principal in relation to a company’s accounts receivables. Accounts receivable are assets equal to the outstanding balances of invoices billed to customers but not yet paid. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payment required within one year.
Accounts receivable are one type of liquid asset considered when identifying and calculating a company’s quick ratio which analyzes its most liquid assets.
Accounts receivable financing is an agreement that involves capital principal in relation to a company’s accounts receivables. Accounts receivable are assets equal to the outstanding balances of invoices billed to customers but not yet paid. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payment required within one year.
Accounts receivable are one type of liquid asset considered when identifying and calculating a company’s quick ratio which analyzes its most liquid assets.
Accrual Accounting
Accrual accounting is one of two accounting methods; the other is cash accounting. Accrual accounting measures a company’s performance and position by recognizing economic events regardless of when cash transactions occur, whereas cash accounting only records transactions when payment occurs.
How Accrual Accounting Works.
The general concept of accrual accounting is that economic events are recognized by matching revenues to expenses (the matching principle) at the time when the transaction occurs rather than when payment is made or received. This method allows the current cash inflows or outflows to be combined with future expected cash inflows or outflows to give a more accurate picture of a company’s current financial position.
Accrual accounting is considered the standard accounting practice for most companies except for very small businesses and individuals. The Internal Revenue Service (IRS) allows qualifying small businesses (less than $25 million in annual revenues) to choose their preferred method.1 The accrual method does provide a more accurate picture of the company’s current condition, but its relative complexity makes it more expensive to implement.
How Accrual Accounting Works.
The general concept of accrual accounting is that economic events are recognized by matching revenues to expenses (the matching principle) at the time when the transaction occurs rather than when payment is made or received. This method allows the current cash inflows or outflows to be combined with future expected cash inflows or outflows to give a more accurate picture of a company’s current financial position.
Accrual accounting is considered the standard accounting practice for most companies except for very small businesses and individuals. The Internal Revenue Service (IRS) allows qualifying small businesses (less than $25 million in annual revenues) to choose their preferred method.1 The accrual method does provide a more accurate picture of the company’s current condition, but its relative complexity makes it more expensive to implement.
Accrued Expense
An accrued expense, also known as accrued liabilities, is an accounting term that refers to an expense that is recognized on the books before it has been paid. The expense is recorded in the accounting period in which it is incurred.
Understanding Accrued Expense.
Since accrued expenses represent a company’s obligation to make future cash payments, they are shown on a company’s balance sheet as current liabilities. An accrued expense can be an estimate and differ from the supplier’s invoice that will arrive at a later date. Following the accrual method of accounting, expenses are recognized when they are incurred, not necessarily when they are paid.
An example of an accrued expense is when a company purchases supplies from a vendor but has not yet received an invoice for the purchase. Other forms of accrued expenses include interest payments on loans, warranties on products or services received, and taxes—all of which have been incurred or obtained, but for which no invoices have been received nor payments made. Employee commissions, wages, and bonuses are accrued in the period they occur although the actual payment is made in the following period.
Understanding Accrued Expense.
Since accrued expenses represent a company’s obligation to make future cash payments, they are shown on a company’s balance sheet as current liabilities. An accrued expense can be an estimate and differ from the supplier’s invoice that will arrive at a later date. Following the accrual method of accounting, expenses are recognized when they are incurred, not necessarily when they are paid.
An example of an accrued expense is when a company purchases supplies from a vendor but has not yet received an invoice for the purchase. Other forms of accrued expenses include interest payments on loans, warranties on products or services received, and taxes—all of which have been incurred or obtained, but for which no invoices have been received nor payments made. Employee commissions, wages, and bonuses are accrued in the period they occur although the actual payment is made in the following period.
Accrued Income
Accrued income is money that’s been earned but has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time—but only pay shareholders once a year—are, by definition, accruing their income. Individual companies can also generate income without actually receiving it, which is the basis of the accrual accounting system.
Understanding Accrued Income.
Most companies use accrual accounting. It is an alternative to the cash accounting method and is necessary for companies that sell products or provide services to customers on credit. Under the U.S. generally accepted accounting principles (GAAP), accrual accounting is based on the revenue recognition principle. This principle seeks to match revenues to the period in which they were earned, rather than the period in which cash is received.
In other words, just because money has not yet been received, it does not mean that revenue has not been earned.
The matching principle also requires that revenue be recognized in the same period as the expenses that were incurred in earning that revenue. Also referred to as accrued revenue, accrued income is often used in the service industry or in cases in which customers are charged an hourly rate for work that has been completed but will be billed in a future accounting period. Accrued income is listed in the asset section of the balance sheet because it represents a future benefit to the company in the form of a future cash payout.
Understanding Accrued Income.
Most companies use accrual accounting. It is an alternative to the cash accounting method and is necessary for companies that sell products or provide services to customers on credit. Under the U.S. generally accepted accounting principles (GAAP), accrual accounting is based on the revenue recognition principle. This principle seeks to match revenues to the period in which they were earned, rather than the period in which cash is received.
In other words, just because money has not yet been received, it does not mean that revenue has not been earned.
The matching principle also requires that revenue be recognized in the same period as the expenses that were incurred in earning that revenue. Also referred to as accrued revenue, accrued income is often used in the service industry or in cases in which customers are charged an hourly rate for work that has been completed but will be billed in a future accounting period. Accrued income is listed in the asset section of the balance sheet because it represents a future benefit to the company in the form of a future cash payout.
Accumulated Depreciation
Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the overall asset value.
Understanding Accumulated Depreciation.
The matching principle under generally accepted accounting principles (GAAP) dictates that expenses must be matched to the same accounting period in which the related revenue is generated. Through depreciation, a business will expense a portion of a capital asset’s value over each year of its useful life. This means that each year a capitalized asset is put to use and generates revenue, the cost associated with using up the asset is recorded.
Accumulated depreciation is the total amount an asset has been depreciated up until a single point. Each period, the depreciation expense recorded in that period is added to the beginning accumulated depreciation balance. An asset’s carrying value on the balance sheet is the difference between its historical cost and accumulated depreciation. At the end of an asset’s useful life, its carrying value on the balance sheet will match its salvage value. When recording depreciation in the general ledger, a company debits depreciation expense and credits accumulated depreciation. Depreciation expense flows through to the income statement in the period it is recorded. Accumulated depreciation is presented on the balance sheet below the line for related capitalized assets. The accumulated depreciation balance increases over time, adding the amount of depreciation expense recorded in the current period.
Understanding Accumulated Depreciation.
The matching principle under generally accepted accounting principles (GAAP) dictates that expenses must be matched to the same accounting period in which the related revenue is generated. Through depreciation, a business will expense a portion of a capital asset’s value over each year of its useful life. This means that each year a capitalized asset is put to use and generates revenue, the cost associated with using up the asset is recorded.
Accumulated depreciation is the total amount an asset has been depreciated up until a single point. Each period, the depreciation expense recorded in that period is added to the beginning accumulated depreciation balance. An asset’s carrying value on the balance sheet is the difference between its historical cost and accumulated depreciation. At the end of an asset’s useful life, its carrying value on the balance sheet will match its salvage value. When recording depreciation in the general ledger, a company debits depreciation expense and credits accumulated depreciation. Depreciation expense flows through to the income statement in the period it is recorded. Accumulated depreciation is presented on the balance sheet below the line for related capitalized assets. The accumulated depreciation balance increases over time, adding the amount of depreciation expense recorded in the current period.
Amortization
Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.
Understanding Amortization.
The term “amortization” refers to two situations. First, amortization is used in the process of paying off debt through .regular principal and interest payments over time. An amortization schedule is used to reduce the current balance on a loan—for example, a mortgage or a car loan—through installment payments.
Second, amortization can also refer to the spreading out of capital expenses related to intangible assets over a specific duration—usually over the asset’s useful life—for accounting and tax purposes.
Understanding Amortization.
The term “amortization” refers to two situations. First, amortization is used in the process of paying off debt through .regular principal and interest payments over time. An amortization schedule is used to reduce the current balance on a loan—for example, a mortgage or a car loan—through installment payments.
Second, amortization can also refer to the spreading out of capital expenses related to intangible assets over a specific duration—usually over the asset’s useful life—for accounting and tax purposes.
Asset Class
An asset class is a bundle of investments that are subject to the same laws and regulations and have similar characteristics. There are three main asset classes—equities (stocks), fixed income (bonds), and cash equivalent/money market instruments.
Understanding Asset Class.
Currently, many other categories are included under asset classes, such as commodities, real estate, other financial derivatives, and cryptocurrencies. It includes both tangible and intangible instruments that investors buy and sell for generating income on a short-term or long-term basis.
More about Asset Classes.
An asset class can be considered as a grouping of comparable financial securities. IBM, MSFT, and AAPL are an instance of a grouping of stocks.
Asset classes and their categories are often used interchangeably. However, they are not correlated in reality. Each asset class may reflect different risk and return-on-investment characteristics. They also perform differently in any given market environment.
Understanding Asset Class.
Currently, many other categories are included under asset classes, such as commodities, real estate, other financial derivatives, and cryptocurrencies. It includes both tangible and intangible instruments that investors buy and sell for generating income on a short-term or long-term basis.
More about Asset Classes.
An asset class can be considered as a grouping of comparable financial securities. IBM, MSFT, and AAPL are an instance of a grouping of stocks.
Asset classes and their categories are often used interchangeably. However, they are not correlated in reality. Each asset class may reflect different risk and return-on-investment characteristics. They also perform differently in any given market environment.
Asset Management
The asset manager refers to an individual who takes care of investment management. The individual from the financial services industry sector manages investment funds and customer account segregation. Asset management is part of a financial firm that hires professionals who manage money and control client portfolios.
From studying the assets of the client to planning and managing the investments, the asset managers take care of everything, and recommendations are made based on each client’s financial health.
Asset management is the strategy of a financial services firm, typically an investment bank, or an entity, for all or part of a client’s portfolio. Institutions provide investment services along with a wide range of conventional and alternative product offerings that a normal investor cannot access.
In essence, the process of asset management has a dual mandate-appreciation of the assets of a client over time while mitigating risk. There are investment minimums, which means that high net worth individuals, government entities, corporations, and financial intermediaries generally have access to this service. An asset manager’s role is to determine what investments will grow the portfolio of a client, or which ones to avoid. Using both macro- and micro-analytical tools, rigorous research is carried out. It involves statistical analysis of current market patterns, interviews with company officials, and anything else that would help achieve the stated goal of appreciation of client properties.
From studying the assets of the client to planning and managing the investments, the asset managers take care of everything, and recommendations are made based on each client’s financial health.
Asset management is the strategy of a financial services firm, typically an investment bank, or an entity, for all or part of a client’s portfolio. Institutions provide investment services along with a wide range of conventional and alternative product offerings that a normal investor cannot access.
In essence, the process of asset management has a dual mandate-appreciation of the assets of a client over time while mitigating risk. There are investment minimums, which means that high net worth individuals, government entities, corporations, and financial intermediaries generally have access to this service. An asset manager’s role is to determine what investments will grow the portfolio of a client, or which ones to avoid. Using both macro- and micro-analytical tools, rigorous research is carried out. It involves statistical analysis of current market patterns, interviews with company officials, and anything else that would help achieve the stated goal of appreciation of client properties.
Asset Allocation
Asset allocation is a strategy in investments that intends to balance the risk and rewards by allocating a portfolio’s capital assets as per the individual’s risk profile, goals, and investment horizon. The three primary asset classes are fixed income, cash and its equivalents, and equities.
All three of these have different levels of return and risk and, hence, will perform uniquely. It is for this reason that individuals should thoroughly understand each instrument before deciding to invest in it.
Importance of Asset Allocation.
There is no straightforward formula to calculate the right asset allocation for all individuals. Nevertheless, the accord amongst the majority of the professionals in the finance world is that the asset allocation is one of the critical choices that investors should make.
In simple words, the choice of individual assets and securities is subordinate to the way in which the assets are allocated in bonds, stocks, and cash. These are going to be the primary determinants of the investment results.
All three of these have different levels of return and risk and, hence, will perform uniquely. It is for this reason that individuals should thoroughly understand each instrument before deciding to invest in it.
Importance of Asset Allocation.
There is no straightforward formula to calculate the right asset allocation for all individuals. Nevertheless, the accord amongst the majority of the professionals in the finance world is that the asset allocation is one of the critical choices that investors should make.
In simple words, the choice of individual assets and securities is subordinate to the way in which the assets are allocated in bonds, stocks, and cash. These are going to be the primary determinants of the investment results.
Asset Allocation Strategies
Investors can resort to different asset allocations for different requirements. For someone who is saving up their money to buy a house in the next few years, it is apt to do so by investing in safer options such as bonds, certificates of deposit, and so on.
Another individual who is saving for his retirement from the early years of their professional life can start off, initially, by investing in stocks and then slowly shifting to safer instruments as the retirement approaches. This schedule works because the investments in stocks need a good amount of time to yield good returns and will give an investor all the time in the world to beat the market fluctuations.
However, not every individual may follow this, as each individual will have their own requirements and risk profile. It is important that individuals consider various factors before deciding on any given investment strategy.
Another individual who is saving for his retirement from the early years of their professional life can start off, initially, by investing in stocks and then slowly shifting to safer instruments as the retirement approaches. This schedule works because the investments in stocks need a good amount of time to yield good returns and will give an investor all the time in the world to beat the market fluctuations.
However, not every individual may follow this, as each individual will have their own requirements and risk profile. It is important that individuals consider various factors before deciding on any given investment strategy.
Balanced Scorecard (BSC)
The term balanced scorecard (BSC) refers to a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Used to measure and provide feedback to organizations, balanced scorecards are common among companies in the United States, the United Kingdom, Japan, and Europe. Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information. Company personnel can use this information to make better decisions for the future of their organizations.
Balance Sheet
A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
The balance sheet is used alongside other important financial statements such as the income statement and statement of cash flows in conducting fundamental analysis or calculating financial ratios.
Bankruptcy
Bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
Understanding Bankruptcy.
Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while giving creditors a chance to obtain some measure of repayment based on the individual’s or business’s assets available for liquidation. In theory, the ability to file for bankruptcy benefits the overall economy by allowing people and companies a second chance to gain access to credit and by providing creditors with a portion of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations that were incurred prior to filing for bankruptcy.
Understanding Bankruptcy.
Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while giving creditors a chance to obtain some measure of repayment based on the individual’s or business’s assets available for liquidation. In theory, the ability to file for bankruptcy benefits the overall economy by allowing people and companies a second chance to gain access to credit and by providing creditors with a portion of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations that were incurred prior to filing for bankruptcy.
Bank Reconciliation Statement
A bank reconciliation statement is a summary of banking and business activity that reconciles an entity’s bank account with its financial records. The statement outlines the deposits, withdrawals, and other activities affecting a bank account for a specific period. A bank reconciliation statement is a useful financial internal control tool used to thwart fraud.
Understanding the Bank Reconciliation Statement.
Bank reconciliation statements ensure payments have been processed and cash collections have been deposited into the bank. The reconciliation statement helps identify differences between the bank balance and book balance, in order to process necessary adjustments or corrections. An accountant typically processes reconciliation statements once a month.
Understanding the Bank Reconciliation Statement.
Bank reconciliation statements ensure payments have been processed and cash collections have been deposited into the bank. The reconciliation statement helps identify differences between the bank balance and book balance, in order to process necessary adjustments or corrections. An accountant typically processes reconciliation statements once a month.
Beneficial Owner
A beneficial owner is a person who enjoys the benefits of ownership even though the title to some form of property is in another name.
It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company.
It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company.
Book-to-Market Ratio
The book-to-market ratio is one indicator of a company’s value. The ratio compares a firm’s book value to its market value. A company’s book value is calculated by looking at the company’s historical cost, or accounting value. A firm’s market value is determined by its share price in the stock market and the number of shares it has outstanding, which is its market capitalization.
Book Value
An asset’s book value is equal to its carrying value on the balance sheet, and companies calculate it using the total net value of the asset against its accumulated depreciation.
Understanding Book Value.
Book value can also be thought of as the net asset value of a company calculated as total assets minus intangible assets (patents, goodwill) and liabilities. For the initial outlay of an investment, book value may be net or gross of expenses such as trading costs, sales taxes, service charges, and so on.
As the accounting value of a firm, book value has two main uses:
It serves as the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated. When compared to the company’s market value, book value can indicate whether a stock is under or overpriced.
Understanding Book Value.
Book value can also be thought of as the net asset value of a company calculated as total assets minus intangible assets (patents, goodwill) and liabilities. For the initial outlay of an investment, book value may be net or gross of expenses such as trading costs, sales taxes, service charges, and so on.
As the accounting value of a firm, book value has two main uses:
It serves as the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated. When compared to the company’s market value, book value can indicate whether a stock is under or overpriced.
Break-even-point
A break-even price refers to the price point at which an investor or trader is neither at a profit nor at a loss. Technically, at the break-even-price, the trader has covered up for all costs, including the cost of the investment. In business, at the break-even-point, a company is able to meet all the costs incurred in the production of goods or services. Any amount realised above the break-even-price is profit.
Understanding Break-Even Price.
In stock market transactions, a break-even-price is that at which a trader or investor is neutral to the price, and may choose to sell to recover their costs. A trader does not incur a loss by selling at the break-even-price. The break-even point can be for any transaction or any investment or business.
For example, in the case of a real estate property, the base sale price gets fixed after considering all the costs of the seller, such as cost of the house, interest paid on the loan, home insurance, municipal taxes, cost of any improvements since purchase, and commission cost for sale. The base price is the minimum break-even-price covering all costs.
Mathematically, the formula for determining the break-even price is the aggregate monetary receipts or sale value minus the costs of investment or production. The break-even-price is at the point where the sale value or receipts match the total costs. In general, the total cost of the production or investment forms the base to fix the break-even-price.
Managerial economists also use the break-even price formula to determine the incremental costs for incremental production. The evaluation helps a business to mathematically fix the capacity expansion plans. The business will know the incremental costs associated with the incremental capacity and can accordingly fix the sale price.
Understanding Break-Even Price.
In stock market transactions, a break-even-price is that at which a trader or investor is neutral to the price, and may choose to sell to recover their costs. A trader does not incur a loss by selling at the break-even-price. The break-even point can be for any transaction or any investment or business.
For example, in the case of a real estate property, the base sale price gets fixed after considering all the costs of the seller, such as cost of the house, interest paid on the loan, home insurance, municipal taxes, cost of any improvements since purchase, and commission cost for sale. The base price is the minimum break-even-price covering all costs.
Mathematically, the formula for determining the break-even price is the aggregate monetary receipts or sale value minus the costs of investment or production. The break-even-price is at the point where the sale value or receipts match the total costs. In general, the total cost of the production or investment forms the base to fix the break-even-price.
Managerial economists also use the break-even price formula to determine the incremental costs for incremental production. The evaluation helps a business to mathematically fix the capacity expansion plans. The business will know the incremental costs associated with the incremental capacity and can accordingly fix the sale price.
Block Chain
Meaning of the Block chain.
A block chain is a digitized, decentralized, public ledger. It is a continuously growing list of records (each identified as a block). Each block is linked and secured, thereby making this an incorruptible ledger. In a block chain, there is no single source of truth, no individual entity owning the network and no one can unilaterally modify the data stored. Technologies behind block chain are- Private key cryptography, P2P network and Block chain protocol. The three key principles of block chain technology are transparency, decentralization and accountability.
Prospects of Block chain Technology.
Originally developed in 2008 by Satoshi Nakamoto, this technology has applications in almost every field. While the first generation of digital revolution brought us the internet of information, the second revolution, with the advent of blockchain technology, will bring forth the internet of value. Some of its applications are – 1. Cryptocurrencies such as bitcoin, etherium, pi etc, 2. Payment processing, 3. Smart contracts, 4. Supply chain management, 5. Asset protection through an indisputable record of ownership, 6. Personal identification data management, 7. Crowdfunding, 8. Improved, integrity-first governance system.
A block chain is a digitized, decentralized, public ledger. It is a continuously growing list of records (each identified as a block). Each block is linked and secured, thereby making this an incorruptible ledger. In a block chain, there is no single source of truth, no individual entity owning the network and no one can unilaterally modify the data stored. Technologies behind block chain are- Private key cryptography, P2P network and Block chain protocol. The three key principles of block chain technology are transparency, decentralization and accountability.
Prospects of Block chain Technology.
Originally developed in 2008 by Satoshi Nakamoto, this technology has applications in almost every field. While the first generation of digital revolution brought us the internet of information, the second revolution, with the advent of blockchain technology, will bring forth the internet of value. Some of its applications are – 1. Cryptocurrencies such as bitcoin, etherium, pi etc, 2. Payment processing, 3. Smart contracts, 4. Supply chain management, 5. Asset protection through an indisputable record of ownership, 6. Personal identification data management, 7. Crowdfunding, 8. Improved, integrity-first governance system.
Business Ethics
What Is Business Ethics?
Business ethics is the study of appropriate business policies and practices regarding potentially controversial subjects including corporate governance, insider trading, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities. The law often guides business ethics, but at other times business ethics provide a basic guideline that businesses can choose to follow to gain public approval.
Business ethics is the study of appropriate business policies and practices regarding potentially controversial subjects including corporate governance, insider trading, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities. The law often guides business ethics, but at other times business ethics provide a basic guideline that businesses can choose to follow to gain public approval.
Capital Expenditures (CapEx)
Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.
Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some economic benefit to the operation.
What CapEx Can Tell You.
CapEx can tell you how much a company is investing in existing and new fixed assets to maintain or grow the business. Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure. Capitalizing an asset requires the company to spread the cost of the expenditure over the useful life of the asset.
Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some economic benefit to the operation.
What CapEx Can Tell You.
CapEx can tell you how much a company is investing in existing and new fixed assets to maintain or grow the business. Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure. Capitalizing an asset requires the company to spread the cost of the expenditure over the useful life of the asset.
Capital Gains Tax
The capital gains tax is a levy on the profit from an investment that is incurred when the investment is sold.
When stock shares or any other taxable assets are sold, the capital gains, or profits, are referred to as having been “realized.” The tax doesn’t apply to unsold investments or “unrealized capital gains,” so stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.
Understanding the Capital Gains Tax.
Most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. That gives them a financial incentive to hold investments for at least a year when the tax on the profit will be lower.
Day traders and others taking advantage of the ease and speed of trading online need to be aware that any profits they make from buying and selling assets held less than a year are not just taxed—they are taxed at a higher rate.
When stock shares or any other taxable assets are sold, the capital gains, or profits, are referred to as having been “realized.” The tax doesn’t apply to unsold investments or “unrealized capital gains,” so stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.
Understanding the Capital Gains Tax.
Most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. That gives them a financial incentive to hold investments for at least a year when the tax on the profit will be lower.
Day traders and others taking advantage of the ease and speed of trading online need to be aware that any profits they make from buying and selling assets held less than a year are not just taxed—they are taxed at a higher rate.
Cash Flow
Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. Cash received represents inflows, while money spent represents outflows.
At a fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows or, more specifically, maximize long-term free cash flow (FCF). FCF is the cash that a company generates from its normal business operations after subtracting any money spent on capital expenditures (CapEx).
Understanding Cash Flow.
A business takes in money from sales as revenues and spends money on expenses. A company may also receive income from interest, investments, royalties, and licensing agreements and sell products on credit, expecting to actually receive the cash owed at a late date.
Assessing the amounts, timing, and uncertainty of cash flows, along with where they originate and where they go, is one of the most important objectives of financial reporting. It is essential for assessing a company’s liquidity, flexibility, and overall financial performance.
At a fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows or, more specifically, maximize long-term free cash flow (FCF). FCF is the cash that a company generates from its normal business operations after subtracting any money spent on capital expenditures (CapEx).
Understanding Cash Flow.
A business takes in money from sales as revenues and spends money on expenses. A company may also receive income from interest, investments, royalties, and licensing agreements and sell products on credit, expecting to actually receive the cash owed at a late date.
Assessing the amounts, timing, and uncertainty of cash flows, along with where they originate and where they go, is one of the most important objectives of financial reporting. It is essential for assessing a company’s liquidity, flexibility, and overall financial performance.
Cash Flow Statement
A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.
A company’s financial statements offer investors and analysts a portrait of all the transactions that go through the business, where every transaction contributes to its success. The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways—through operations, investment, and financing. The sum of these three segments is called net cash flow.
A company’s financial statements offer investors and analysts a portrait of all the transactions that go through the business, where every transaction contributes to its success. The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways—through operations, investment, and financing. The sum of these three segments is called net cash flow.
Cost of Goods Sold (COGS)
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.
Cost of goods sold is also referred to as “cost of sales.
Inventory that is sold appears in the income statement under the COGS account. The beginning inventory for the year is the inventory left over from the previous year—that is, the merchandise that was not sold in the previous year. Any additional productions or purchases made by a manufacturing or retail company are added to the beginning inventory. At the end of the year, the products that were not sold are subtracted from the sum of beginning inventory and additional purchases. The final number derived from the calculation is the cost of goods sold for the year
Cost of goods sold is also referred to as “cost of sales.
Inventory that is sold appears in the income statement under the COGS account. The beginning inventory for the year is the inventory left over from the previous year—that is, the merchandise that was not sold in the previous year. Any additional productions or purchases made by a manufacturing or retail company are added to the beginning inventory. At the end of the year, the products that were not sold are subtracted from the sum of beginning inventory and additional purchases. The final number derived from the calculation is the cost of goods sold for the year
Cost of Capital
Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. When analysts and investors discuss the cost of capital, they typically mean the weighted average of a firm’s cost of debt and cost of equity blended together.
The cost of capital metric is used by companies internally to judge whether a capital project is worth the expenditure of resources, and by investors who use it to determine whether an investment is worth the risk compared to the return. The cost of capital depends on the mode of financing used. It refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt.
The cost of capital metric is used by companies internally to judge whether a capital project is worth the expenditure of resources, and by investors who use it to determine whether an investment is worth the risk compared to the return. The cost of capital depends on the mode of financing used. It refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt.
Days Payable Outstanding – DPO
Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. The ratio is typically calculated on a quarterly or annual basis, and indicates how well the company’s cash outflows are being managed.
A company with a higher value of DPO takes longer to pay its bills, which means that it can retain available funds for a longer duration, allowing the company an opportunity to utilize those funds in a better way to maximize the benefits. A high DPO, however, may also be a red flag indicating an inability to pay its bills on time.
A company with a higher value of DPO takes longer to pay its bills, which means that it can retain available funds for a longer duration, allowing the company an opportunity to utilize those funds in a better way to maximize the benefits. A high DPO, however, may also be a red flag indicating an inability to pay its bills on time.
Dividend Payout Ratio
The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders via dividends. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations. It is sometimes simply referred to as simply the payout ratio.
Debt Ratio
The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.
A ratio greater than 1 shows that a considerable portion of debt is funded by assets. In other words, the company has more liabilities than assets. A high ratio also indicates that a company may be putting itself at risk of default on its loans if interest rates were to rise suddenly. A ratio below 1 translates to the fact that a greater portion of a company’s assets is funded by equity.
A ratio greater than 1 shows that a considerable portion of debt is funded by assets. In other words, the company has more liabilities than assets. A high ratio also indicates that a company may be putting itself at risk of default on its loans if interest rates were to rise suddenly. A ratio below 1 translates to the fact that a greater portion of a company’s assets is funded by equity.
Earnings Per Share (EPS)
Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. It is common for a company to report EPS that is adjusted for extraordinary items and potential share dilution.
The higher a company’s EPS, the more profitable it is considered to be.
Formula and Calculation for EPS.
Earnings per share value is calculated as net income (also known as profits or earnings) divided by available shares. A more refined calculation adjusts the numerator and denominator for shares that could be created through options, convertible debt, or warrants. The numerator of the equation is also more relevant if it is adjusted for continuing operations.
The higher a company’s EPS, the more profitable it is considered to be.
Formula and Calculation for EPS.
Earnings per share value is calculated as net income (also known as profits or earnings) divided by available shares. A more refined calculation adjusts the numerator and denominator for shares that could be created through options, convertible debt, or warrants. The numerator of the equation is also more relevant if it is adjusted for continuing operations.
Equity
Equity is usually referred to as shareholder equity, which represents the sum of money that will be returned to shareholders of a company if all of the assets were liquidated and the entire debt of the company was paid off.
Equity is found on the balance sheet of a company and is one of the most common financial indicators used by investors to determine a company’s financial health. Likewise, shareholder equity will reflect a company’s book value. Often, equity may be given as a pay-in-kind.
What Does an Equity Imply?
The balance sheet accounting calculation, as well as equity, has implications outside businesses. Upon subtracting all debts associated with the asset, we can think of equity as a degree of ownership on any asset.
Equity is found on the balance sheet of a company and is one of the most common financial indicators used by investors to determine a company’s financial health. Likewise, shareholder equity will reflect a company’s book value. Often, equity may be given as a pay-in-kind.
What Does an Equity Imply?
The balance sheet accounting calculation, as well as equity, has implications outside businesses. Upon subtracting all debts associated with the asset, we can think of equity as a degree of ownership on any asset.
E-Commerce
Ecommerce is a term which encompasses a number of activities which includes buying and selling of goods and services online. This term is most commonly used in reference to activities like online shopping, internet banking, online auctions, payment gateways, etc.
What is Ecommerce?
Electronic commerce or Ecommerce as it is popularly known is buying and selling of goods and services via the internet. Ecommerce generally refers to the transactions made during the online trading of goods and services. So, basically when you as an individual or as an organisation engage in the purchase or sale of goods and services online, you are engaging in Ecommerce.
The history of Ecommerce is dated back to the 1990’s when the first ever Ecommerce transaction was made— a CD of the band Sting was sold online on 11th of August 1994. This particular transaction made people aware that the internet can be used for buying and selling products and can in fact prove to be a convenient source for doing so.
After this first ever Ecommerce transaction, the world of ecommerce has only grown bigger. The ecommerce giants like Amazon who have risen to fame since the mid 90’s are now the biggest platforms for ecommerce services. These platforms have gained a higher popularity as it is much easier to search for the desired products at reasonable rates from online markets and retailers than the physical marketplaces.
Ecommerce platforms have also helped many small businesses to grow as it helps them to sell their products online and increase the reach of their products to a large number of customers using the ecommerce platform.
What is Ecommerce?
Electronic commerce or Ecommerce as it is popularly known is buying and selling of goods and services via the internet. Ecommerce generally refers to the transactions made during the online trading of goods and services. So, basically when you as an individual or as an organisation engage in the purchase or sale of goods and services online, you are engaging in Ecommerce.
The history of Ecommerce is dated back to the 1990’s when the first ever Ecommerce transaction was made— a CD of the band Sting was sold online on 11th of August 1994. This particular transaction made people aware that the internet can be used for buying and selling products and can in fact prove to be a convenient source for doing so.
After this first ever Ecommerce transaction, the world of ecommerce has only grown bigger. The ecommerce giants like Amazon who have risen to fame since the mid 90’s are now the biggest platforms for ecommerce services. These platforms have gained a higher popularity as it is much easier to search for the desired products at reasonable rates from online markets and retailers than the physical marketplaces.
Ecommerce platforms have also helped many small businesses to grow as it helps them to sell their products online and increase the reach of their products to a large number of customers using the ecommerce platform.
Economic Cycle
The economic cycle is the economic fluctuation between periods of expansion (growth) and contracture (recession). The current stage of the economic cycle can be calculated by factors, such as interest rates, total employment, gross domestic product (GDP), and consumer spending.
The economic cycle refers to the overall state of the economy in a cyclical pattern which goes through four stages. Economic cycles are a significant focus of economic research and policy, but the exact root causes of a cycle are widely debated among the various economic schools.
Insight on economic cycles is beneficial for businesses and investors. They also need to manage their strategy about economic cycles, not so much to control them but to survive and perhaps profit from them.
It also varies from country to country and is found and monitored by the Central Bank and Chief Economic Advisors to the government.
The economic cycle refers to the overall state of the economy in a cyclical pattern which goes through four stages. Economic cycles are a significant focus of economic research and policy, but the exact root causes of a cycle are widely debated among the various economic schools.
Insight on economic cycles is beneficial for businesses and investors. They also need to manage their strategy about economic cycles, not so much to control them but to survive and perhaps profit from them.
It also varies from country to country and is found and monitored by the Central Bank and Chief Economic Advisors to the government.
Effective Tax Rate
What is Effective Tax Rate?
Effective tax rate can be defined as the average rate at which an individual is taxed on earned income, or the average rate at which a corporation is taxed on pre-tax profits. The overall tax incidence under the applicable tax rates is lower due to the various allowances and deductions claimed by a taxpayer. The effective tax rate may be lower than the tax rates applicable under different slabs to an individual. Similarly, the rate can be lower due to tax deductions or incentives claimed by corporate taxpayers.
The statutory rate is the rate established by the tax laws in force in the country. However, effective tax rate is the rate at which tax is payable on the earnings from salary, property, capital gains, business or profession exercised by a taxpayer.
The effective tax rate is calculated only by taking into account the income tax liabilities including cess imposed by Central Government if any. The rate does not take into account, the state government levies or local levies such as sales tax, entertainment tax, professional tax, luxury tax, and so on.
The effective tax rate accurately represents a taxpayer’s overall tax liability in comparison to their marginal tax rate and is generally lower. While comparing the marginal versus an effective tax rate, it is essential to note that the marginal tax rate refers to the highest tax bracket into which their income falls.
Effective tax rate can be defined as the average rate at which an individual is taxed on earned income, or the average rate at which a corporation is taxed on pre-tax profits. The overall tax incidence under the applicable tax rates is lower due to the various allowances and deductions claimed by a taxpayer. The effective tax rate may be lower than the tax rates applicable under different slabs to an individual. Similarly, the rate can be lower due to tax deductions or incentives claimed by corporate taxpayers.
The statutory rate is the rate established by the tax laws in force in the country. However, effective tax rate is the rate at which tax is payable on the earnings from salary, property, capital gains, business or profession exercised by a taxpayer.
The effective tax rate is calculated only by taking into account the income tax liabilities including cess imposed by Central Government if any. The rate does not take into account, the state government levies or local levies such as sales tax, entertainment tax, professional tax, luxury tax, and so on.
The effective tax rate accurately represents a taxpayer’s overall tax liability in comparison to their marginal tax rate and is generally lower. While comparing the marginal versus an effective tax rate, it is essential to note that the marginal tax rate refers to the highest tax bracket into which their income falls.
Ease of doing Business
Ease of doing business is an index issued by the World Bank. It is an aggregate value that includes various parameters which define the Ease of doing business in a country.
Understanding Ease Of Doing Business.
It is determined by aggregating the distance to frontier scores of various economies. According to that parameter, the distance to frontier score uses the ‘regulatory best practices for doing business as the parameter and benchmark economies.
For each of the indicators that form the statistic’ Ease of doing business,’ a distance to frontier score is estimated, and all the scores are aggregated. The aggregated score will be the Ease of doing business index.
Indicators for which distance to frontier is computed include construction permits, registration, getting credit etc. Countries are ranked as per the index.
Understanding Ease Of Doing Business.
It is determined by aggregating the distance to frontier scores of various economies. According to that parameter, the distance to frontier score uses the ‘regulatory best practices for doing business as the parameter and benchmark economies.
For each of the indicators that form the statistic’ Ease of doing business,’ a distance to frontier score is estimated, and all the scores are aggregated. The aggregated score will be the Ease of doing business index.
Indicators for which distance to frontier is computed include construction permits, registration, getting credit etc. Countries are ranked as per the index.
Free Market
What is a Free Market?
The free market is a supply and demand-oriented economic system with little or no government control. It is a concise overview of all volunteer exchanges happening in a given economic environment.
A spontaneous and decentralised system of transactions through which individuals make economic decisions is defined by free markets. The free-market economy of a country may differ between a very large or entirely black market, depending on its political and legal laws.
The free market is a supply and demand-oriented economic system with little or no government control. It is a concise overview of all volunteer exchanges happening in a given economic environment.
A spontaneous and decentralised system of transactions through which individuals make economic decisions is defined by free markets. The free-market economy of a country may differ between a very large or entirely black market, depending on its political and legal laws.
Fund Flow
Fund flow is the sum of all cash inflows/outflows from and into different financial assets. Fund flow is usually calculated on a monthly or quarterly basis; no account is taken of the output of an asset or fund. It is only the share redemptions or outflows, and share purchases or inflows.
Net inflows produce excess cash for investment managers, which in turn increases the demand for securities such as stocks and bonds.
Fund flow is centred only on cash movement, indicating the net movement after evaluating monetary fund inflows and outflows. Such transactions may include investor payments or payments made to the company in exchange for goods and services.
Net inflows produce excess cash for investment managers, which in turn increases the demand for securities such as stocks and bonds.
Fund flow is centred only on cash movement, indicating the net movement after evaluating monetary fund inflows and outflows. Such transactions may include investor payments or payments made to the company in exchange for goods and services.
Goodwill
Goodwill is an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists.
Gross Profit Margin
Gross profit margin is a metric analysts use to assess a company’s financial health by calculating the amount of money left over from product sales after subtracting the cost of goods sold (COGS). Sometimes referred to as the gross margin ratio, gross profit margin is frequently expressed as a percentage of sales.
How to Calculate Gross Profit Margin.
A company’s gross profit margin percentage is calculated by first subtracting the cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances, and discounts). This figure is then divided by net sales, to calculate the gross profit margin in percentage terms.
What Does the Gross Profit Margin Tell You?
If a company’s gross profit margin wildly fluctuates, this may signal poor management practices and/or inferior products. On the other hand, such fluctuations may be justified in cases where a company makes sweeping operational changes to its business model, in which case temporary volatility should be no cause for alarm.
How to Calculate Gross Profit Margin.
A company’s gross profit margin percentage is calculated by first subtracting the cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances, and discounts). This figure is then divided by net sales, to calculate the gross profit margin in percentage terms.
What Does the Gross Profit Margin Tell You?
If a company’s gross profit margin wildly fluctuates, this may signal poor management practices and/or inferior products. On the other hand, such fluctuations may be justified in cases where a company makes sweeping operational changes to its business model, in which case temporary volatility should be no cause for alarm.
GAP Analysis
Meaning of Gap Analysis.
Gap analysis is the method organisations use to monitor their actual performance in comparison to their anticipated and projected performance. This research is used to assess if a company is meeting its standards and is making good use of its resources.
Gap analysis is the process by which a company can identify its current state through evaluating time, money, and labour, and make a comparison to its target state. The management team will develop an action plan to push the company forward and address the performance gaps by identifying and evaluating those gaps.
Gap analysis is considered more difficult to use and less commonly applied than evaluating the length, but it can also be used to determine exposure to a variety of movement in the term structure. The term “gap” in gap analysis is the void between where an entity is in the future and where it needs to be.
Gap analysis is the method organisations use to monitor their actual performance in comparison to their anticipated and projected performance. This research is used to assess if a company is meeting its standards and is making good use of its resources.
Gap analysis is the process by which a company can identify its current state through evaluating time, money, and labour, and make a comparison to its target state. The management team will develop an action plan to push the company forward and address the performance gaps by identifying and evaluating those gaps.
Gap analysis is considered more difficult to use and less commonly applied than evaluating the length, but it can also be used to determine exposure to a variety of movement in the term structure. The term “gap” in gap analysis is the void between where an entity is in the future and where it needs to be.
GDP Per Capita
GDP per capita is a measure that helps to determine the economic strength and growth of the nation, which ultimately indicates the prosperity of the nation. GDP per capita is calculated considering the financial worth of the nation’s produce. This means that the GDP per capita is nothing but a measure of the nation’s economic activity.
After taking into account this economic activity, the calculated wealth is divided by the population of the country. By doing so the GDP per capita measures the country’s economic output per person in that country.
Very often, the small nations that are rich and well developed turn out to have a higher GDP per capita, which indicates that these nations are prosperous and economically strong and growing. This also indicates that the nation is a good place to live for its people as their needs are being satisfied as the total wealth is divided among a smaller population. This is why the countries having smaller populations often seem to have a higher GDP per capita as compared to the highly populated countries.
After taking into account this economic activity, the calculated wealth is divided by the population of the country. By doing so the GDP per capita measures the country’s economic output per person in that country.
Very often, the small nations that are rich and well developed turn out to have a higher GDP per capita, which indicates that these nations are prosperous and economically strong and growing. This also indicates that the nation is a good place to live for its people as their needs are being satisfied as the total wealth is divided among a smaller population. This is why the countries having smaller populations often seem to have a higher GDP per capita as compared to the highly populated countries.
Holding Company
A holding company is a business entity—usually a corporation or limited liability company (LLC). Typically, a holding company doesn’t manufacture anything, sell any products or services, or conduct any other business operations. Rather, holding companies hold the controlling stock in other companies.
Although a holding company owns the assets of other companies, it often maintains only oversight capacities. So while it may oversee the company’s management decisions, it does not actively participate in running a business’s day-to-day operations of these subsidiaries.
A holding company is also sometimes called an “umbrella” or parent company.
Although a holding company owns the assets of other companies, it often maintains only oversight capacities. So while it may oversee the company’s management decisions, it does not actively participate in running a business’s day-to-day operations of these subsidiaries.
A holding company is also sometimes called an “umbrella” or parent company.
Human Capital
Human capital is an intangible asset or quality not listed on a company’s balance sheet. It can be classified as the economic value of a worker’s experience and skills. This includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.
The concept of human capital recognizes that not all labor is equal. But employers can improve the quality of that capital by investing in employees—the education, experience, and abilities of employees all have economic value for employers and for the economy as a whole.
Human capital is important because it is perceived to increase productivity and thus profitability. So the more a company invests in its employees (i.e., in their education and training), the more productive and profitable it could be
The concept of human capital recognizes that not all labor is equal. But employers can improve the quality of that capital by investing in employees—the education, experience, and abilities of employees all have economic value for employers and for the economy as a whole.
Human capital is important because it is perceived to increase productivity and thus profitability. So the more a company invests in its employees (i.e., in their education and training), the more productive and profitable it could be
Horizontal Integration
Horizontal integration refers to the mode of acquiring a business operating at par in the value chain either in a similar or different industry. It is opposite to vertical integration, where entities expand into upstream or downstream activities, that are at different production stage.
The real motive behind many horizontal mergers is that corporations want to reduce “horizontal” competition in the form of replacement competition, possible new entrants’ competition, and existing rivals’ competition.
Horizontal integration involves competitive strategy which can develop economies of scale, and build market power over distributors and suppliers. It also involves improving product differentiation and helps entities grow their business or penetrate new markets. By merging two companies, they will be able to increase sales than they might have done individually, due to the synergy.
Upon the success of horizontal integration, it may lead to a reduction of competition which is often at the expense of its customers. If horizontal integrations take place to consolidate market share among a small number of companies within the same sector, it constitutes an oligopoly.
In case one company ends up with a dominant market share, it leads to a monopoly. Therefore.
The real motive behind many horizontal mergers is that corporations want to reduce “horizontal” competition in the form of replacement competition, possible new entrants’ competition, and existing rivals’ competition.
Horizontal integration involves competitive strategy which can develop economies of scale, and build market power over distributors and suppliers. It also involves improving product differentiation and helps entities grow their business or penetrate new markets. By merging two companies, they will be able to increase sales than they might have done individually, due to the synergy.
Upon the success of horizontal integration, it may lead to a reduction of competition which is often at the expense of its customers. If horizontal integrations take place to consolidate market share among a small number of companies within the same sector, it constitutes an oligopoly.
In case one company ends up with a dominant market share, it leads to a monopoly. Therefore.
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world.
IFRS have been adopted for use in 120 nations, including those in the European Union. The United States uses a different system, the Generally Accepted Accounting Principles (GAAP).
The IFRS are issued by the International Accounting Standards Board (IASB). IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced in 200.
IFRS have been adopted for use in 120 nations, including those in the European Union. The United States uses a different system, the Generally Accepted Accounting Principles (GAAP).
The IFRS are issued by the International Accounting Standards Board (IASB). IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced in 200.
Insurance Premium
An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance. Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy.
Initial Public Offering (IPO)
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering.
Investment management
Investment management is not just restricted to buying and selling assets, it also includes handling financial assets and other investments.
Investment management includes preparing a strategy, either short- or long-term, to acquire and dispose of portfolio holdings. Also, it can include banking, budgeting, and tax services and duties. In another case, the term refers to managing the holdings within an investment portfolio and trading them to realise a particular investment objective.
Understanding Investment Management.
In a different perspective, investment management can be understood as money management, portfolio management, or wealth management. A professional approach to investment management aims at achieving certain investment goals for the benefit of clients, as the money invested is their responsibility. These clients may be individual investors or institutional investors such as pension funds, retirement plans, and insurance companies.
In terms of corporate finance, investment management means ensuring that the company’s assets and resources are well-utilised and maintained.
Investment management includes preparing a strategy, either short- or long-term, to acquire and dispose of portfolio holdings. Also, it can include banking, budgeting, and tax services and duties. In another case, the term refers to managing the holdings within an investment portfolio and trading them to realise a particular investment objective.
Understanding Investment Management.
In a different perspective, investment management can be understood as money management, portfolio management, or wealth management. A professional approach to investment management aims at achieving certain investment goals for the benefit of clients, as the money invested is their responsibility. These clients may be individual investors or institutional investors such as pension funds, retirement plans, and insurance companies.
In terms of corporate finance, investment management means ensuring that the company’s assets and resources are well-utilised and maintained.
Implicit Cost
An implicit cost is any cost already incurred but not explicitly expressed or reported as a separate expense. It reflects the value of opportunity that occurs when an organisation uses internal capital for a project without any precise reimbursement for resource use.
This means that when a company allocates its resources, the ability to earn money from resource and use elsewhere is always forgotten, so there is no cash exchange. Simply put, an implicit cost stems from the use of an asset, rather than renting or purchasing it.
This means that when a company allocates its resources, the ability to earn money from resource and use elsewhere is always forgotten, so there is no cash exchange. Simply put, an implicit cost stems from the use of an asset, rather than renting or purchasing it.
Inventory Turnover
Inventory turnover is a ratio that states the number of times a company has sold and replaced its inventory during a period of time. The number of days in the specified period is then divided by the inventory turnover formula to know the number of days it takes to sell the current inventory. The ratio helps businesses make better decisions on manufacturing, marketing, pricing, and purchasing new inventory.
Formula to Calculate Inventory Turnover.
Method 1.
Inventory Turnover = Sales / Average Inventory.
Where, Average Inventory = (Beginning Inventory + Ending Inventory) / 2.
Method 2.
Companies also use the cost of goods sold (COGS) as a parameter instead of sales. Analysts use this method of dividing COGS by average inventory instead of sales; this method gives greater accuracy in the inventory turnover calculation because sales include a markup over cost. The average inventory factor removes seasonality effects on the result.
Formula to Calculate Inventory Turnover.
Method 1.
Inventory Turnover = Sales / Average Inventory.
Where, Average Inventory = (Beginning Inventory + Ending Inventory) / 2.
Method 2.
Companies also use the cost of goods sold (COGS) as a parameter instead of sales. Analysts use this method of dividing COGS by average inventory instead of sales; this method gives greater accuracy in the inventory turnover calculation because sales include a markup over cost. The average inventory factor removes seasonality effects on the result.
Introduction to international monetary fund (IMF)
The International Monetary Fund (IMF) is an international organisation that boosts global economic growth and financial stability, international trade, and decreases poverty.
Quotas of member countries are a vital determinant of the voting power in IMF. Votes include one vote per 100,000 special drawing right (SDR) of quota plus essential votes.
SDRs are an international kind of monetary reserve currency produced by the IMF as a supplement to the existent money reserves of member countries.
Quotas of member countries are a vital determinant of the voting power in IMF. Votes include one vote per 100,000 special drawing right (SDR) of quota plus essential votes.
SDRs are an international kind of monetary reserve currency produced by the IMF as a supplement to the existent money reserves of member countries.
Islamic Banking
Islamic Banking, otherwise also called the Islamic finance, is another banking convention that follows the Islamic law called shariah, for the purpose of assuming social responsibility and fulfilling them ethically.
The main objectives of this kind of banking includes the sharing of all profits and losses (mudarabah), safekeeping (wadiah), prohibition of returning or taking back money at a value that is not at par with the original value, i.e. interest (riga) is usually not permitted, among others.
The main objectives of this kind of banking includes the sharing of all profits and losses (mudarabah), safekeeping (wadiah), prohibition of returning or taking back money at a value that is not at par with the original value, i.e. interest (riga) is usually not permitted, among others.
Limited Liability Company (LLC)
A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of a partnership rather than an LLC.
Understanding a Limited Liability Company (LLC).
Limited liability companies are permitted under state statutes, and the regulations governing them vary from state to state. LLC owners are generally called members.
Many states don’t restrict ownership, meaning anyone can be a member including individuals, corporations, foreigners, foreign entities, and even other LLCs. Some entities, though, cannot form LLCs, including banks and insurance companies.
Understanding a Limited Liability Company (LLC).
Limited liability companies are permitted under state statutes, and the regulations governing them vary from state to state. LLC owners are generally called members.
Many states don’t restrict ownership, meaning anyone can be a member including individuals, corporations, foreigners, foreign entities, and even other LLCs. Some entities, though, cannot form LLCs, including banks and insurance companies.
Limited Partnership (LP)
A limited partnership (LP)—not to be confused with a limited liability partnership (LLP)—is a partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner of a limited partnership has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.
Understanding Limited Partnerships (LPs) .
A limited partnership is required to have both general partners and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that’s limited to their investment amount in the LP.
Types of Partnerships.
Generally, a partnership is a business where two or more individuals have ownership. There are three forms of partnerships: limited partnership, general partnership, and limited liability partnership. The three forms differ in various aspects, but also share similar features
Understanding Limited Partnerships (LPs) .
A limited partnership is required to have both general partners and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that’s limited to their investment amount in the LP.
Types of Partnerships.
Generally, a partnership is a business where two or more individuals have ownership. There are three forms of partnerships: limited partnership, general partnership, and limited liability partnership. The three forms differ in various aspects, but also share similar features
Liquidity Ratios
Liquidity ratios are an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital. Liquidity ratios .measure a company’s ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio.
Understanding Liquidity Ratios.
Liquidity is the ability to convert assets into cash quickly and cheaply. Liquidity ratios are most useful when they are used in comparative form. This analysis may be internal or external.
For example, internal analysis regarding liquidity ratios involves using multiple accounting periods that are reported using the same accounting methods. Comparing previous periods to current operations allows analysts to track changes in the business. In general, a higher liquidity ratio shows a company is more liquid and has better coverage of outstanding debts.
Alternatively, external analysis involves comparing the liquidity ratios of one company to another or an entire industry. This information is useful to compare the company’s strategic positioning to its competitors when establishing benchmark goals. Liquidity ratio analysis may not be as effective when looking across industries as various businesses require different financing structures. Liquidity ratio analysis is less effective for comparing businesses of different sizes in different geographical locations.
Understanding Liquidity Ratios.
Liquidity is the ability to convert assets into cash quickly and cheaply. Liquidity ratios are most useful when they are used in comparative form. This analysis may be internal or external.
For example, internal analysis regarding liquidity ratios involves using multiple accounting periods that are reported using the same accounting methods. Comparing previous periods to current operations allows analysts to track changes in the business. In general, a higher liquidity ratio shows a company is more liquid and has better coverage of outstanding debts.
Alternatively, external analysis involves comparing the liquidity ratios of one company to another or an entire industry. This information is useful to compare the company’s strategic positioning to its competitors when establishing benchmark goals. Liquidity ratio analysis may not be as effective when looking across industries as various businesses require different financing structures. Liquidity ratio analysis is less effective for comparing businesses of different sizes in different geographical locations.
Liquidity Risk
Liquidity is an organisation, business, or even an individual’s ability to pay off their debts without suffering severe losses. In comparison, liquidity risk derives from the lack of marketability of an investment that cannot be acquired or sold fast enough to avoid or mitigate a loss. Typically, it is expressed in substantial bid-ask spreads or significant price changes.
Letter of Indemnity
A letter of indemnity is often referred to as an LOI. It is a document used to enter a contract which ensures some terms are met between the parties entering the contract. Typically, these letters are prepared and drafted by a third-party institution, such as banks and insurers, who agree to compensate either of the party when the other party fails to meet the terms of the contract.
In simple words, the primary objective of a letter of indemnity is to make sure that both parties involved in a contract meet all the requirements so as to avoid losses to both the parties involved in a transaction. The idea of indemnity is derived from avoiding losses on account of someone else committing a mistake.
A letter of indemnity will contain detailed steps of measures to prevent the party that has been right during the transaction mentioned in the contract.
In simple words, the primary objective of a letter of indemnity is to make sure that both parties involved in a contract meet all the requirements so as to avoid losses to both the parties involved in a transaction. The idea of indemnity is derived from avoiding losses on account of someone else committing a mistake.
A letter of indemnity will contain detailed steps of measures to prevent the party that has been right during the transaction mentioned in the contract.
Long-Term Debt
Any debt that has a repayment period of more than a year is known as long-term debt. There are two perspectives for long-term debts—financial statement reporting and financial investing.
The former perspective states that companies must report the long-term debts issued and all the related obligations on its financial statements. In contrast, investing in such debt includes investing money into debt investments with maturities of more than a year.
While debt owners see them as assets, issuers of debt consider them as a liability as they are to be repaid. Long-term debt liabilities act as a key component to determine business solvency ratio. Stakeholders and credit rating agencies analyse this ratio to assess the solvency risk of the company.
The former perspective states that companies must report the long-term debts issued and all the related obligations on its financial statements. In contrast, investing in such debt includes investing money into debt investments with maturities of more than a year.
While debt owners see them as assets, issuers of debt consider them as a liability as they are to be repaid. Long-term debt liabilities act as a key component to determine business solvency ratio. Stakeholders and credit rating agencies analyse this ratio to assess the solvency risk of the company.
Market Risk Premium
The market risk premium is defined as the difference between the expected rate of returns on a market portfolio and the rate, which is considered risk-free. Investors are needed to compensate for the risk and the cost of opportunity. The rate that is risk-free is a theoretical interest that is to be paid by an investment at zero risks, and the United States yields that are long-term have typically made use as a proxy for the interest rate that is risk-free as they are of lower risk of default.
Treasuries have generally had comparatively lower yields due to the result of this imagined dependence. The returns on the equity markets are on the basis of the expected returns on a proper benchmark index like the Standard and Poor 500 index.
Treasuries have generally had comparatively lower yields due to the result of this imagined dependence. The returns on the equity markets are on the basis of the expected returns on a proper benchmark index like the Standard and Poor 500 index.
Market Failure
In economics, market failure refers to a situation where the allocation of goods and services by a free market is not effective and efficient. It often leads to a net social welfare loss. Market failures are usually viewed as scenarios where individuals chase to attain pure self-interest leads to inefficient results that can be fixed as per society.
Mutual Funds
Mutual funds are the type of financial vehicle made up of a pool of money from various investors. It gives small or individual investors access to the diversified, professionally managed portfolio at a lower price. Before investing in mutual funds, investors should understand the mutual fund types and their features. The mutual funds are divided on the basis of assets class, structure, investment goals and risk profile. Also, there are some specialised mutual funds which are not covered under the categories mentioned earlier. Such as sector funds, index funds, emergency funds, real estate funds, etc.
Mergers and Acquisitions
Mergers and acquisitions are business transactions in which the ownership rights of a company gets transferred to another company. This transaction includes transferring of business units, operating units and companies. Mergers and acquisitions, as a strategy of management, allows companies to either expand or shrink and change the business’ nature and competitiveness.
Mergers and acquisitions is a generic term to outline the combining of organisations or capital assets through numerous financial and commercial transactions, which includes mergers and acquisitions, tenders, buying assets and managing acquisitions. Mergers and acquisitions sometimes refer to the division of a company that deals with such activities.
Mergers and acquisitions is a generic term to outline the combining of organisations or capital assets through numerous financial and commercial transactions, which includes mergers and acquisitions, tenders, buying assets and managing acquisitions. Mergers and acquisitions sometimes refer to the division of a company that deals with such activities.
Marketable Securities
Marketable securities are highly-liquid financial tools that can be sold or converted into cash within a year of investment. Businesses issue these securities to raise capital for operating expenses or business expansion. On the other hand, a business invests in marketable securities to make some short-term earnings with the cash at hand.
Purpose of Investing in Marketable Securities.
Usually, businesses invest in marketable securities for one of three reasons. Based on the reason for investment, the way of handling the funds is determined.
1. Held Until Maturity: Companies hold on to the securities until the maturity date. If the date is well within a year’s time, the investment is called short-term investment. If the maturity date exceeds a year from the purchase date, they are called long-term investment and non-current assets. Their fair value is listed in the company’s balance sheet, and the temporary fluctuations are ignored. Any realised gains or losses are listed in the balance sheet.
2. For Trading: The marketable securities are purchased for the sole purpose of generating a short-term profit and are held for a period less than a year. Along with listing the fair value of the holdings in the balance sheet, any gains and losses incurred during the holding period are also recorded. If there are any temporary fluctuations in the market, they are recorded in the income statement.
3. For Sale: If the securities are not purchased for trading or to be held until maturity, they are purchased to sell. They are listed at the fair value in the balance sheet with unrealised gains or losses. Unlike in the second case, temporary gains and losses need not be reported in the income statement.
Purpose of Investing in Marketable Securities.
Usually, businesses invest in marketable securities for one of three reasons. Based on the reason for investment, the way of handling the funds is determined.
1. Held Until Maturity: Companies hold on to the securities until the maturity date. If the date is well within a year’s time, the investment is called short-term investment. If the maturity date exceeds a year from the purchase date, they are called long-term investment and non-current assets. Their fair value is listed in the company’s balance sheet, and the temporary fluctuations are ignored. Any realised gains or losses are listed in the balance sheet.
2. For Trading: The marketable securities are purchased for the sole purpose of generating a short-term profit and are held for a period less than a year. Along with listing the fair value of the holdings in the balance sheet, any gains and losses incurred during the holding period are also recorded. If there are any temporary fluctuations in the market, they are recorded in the income statement.
3. For Sale: If the securities are not purchased for trading or to be held until maturity, they are purchased to sell. They are listed at the fair value in the balance sheet with unrealised gains or losses. Unlike in the second case, temporary gains and losses need not be reported in the income statement.
Money Laundering
Money laundering is defined as the concealing of the identity of illegal proceeds in a manner to make it appear as if it were from legitimate sources. – The IMF estimates that global money laundering accounts for nearly 2 to 5% of the GDP of the world. – It is often referred to as victimless crime, as it is seen as a crime against the world at large and not against an individual or a set of individuals. – The sources of the money laundered can be from arms trafficking, drug trafficking, corruption, tax evasion, smuggling etc. – Some of the forms of money laundering include smurfing, investing in shell companies, payment of black salaries, round tripping, tax amnesties etc.
Market Share
Market share is the percent of total sales in an industry generated by a particular company. Market share is calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period. This metric is used to give a general idea of the size of a company in relation to its market and its competitors. The market leader in an industry is the company with the largest market share.
Understanding Market Share.
A company’s market share is its portion of total sales in relation to the market or industry in which it operates. To calculate a company’s market share, first determine a period you want to examine. It can be a fiscal quarter, year, or multiple years.
Next, calculate the company’s total sales over that period. Then, find out the total sales of the company’s industry. Finally, divide the company’s total revenues by its industry’s total sales. For example, if a company sold $100 million in tractors last year domestically, and the total amount of tractors sold in the U.S. was $200 million, the company’s U.S. market share for tractors would be 50%.
Benefits of Market Share.
Investors and analysts monitor increases and decreases in market share carefully as this can be a sign of the relative competitiveness of the company’s products or services. As the total market for a product or service grows, a company that is maintaining its market share is growing revenues at the same rate as the total market. A company that is growing its market share will be growing its revenues faster than its competitors.
Understanding Market Share.
A company’s market share is its portion of total sales in relation to the market or industry in which it operates. To calculate a company’s market share, first determine a period you want to examine. It can be a fiscal quarter, year, or multiple years.
Next, calculate the company’s total sales over that period. Then, find out the total sales of the company’s industry. Finally, divide the company’s total revenues by its industry’s total sales. For example, if a company sold $100 million in tractors last year domestically, and the total amount of tractors sold in the U.S. was $200 million, the company’s U.S. market share for tractors would be 50%.
Benefits of Market Share.
Investors and analysts monitor increases and decreases in market share carefully as this can be a sign of the relative competitiveness of the company’s products or services. As the total market for a product or service grows, a company that is maintaining its market share is growing revenues at the same rate as the total market. A company that is growing its market share will be growing its revenues faster than its competitors.
Memorandum of Understanding (MOU)
A memorandum of understanding is an agreement between two or more parties outlined in a formal document. It is not legally binding but signals the willingness of the parties to move forward with a contract.
The MOU can be seen as the starting point for negotiations as it defines the scope and purpose of the talks. Such memoranda are most often seen in international treaty negotiations but also may be used in high-stakes business dealings such as merger talks.
How a Memorandum of Understanding (MOU) Works.
An MOU is an expression of agreement to proceed. It indicates that the parties have reached an understanding and are moving forward. Although it is not legally binding, it is a serious declaration that a contract is imminent.
Contents of a Memorandum of Understanding (MOU).
An MOU clearly outlines specific points of understanding. It names the parties, describes the project on which they are agreeing, defines its scope, and details each party’s roles and responsibilities.
A memorandum of understanding allows all parties to clearly state all of their objectives and goals. This makes for less uncertainty and prevents future unexpected disputes to occur. Furthermore, by clearly laying out what each party expects of the other, an MOU provides a blueprint for any contract both parties may or may not wish to draw up in the future.
The MOU can be seen as the starting point for negotiations as it defines the scope and purpose of the talks. Such memoranda are most often seen in international treaty negotiations but also may be used in high-stakes business dealings such as merger talks.
How a Memorandum of Understanding (MOU) Works.
An MOU is an expression of agreement to proceed. It indicates that the parties have reached an understanding and are moving forward. Although it is not legally binding, it is a serious declaration that a contract is imminent.
Contents of a Memorandum of Understanding (MOU).
An MOU clearly outlines specific points of understanding. It names the parties, describes the project on which they are agreeing, defines its scope, and details each party’s roles and responsibilities.
A memorandum of understanding allows all parties to clearly state all of their objectives and goals. This makes for less uncertainty and prevents future unexpected disputes to occur. Furthermore, by clearly laying out what each party expects of the other, an MOU provides a blueprint for any contract both parties may or may not wish to draw up in the future.
Mutual Fund
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.
Net Operating Income (NOI)
Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses.
NOI is a before-tax figure, appearing on a property’s income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. When this metric is used in other industries, it is referred to as “EBIT,” which stands for “earnings before interest and taxes.” Understanding Net Operating Income (NOI)
Net operating income is a valuation method used by real estate professionals to determine the precise value of their income-producing properties. To calculate NOI, the property’s operating expenses must be subtracted from the income a property produces.
NOI is a before-tax figure, appearing on a property’s income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. When this metric is used in other industries, it is referred to as “EBIT,” which stands for “earnings before interest and taxes.” Understanding Net Operating Income (NOI)
Net operating income is a valuation method used by real estate professionals to determine the precise value of their income-producing properties. To calculate NOI, the property’s operating expenses must be subtracted from the income a property produces.
Net Profit Margin
The net profit margin, or simply net margin, measures how much net income or profit is generated as a percentage of revenue. It is the ratio of net profits to revenues for a company or business segment. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit.
What Does Net Profit Margin Tell You?
The net profit margin factors in all business activities including:
Total revenue.
All outgoing cash flow.
Additional income streams.
COGS and other operational expenses.
Debt payments including interest paid.
Investment income and income from secondary operations .
One-time payments for unusual events such as lawsuits and taxes.
Net profit margin is one of the most important indicators of a company’s financial health. By tracking increases and decreases in its net profit margin, a company can assess whether current practices are working and forecast profits based on revenues. Because companies express net profit margin as a percentage rather than a dollar amount, it is possible to compare the profitability of two or more businesses regardless of size.
What Does Net Profit Margin Tell You?
The net profit margin factors in all business activities including:
Total revenue.
All outgoing cash flow.
Additional income streams.
COGS and other operational expenses.
Debt payments including interest paid.
Investment income and income from secondary operations .
One-time payments for unusual events such as lawsuits and taxes.
Net profit margin is one of the most important indicators of a company’s financial health. By tracking increases and decreases in its net profit margin, a company can assess whether current practices are working and forecast profits based on revenues. Because companies express net profit margin as a percentage rather than a dollar amount, it is possible to compare the profitability of two or more businesses regardless of size.
Net Margin vs. Gross Profit Margin
Gross profit margin is the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). COGS are raw materials and expenses associated directly with the creation of the company’s primary product, not including overhead costs such as rent, utilities, freight, or payroll.
Gross profit margin is the gross profit divided by total revenue and is the percentage of income retained as profit after accounting for the cost of goods. Gross margin is helpful in determining how much profit is generated from the production of a company’s goods because it excludes other items such as overhead from the corporate office, taxes, and interest on a debt.
Net profit margin, on the other hand, is the percentage of profit generated from revenue after accounting for all expenses, costs, and cash flow items.
Gross profit margin is the gross profit divided by total revenue and is the percentage of income retained as profit after accounting for the cost of goods. Gross margin is helpful in determining how much profit is generated from the production of a company’s goods because it excludes other items such as overhead from the corporate office, taxes, and interest on a debt.
Net profit margin, on the other hand, is the percentage of profit generated from revenue after accounting for all expenses, costs, and cash flow items.
Net Worth
Net worth is nothing but the difference between assets and liabilities of a business. Positive net worth means that assets are more than the liabilities, while negative net worth describes the opposite.
Understanding Net Worth.
Net worth describes the financial health of an organisation. An asset is owned by the business and has a monetary value while liabilities are obligations that have to be paid.
So, if a business has liabilities in excess to what is owned, then the business’s health is bad.
The best way to improve the net worth is to either decrease liabilities while assets either stay constant or increase.
Net worth can be calculated for individuals, businesses, companies, sectors, and even countries.
In the context of business, net worth is also known as book value or shareholders’ equity.
Individuals with a substantial net worth are known as high net worth individuals (HNWI).
Understanding Net Worth.
Net worth describes the financial health of an organisation. An asset is owned by the business and has a monetary value while liabilities are obligations that have to be paid.
So, if a business has liabilities in excess to what is owned, then the business’s health is bad.
The best way to improve the net worth is to either decrease liabilities while assets either stay constant or increase.
Net worth can be calculated for individuals, businesses, companies, sectors, and even countries.
In the context of business, net worth is also known as book value or shareholders’ equity.
Individuals with a substantial net worth are known as high net worth individuals (HNWI).
Opportunity Cost
Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Because by definition they are unseen, opportunity costs can be easily overlooked. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.
Formula and Calculation of Opportunity Cost.
Opportunity Cost=FO−CO.
where:
FO=Return on best foregone option.
CO=Return on chosen option.
The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Say that you have option A—to invest in the stock market hoping to generate capital gain returns. Meanwhile, Option B is to reinvest your money back into the business, expecting that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin. Assume the expected return on investment in the stock market is 12% over the next year, and your company expects the equipment update to generate a 10% return over the same period. The opportunity cost of choosing the equipment over the stock market is (12% – 10%), which equals two percentage points. In other words, by investing in the business, you would forgo the opportunity to earn a higher return.
Formula and Calculation of Opportunity Cost.
Opportunity Cost=FO−CO.
where:
FO=Return on best foregone option.
CO=Return on chosen option.
The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Say that you have option A—to invest in the stock market hoping to generate capital gain returns. Meanwhile, Option B is to reinvest your money back into the business, expecting that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin. Assume the expected return on investment in the stock market is 12% over the next year, and your company expects the equipment update to generate a 10% return over the same period. The opportunity cost of choosing the equipment over the stock market is (12% – 10%), which equals two percentage points. In other words, by investing in the business, you would forgo the opportunity to earn a higher return.
Over-the-Counter (OTC)
Over-the-counter (OTC) refers to the process of how securities are traded via a broker-dealer network as opposed to on a centralized exchange. Over-the-counter trading can involve equities, debt instruments, and derivatives, which are financial contracts that derive their value from an underlying asset such as a commodity.
In some cases, securities might not meet the requirements to have a listing on a standard market exchange such as the New York Stock Exchange (NYSE). Instead, these securities can be traded over-the-counter.
However, over-the-counter trading can include equities that are listed on exchanges and stocks that are not listed. Stocks that are not listed on an exchange, and trade via OTC, are typically called over-the-counter equity securities, or OTC equities.
Understanding Over-the-Counter.
Stocks that trade via OTC are typically smaller companies that cannot meet exchange listing requirements of formal exchanges. However, many other types of securities also trade here. Stocks that trade on exchanges are called listed stocks, whereas stocks that trade via OTC are called unlisted stocks.
In some cases, securities might not meet the requirements to have a listing on a standard market exchange such as the New York Stock Exchange (NYSE). Instead, these securities can be traded over-the-counter.
However, over-the-counter trading can include equities that are listed on exchanges and stocks that are not listed. Stocks that are not listed on an exchange, and trade via OTC, are typically called over-the-counter equity securities, or OTC equities.
Understanding Over-the-Counter.
Stocks that trade via OTC are typically smaller companies that cannot meet exchange listing requirements of formal exchanges. However, many other types of securities also trade here. Stocks that trade on exchanges are called listed stocks, whereas stocks that trade via OTC are called unlisted stocks.
Partnership
A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.
There are several types of partnership arrangements. In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-called “silent partner,” in which one party is not involved in the day-to-day operations of the business.
How Does a Partnership Differ from Other Forms of Business Organization?
A partnership is a way of structuring a business that involves two or more individuals (the partners). It involves a contractual agreement (the partnership agreement) between all of the partners that set the terms and conditions of their business relationship, including the distribution of ownership, responsibilities, and profits and losses. Partnerships outline and clearly define a business relationship and responsibility.
Unlike LLCs or corporations, however, partners are personally held liable for any business debts of the partnership, which means that creditors or other claimants can go after the partners’ personal assets. Because of this, individuals who wish to form a partnership should be extremely selective when choosing partners.
There are several types of partnership arrangements. In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-called “silent partner,” in which one party is not involved in the day-to-day operations of the business.
How Does a Partnership Differ from Other Forms of Business Organization?
A partnership is a way of structuring a business that involves two or more individuals (the partners). It involves a contractual agreement (the partnership agreement) between all of the partners that set the terms and conditions of their business relationship, including the distribution of ownership, responsibilities, and profits and losses. Partnerships outline and clearly define a business relationship and responsibility.
Unlike LLCs or corporations, however, partners are personally held liable for any business debts of the partnership, which means that creditors or other claimants can go after the partners’ personal assets. Because of this, individuals who wish to form a partnership should be extremely selective when choosing partners.
Public Company
A public company is a corporation wherein the ownership is dispensed to general public shareholders through the free trade of shares of stock over-the-counter at markets or on exchanges. Even though a minute percentage of shares are initially given to the public, the daily trading which happens in the market will determine the worth of an entire company. It is termed as “”public”” as the shareholders, who become equity owners of the firm, may be composed of any individual who buys stock in the firm.
Public companies are traded publicly within an open market. Various investors buy shares. Mostly, public companies were initially private companies who became public companies to raise capital post complying with all of the regulatory requirements.
Public companies are traded publicly within an open market. Various investors buy shares. Mostly, public companies were initially private companies who became public companies to raise capital post complying with all of the regulatory requirements.
Profit Margin
Profit margin is one of the profitability measures that is widely used to gauge the degree to which a corporation or enterprise is making money. It reflects what percentage of revenue is profits. The percentage figure shows how many cents of profit the company has generated for every dollar of sales.
There are many different forms of margin for benefit. However, in daily usage it typically refers to the net profit margin, the bottom line of a business after all other costs, including taxes and one-off chances, were taken out of sales.
There are many different forms of margin for benefit. However, in daily usage it typically refers to the net profit margin, the bottom line of a business after all other costs, including taxes and one-off chances, were taken out of sales.
Parent Company
A parent company is an organisation which has the interest of controlling another entity, providing it with the control over the operation. Parent companies may be hands-off or hands-on owners of the subsidiary companies. It depends on the extent of managerial authority provided to the managers of the subsidiary firm.
Understanding Parent Company.
One must not confuse a parent company with a holding company. The two cannot be used interchangeably as parent companies operate their own operations while holding companies are set up, particularly for owning a group of subsidiaries.
They are generally set up for the purpose of taxation. Parent companies may be a blend of several seemingly unmatched business whose business diversity brought in by the business wings are going to provide advantage from cross-branding.
In an alternate arrangement, parent companies and subsidiaries can be integrated horizontally, such as Gap Inc, which is the owner of the Banana Republic and Old Navy. They can also be integrated vertically by being the owner of various companies at several stages of the supply chain or production.
Understanding Parent Company.
One must not confuse a parent company with a holding company. The two cannot be used interchangeably as parent companies operate their own operations while holding companies are set up, particularly for owning a group of subsidiaries.
They are generally set up for the purpose of taxation. Parent companies may be a blend of several seemingly unmatched business whose business diversity brought in by the business wings are going to provide advantage from cross-branding.
In an alternate arrangement, parent companies and subsidiaries can be integrated horizontally, such as Gap Inc, which is the owner of the Banana Republic and Old Navy. They can also be integrated vertically by being the owner of various companies at several stages of the supply chain or production.
Preference Shares
Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.
Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.
Understanding Preference Shares.
Preference shares fall under four categories: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock and convertible preferred stock.
Cumulative preferred stock includes a provision that requires the company to pay shareholders all dividends, including those that were omitted in the past, before the common shareholders are able to receive their dividend payments. These dividend payments are guaranteed but not always paid out when they are due. Unpaid dividends are assigned the moniker “dividends in arrears” and must legally go to the current owner of the stock at the time of payment. At times additional compensation (interest) is awarded to the holder of this type of preferred stock.
Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.
Understanding Preference Shares.
Preference shares fall under four categories: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock and convertible preferred stock.
Cumulative preferred stock includes a provision that requires the company to pay shareholders all dividends, including those that were omitted in the past, before the common shareholders are able to receive their dividend payments. These dividend payments are guaranteed but not always paid out when they are due. Unpaid dividends are assigned the moniker “dividends in arrears” and must legally go to the current owner of the stock at the time of payment. At times additional compensation (interest) is awarded to the holder of this type of preferred stock.
PPP ( Purchasing Power Parity )
Purchasing Power Parity or PPP refers to an economic theory that compares the economic productivity and living standards of different countries using the basket of goods approach. Accordingly, two countries are said to be at equilibrium when the basket of goods is priced the same in both countries, accounting for the exchange rates.
It can be expressed as,
S = P1 / P2 Where,
S = Exchange rate of one currency 1 to currency 2 P1 = Cost of a good in currency 1 P2 = Cost of the same good in currency 2.
It helps in comparison of Gross Domestic Products and Price Level Indices of different countries. · The PPP exchange rates are used to convert the national poverty lines into Global Poverty Lines. · It is a more accurate means of estimating the nation’s domestic market because it takes into account the relative cost of local goods, services and inflation rates of the country. · These estimates are used by the United Nations in constructing the Human Development Index (HDI).
It can be expressed as,
S = P1 / P2 Where,
S = Exchange rate of one currency 1 to currency 2 P1 = Cost of a good in currency 1 P2 = Cost of the same good in currency 2.
It helps in comparison of Gross Domestic Products and Price Level Indices of different countries. · The PPP exchange rates are used to convert the national poverty lines into Global Poverty Lines. · It is a more accurate means of estimating the nation’s domestic market because it takes into account the relative cost of local goods, services and inflation rates of the country. · These estimates are used by the United Nations in constructing the Human Development Index (HDI).
Price-to-Earnings (P/E) Ratio
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.
P/E may be estimated on a trailing (backward-looking) or forward (projected) basis.
To determine the P/E value, one must simply divide the current stock price by the earnings per share (EPS).
The current stock price (P) can be found simply by plugging a stock’s ticker symbol into any finance website, and although this concrete value reflects what investors must currently pay for a stock, the EPS is a slightly more nebulous figure.
EPS comes in two main varieties. TTM is a Wall Street acronym for trailing 12 months. This number signals the company’s performance over the past 12 months. The second type of EPS is found in a company’s earnings release, which often provides EPS guidance. This is the company’s best-educated guess of what it expects to earn in the future. These different versions of EPS form the basis of trailing and forward P/E, respectively.
P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.
P/E may be estimated on a trailing (backward-looking) or forward (projected) basis.
To determine the P/E value, one must simply divide the current stock price by the earnings per share (EPS).
The current stock price (P) can be found simply by plugging a stock’s ticker symbol into any finance website, and although this concrete value reflects what investors must currently pay for a stock, the EPS is a slightly more nebulous figure.
EPS comes in two main varieties. TTM is a Wall Street acronym for trailing 12 months. This number signals the company’s performance over the past 12 months. The second type of EPS is found in a company’s earnings release, which often provides EPS guidance. This is the company’s best-educated guess of what it expects to earn in the future. These different versions of EPS form the basis of trailing and forward P/E, respectively.
Profit and Loss Statement (P&L)
The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement.
These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement, or expense statement.
For non-profit organizations, revenues and expenses are generally tracked in a financial report called the statement of activities (sometimes called statement of financial activities or statement of support).
P&L management refers to how a company handles its P&L statement through revenue and cost management. The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. It is often the most popular and common financial statement in a business plan as it quickly shows how much profit or loss was generated by a business.
These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement, or expense statement.
For non-profit organizations, revenues and expenses are generally tracked in a financial report called the statement of activities (sometimes called statement of financial activities or statement of support).
P&L management refers to how a company handles its P&L statement through revenue and cost management. The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement. It is often the most popular and common financial statement in a business plan as it quickly shows how much profit or loss was generated by a business.
Public Limited Company (PLC)
A public limited company (PLC) is a public company in the United Kingdom. PLC is the equivalent of a U.S. publicly traded company that carries the Inc. or corporation designation. The use of the PLC abbreviation after the name of a company is mandatory and communicates to investors and to anyone dealing with the company that it is a publicly traded corporation.
How a Public Limited Company (PLC) Works.
A PLC designates a company that has offered shares of stock to the general public. The buyers of those shares have limited liability. Meaning, they cannot be held responsible for any business losses in excess of the amount they paid for the shares.
Advantages and Disadvantages of a PLC.
The biggest advantage of forming a public limited company (PLC) is that it grants the ability to raise capital by issuing public shares. A listing on a public stock exchange attracts interest from hedge funds, mutual funds, and professional traders as well as individual investors. That tends to lead to increased access to capital for investment in the company than a private limited company can amass.
Public Limited Company Owned By?
PLCs are owned by shareholders. These companies are traded on exchanges and shares where shares can be openly bought or sold by individuals, companies, mutual funds, etc.
How a Public Limited Company (PLC) Works.
A PLC designates a company that has offered shares of stock to the general public. The buyers of those shares have limited liability. Meaning, they cannot be held responsible for any business losses in excess of the amount they paid for the shares.
Advantages and Disadvantages of a PLC.
The biggest advantage of forming a public limited company (PLC) is that it grants the ability to raise capital by issuing public shares. A listing on a public stock exchange attracts interest from hedge funds, mutual funds, and professional traders as well as individual investors. That tends to lead to increased access to capital for investment in the company than a private limited company can amass.
Public Limited Company Owned By?
PLCs are owned by shareholders. These companies are traded on exchanges and shares where shares can be openly bought or sold by individuals, companies, mutual funds, etc.
Portfolio management
Portfolio management is the process of making decisions about matching investments to objectives, investment mix and policy, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management is all about determining strengths, weaknesses, opportunities, and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a given appetite for risk.
Understanding Portfolio Management.
The terms “portfolio management” and “financial planning” are not synonyms; they are not the same. Portfolio management is the act of creating and maintaining an investment account. Whereas, financial planning is the process of developing financial goals and setting up a plan of action to achieve them. Professionally licensed portfolio managers are responsible for portfolio management on behalf of others, while individuals may plan their own investments and build their own portfolio. The end goal of portfolio management is to maximize the investments expected return, given an appropriate level of risk exposure.
Understanding Portfolio Management.
The terms “portfolio management” and “financial planning” are not synonyms; they are not the same. Portfolio management is the act of creating and maintaining an investment account. Whereas, financial planning is the process of developing financial goals and setting up a plan of action to achieve them. Professionally licensed portfolio managers are responsible for portfolio management on behalf of others, while individuals may plan their own investments and build their own portfolio. The end goal of portfolio management is to maximize the investments expected return, given an appropriate level of risk exposure.
Point of Sale
Point of sale corresponds to the location where the transaction occurs – this may be physical or virtual. Legacy POS systems were on the market premises – an on-site server was used in a specific store with the help of one’s desktop, cash register, barcode scanner and the like. But with the advent of the internet and the cloud, mobility increased. A mobile POS system allows the retailers to manage their entire business from any device, at any point of time. The accounts are settled at the end of the day, as pre-decided by the merchant. The amount is credited the following day after deducting charges.
Paid-up Capital
Paid-up capital is the amount of money received by the company when it sells its shares to the shareholders and investors directly through the primary market. In other words, it is the money that the investors give to the company on buying a share in that company.
If these shares are bought or sold in the secondary market, the money does not go to the company but it goes to the shareholders that are selling the shares. Therefore, no paid-up capital is gained when shares are sold through the secondary market.
Another term you should be aware of while learning about paid-up capital, is authorised capital. Authorised capital refers to the maximum amount of shares the company is allowed to sell. The paid-up capital can be equal to or less than this authorised capital but never more than it.
The companies need to apply to raise an authorised capital. Usually the company will make sure that the authorised capital is more than the current financial need so that a significant amount of paid-up capital can be gained.
If these shares are bought or sold in the secondary market, the money does not go to the company but it goes to the shareholders that are selling the shares. Therefore, no paid-up capital is gained when shares are sold through the secondary market.
Another term you should be aware of while learning about paid-up capital, is authorised capital. Authorised capital refers to the maximum amount of shares the company is allowed to sell. The paid-up capital can be equal to or less than this authorised capital but never more than it.
The companies need to apply to raise an authorised capital. Usually the company will make sure that the authorised capital is more than the current financial need so that a significant amount of paid-up capital can be gained.
Rate of Return (RoR)
A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.
Understanding a Rate of Return (RoR).
A rate of return (RoR) can be applied to any investment vehicle, from real estate to bonds, stocks, and fine art. The RoR works with any asset provided the asset is purchased at one point in time and produces cash flow at some point in the future. Investments are assessed based, in part, on past rates of return, which can be compared against assets of the same type to determine which investments are the most attractive. Many investors like to pick a required rate of return before making an investment choice.
Understanding a Rate of Return (RoR).
A rate of return (RoR) can be applied to any investment vehicle, from real estate to bonds, stocks, and fine art. The RoR works with any asset provided the asset is purchased at one point in time and produces cash flow at some point in the future. Investments are assessed based, in part, on past rates of return, which can be compared against assets of the same type to determine which investments are the most attractive. Many investors like to pick a required rate of return before making an investment choice.
Return on Equity (ROE)
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity. Because shareholders’ equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of a corporation’s profitability in relation to stockholders’ equity
How to Calculate Return on Equity.
ROE is expressed as a percentage and can be calculated for any company if net income and equity are both positive numbers. Net income is calculated before dividends paid to common shareholders and after dividends to preferred shareholders and interest to lenders.
What Does ROE Tell You?
Whether ROE is deemed good or bad will depend on what is normal among a stock’s peers. For example, utilities have many assets and debt on the balance sheet compared to a relatively small amount of net income. A normal ROE in the utility sector could be 10% or less. A technology or retail firm with smaller balance sheet accounts relative to net income may have normal ROE levels of 18% or more.
A good rule of thumb is to target an ROE that is equal to or just above the average for the peer group. For example, assume a company, TechCo, has maintained a steady ROE of 18% over the past few years compared to the average of its peers, which was 15%. An investor could conclude that TechCo’s management is above average at using the company’s assets to create profits. Relatively high or low ROE ratios will vary significantly from one industry group or sector to another. When used to evaluate one company to another similar company, the comparison will be more meaningful. A common shortcut for investors is to consider a return on equity near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor.
How to Calculate Return on Equity.
ROE is expressed as a percentage and can be calculated for any company if net income and equity are both positive numbers. Net income is calculated before dividends paid to common shareholders and after dividends to preferred shareholders and interest to lenders.
What Does ROE Tell You?
Whether ROE is deemed good or bad will depend on what is normal among a stock’s peers. For example, utilities have many assets and debt on the balance sheet compared to a relatively small amount of net income. A normal ROE in the utility sector could be 10% or less. A technology or retail firm with smaller balance sheet accounts relative to net income may have normal ROE levels of 18% or more.
A good rule of thumb is to target an ROE that is equal to or just above the average for the peer group. For example, assume a company, TechCo, has maintained a steady ROE of 18% over the past few years compared to the average of its peers, which was 15%. An investor could conclude that TechCo’s management is above average at using the company’s assets to create profits. Relatively high or low ROE ratios will vary significantly from one industry group or sector to another. When used to evaluate one company to another similar company, the comparison will be more meaningful. A common shortcut for investors is to consider a return on equity near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor.
Ratio Analysis
Ratio analysis is a quantitative procedure of obtaining a look into a firm’s functional efficiency, liquidity, revenues, and profitability by analysing its financial records and statements. Ratio analysis is a very important factor that will help in doing an analysis of the fundamentals of equity.
Analysts and investors make use of the methods for ratio analysis to study and evaluate the fiscal wellbeing of businesses by closely examining the historical performance and monetary statements.
Comparative data and analysis can give an insight into the performance of the business over a given period of time by comparing it with the industry standards. At the same time, it also measures how well a business racks up against other businesses functioning in the same sector.
Liquidity Ratios.
These ratios evaluate a business’ efficiency to settle its debts as and when they become due, with its revenues or assets in the disposal. Liquidity ratios cover quick ratio, current ratio, and the working capital ratio
Analysts and investors make use of the methods for ratio analysis to study and evaluate the fiscal wellbeing of businesses by closely examining the historical performance and monetary statements.
Comparative data and analysis can give an insight into the performance of the business over a given period of time by comparing it with the industry standards. At the same time, it also measures how well a business racks up against other businesses functioning in the same sector.
Liquidity Ratios.
These ratios evaluate a business’ efficiency to settle its debts as and when they become due, with its revenues or assets in the disposal. Liquidity ratios cover quick ratio, current ratio, and the working capital ratio
Revenue Recognition
Revenue recognition refers to one of the key accounting principles and part of the GAAP (Generally Accepted Accounting Principle). The principle specifies the conditions subject to which revenue should be recognised in the books of accounts of a company. Basically, the principle of revenue recognition states that revenue recognition occurs after the business event.
Understanding Revenue Recognition.
In most cases, accounting for revenues is clear cut and straight forward. A company needs to recognise revenues on the sale of a product or service. However, in different types of industries, revenue accounting is dependent on the nature of the industry and their revenue contracts. For example, in a real estate development industry, the revenue generation is staggered over the period of the project.
The principle of revenue recognition follows the accrual method of accounting. That means all revenue that accrues gets recognised irrespective of the actual collection. Revenue recognition gets complicated in many situations because of contractual agreements and regulatory issues. In general, most revenue authorities desire recognition of revenue irrespective of the completion of a project.
In each country, the revenue recognition standards lay down principles for different types of industries. In several countries, the revenue recognition standard requires revenue recognition on the percentage of completion method for the real estate sector. The standard recognises the difficulties faced by any industry and sets the guiding principles.
Understanding Revenue Recognition.
In most cases, accounting for revenues is clear cut and straight forward. A company needs to recognise revenues on the sale of a product or service. However, in different types of industries, revenue accounting is dependent on the nature of the industry and their revenue contracts. For example, in a real estate development industry, the revenue generation is staggered over the period of the project.
The principle of revenue recognition follows the accrual method of accounting. That means all revenue that accrues gets recognised irrespective of the actual collection. Revenue recognition gets complicated in many situations because of contractual agreements and regulatory issues. In general, most revenue authorities desire recognition of revenue irrespective of the completion of a project.
In each country, the revenue recognition standards lay down principles for different types of industries. In several countries, the revenue recognition standard requires revenue recognition on the percentage of completion method for the real estate sector. The standard recognises the difficulties faced by any industry and sets the guiding principles.
Stock Trading
Stock trading involves buying and selling of shares in a certain company. If you own certain stocks and shares of a company, it translates to you owning a piece of the firm. A professional or an individual who trades on behalf of a financial firm will be known as a stock trader. Stock traders are broadly classified into three categories – informed, uninformed, and intuitive traders.
A few of the most common traders include swing traders, day traders, momentum traders, and buy and hold traders.
What are the advantages of Stock Trading?
An individual trader will buy and sell via brokerage or an agent. On the other hand, institutional traders are mostly employed by investment companies. Stock traders provide liquidity to the markets, and employ several methods and styles for defining their strategies. Stock trading has two main types – individual stock trading and institutional stock trading.
Stock traders are different from stock investors. Stock traders trade equity securities, whereas stock investors utilize their own funds to purchase securities. The stock investor’s primary goal is to produce interest income or to profit from the increase in value, also termed as capital gains.
A few of the most common traders include swing traders, day traders, momentum traders, and buy and hold traders.
What are the advantages of Stock Trading?
An individual trader will buy and sell via brokerage or an agent. On the other hand, institutional traders are mostly employed by investment companies. Stock traders provide liquidity to the markets, and employ several methods and styles for defining their strategies. Stock trading has two main types – individual stock trading and institutional stock trading.
Stock traders are different from stock investors. Stock traders trade equity securities, whereas stock investors utilize their own funds to purchase securities. The stock investor’s primary goal is to produce interest income or to profit from the increase in value, also termed as capital gains.
Sunk Cost
A sunk cost applies to money previously invested and not recoverable. In any industry, the axiom that one must “spend money to make money” is expressed in the sunken cost phenomenon.
Sunk Cost Explained.
A sunk cost varies from the potential costs that a company may face, such as decisions about the cost of purchasing inventories or pricing of goods. Sunk costs are removed from possible business decisions because, regardless of the result of a decision, the cost will remain the same.
Organisations must consider current/relevant costs when making strategic decisions that include the future costs that need to be incurred. The relevant costs are compared to the revenue contribution of two different choices. A sunk cost is not considered because they do not alter one’s choice.
For instance, a manufacturing company may have a variety of sunk costs, such as machinery costs, equipment costs, land and factory lease expenses. Sunk costs are excluded while calculating the cost of deciding between a further sell or a buying process.
Sunk Cost Explained.
A sunk cost varies from the potential costs that a company may face, such as decisions about the cost of purchasing inventories or pricing of goods. Sunk costs are removed from possible business decisions because, regardless of the result of a decision, the cost will remain the same.
Organisations must consider current/relevant costs when making strategic decisions that include the future costs that need to be incurred. The relevant costs are compared to the revenue contribution of two different choices. A sunk cost is not considered because they do not alter one’s choice.
For instance, a manufacturing company may have a variety of sunk costs, such as machinery costs, equipment costs, land and factory lease expenses. Sunk costs are excluded while calculating the cost of deciding between a further sell or a buying process.
Solvency Ratio
A solvency ratio is a vital metric used to see a business’s ability to fulfil long-term debt requirements and is used by prospective business lenders. It shows whether a company’s cash flow is good enough to meet its long-term liabilities. It is, therefore, considered to a measure of its financial health. An unfavourable ratio can show some likelihood that a company will default on its debt obligations.
The principal solvency ratios are the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity (D/E) ratio. These measures can be compared with liquidity ratios, which consider a firm’s capability to meet short-term obligations rather than medium- to long-term ones.
Understanding Solvency Ratios.
Solvency ratios are one of many metrics applied to determine whether a company can stay solvent in the long term.
A solvency ratio is a general measure of solvency, as it measures a firm’s actual cash flow, rather than net income, by adding depreciation and other non-cash expenses to evaluate a company’s capacity to stay afloat.
It estimates this cash flow capacity in relation to all liabilities. This way, a solvency ratio estimates a company’s long-term health by evaluating its repayment ability for its long term debt and the interest on that debt.
The principal solvency ratios are the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity (D/E) ratio. These measures can be compared with liquidity ratios, which consider a firm’s capability to meet short-term obligations rather than medium- to long-term ones.
Understanding Solvency Ratios.
Solvency ratios are one of many metrics applied to determine whether a company can stay solvent in the long term.
A solvency ratio is a general measure of solvency, as it measures a firm’s actual cash flow, rather than net income, by adding depreciation and other non-cash expenses to evaluate a company’s capacity to stay afloat.
It estimates this cash flow capacity in relation to all liabilities. This way, a solvency ratio estimates a company’s long-term health by evaluating its repayment ability for its long term debt and the interest on that debt.
Total-Debt-to-Total-Assets Ratio
Total-debt-to-total-assets is a leverage ratio that defines the total amount of debt relative to assets owned by a company. Using this metric, analysts can compare one company’s leverage with that of other companies in the same industry. This information can reflect how financially stable a company is. The higher the ratio, the higher the degree of leverage (DoL) and, consequently, the higher the risk of investing in that company.
Understanding the Total-Debt-to-Total-Assets Ratio.
The total-debt-to-total-assets ratio analyzes a company’s balance sheet by including long-term and short-term debt (borrowings maturing within one year), as well as all assets—both tangible and intangible, such as goodwill. It indicates how much debt is used to carry a firm’s assets, and how those assets might be used to service debt. It therefore measures a firm’s degree of leverage.
Debt servicing payments must be made under all circumstances, otherwise the company would breach its debt covenants and run the risk of being forced into bankruptcy by creditors. While other liabilities such as accounts payable and long-term leases can be negotiated to some extent, there is very little “wiggle room” with debt covenants.
A company with a high degree of leverage may thus find it more difficult to stay afloat during a recession than one with low leverage. It should be noted that the total debt measure does not include short-term liabilities such as accounts payable and long-term liabilities such as capital leases and pension plan obligations.
Understanding the Total-Debt-to-Total-Assets Ratio.
The total-debt-to-total-assets ratio analyzes a company’s balance sheet by including long-term and short-term debt (borrowings maturing within one year), as well as all assets—both tangible and intangible, such as goodwill. It indicates how much debt is used to carry a firm’s assets, and how those assets might be used to service debt. It therefore measures a firm’s degree of leverage.
Debt servicing payments must be made under all circumstances, otherwise the company would breach its debt covenants and run the risk of being forced into bankruptcy by creditors. While other liabilities such as accounts payable and long-term leases can be negotiated to some extent, there is very little “wiggle room” with debt covenants.
A company with a high degree of leverage may thus find it more difficult to stay afloat during a recession than one with low leverage. It should be noted that the total debt measure does not include short-term liabilities such as accounts payable and long-term liabilities such as capital leases and pension plan obligations.
Tax Credit
More commonly across the globe, a government may grant tax credits to encourage specific actions from taxpayers. These include the replacing of any older appliances with more energy-efficient ones. Alternatively, it is present to help underprivileged taxpayers by decreasing the overall cost of housing.
Tax credits are favoured to tax deductions or exemptions. It is because tax credits will reduce tax liability by every penny. Although a deduction or exemption still decreases the final tax liability, it works within an individuals marginal tax rate.
A tax credit is the amount of money taxpayers are permitted to subtract from the income tax liability that they owe to the government.
On the other hand, tax credits can be rebates that the government provides in case of special circumstances surrounding a person.
Tax credits are favoured to tax deductions or exemptions. It is because tax credits will reduce tax liability by every penny. Although a deduction or exemption still decreases the final tax liability, it works within an individuals marginal tax rate.
A tax credit is the amount of money taxpayers are permitted to subtract from the income tax liability that they owe to the government.
On the other hand, tax credits can be rebates that the government provides in case of special circumstances surrounding a person.
Trademark
A trademark is a recognisable insignia, expression, term, or emblem that signifies and legally differentiates a particular product from all other products of its kind. A trademark marks a product solely as belonging to a particular company and acknowledges the brand’s ownership of the company.
Similar to a trademark, a service mark defines and separates the source of a service rather than a product. The word “trademark” is often used to relate to both trademarks and service marks. In general, trademarks are considered a form of intellectual property.
Understanding the trademark.
A trademark could be a corporate logo, a slogan, a brand, or just a product name. For instance, few would think of a beverage and calling it Coca Cola, or using its logo’s famous wave. It is now clear that The Coca-Cola Company (KO) belongs to the brand “Coca Cola,” and to its logo.
Nonetheless, trademarking does include some fuzzy definitions, as it forbids any marks that have a “likelihood of conflict” with an existing one. Accordingly, a company cannot use a symbol or brand name if it sounds similar, looks similar, or has a similar meaning to one already on the books—especially if the goods or services are connected.
Similar to a trademark, a service mark defines and separates the source of a service rather than a product. The word “trademark” is often used to relate to both trademarks and service marks. In general, trademarks are considered a form of intellectual property.
Understanding the trademark.
A trademark could be a corporate logo, a slogan, a brand, or just a product name. For instance, few would think of a beverage and calling it Coca Cola, or using its logo’s famous wave. It is now clear that The Coca-Cola Company (KO) belongs to the brand “Coca Cola,” and to its logo.
Nonetheless, trademarking does include some fuzzy definitions, as it forbids any marks that have a “likelihood of conflict” with an existing one. Accordingly, a company cannot use a symbol or brand name if it sounds similar, looks similar, or has a similar meaning to one already on the books—especially if the goods or services are connected.
Venture Capital
Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. Venture capital is typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.
Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, bank loans, or other debt instruments. The main downside is that the investors usually get equity in the company, and, thus, a say in company decisions.
A value-added tax, popularly known as VAT, is a tax added to a product at every stage in the supply chain and is based on the value added. It is already being implemented widely across the globe under various names, including goods and services tax (GST).
A value-added tax, popularly known as VAT, is a tax added to a product at every stage in the supply chain and is based on the value added. It is already being implemented widely across the globe under various names, including goods and services tax (GST).
Volatility
Volatility measures the rate of change in the price of a security being traded on the stock market. This change is the major component of the risk talked about in investing that may define how much money that could be gained in parallel to how much will be lost.
Understanding Volatility.
Price fluctuations of securities on the stock market are natural and given. This rate of change is what makes up most of the market risk. This measurement of change is what volatility is, which calculates the level of change, and thus the risk associated with it. The calculations enable investors and traders to assess the movement of the security with its price and thereby predict possible future trends. Volatility measures the quickness with which the indices or the market moves, thereby giving a broad assumption on the amount of risk. Volatility is measured using standard deviation, variance, beta coefficients, option pricing models etc. By measuring the standard deviation, technical analysts try to study the possible prices to which the security will climb or fall or continue with respect to its current position. It is the square root of variance, which also measures the dispersion of the security’s price. Volatility is not a singular concept; it can be calculated over various periods of time like weekly, daily, quarterly or annually. Historical volatility measures the past performance of the assets and pushes analysts to check if price patterns may repeat. It is a common type of validity calculated for most securities, and is expressed as a percentage. Implied volatility is used in options trading to find the volatility of the underlying asset. The interpretation of the volatility is what matters. If an asset is highly volatile, it means that the asset may climb to higher prices and therefore hold greater risk. Although there are exceptions; it greatly depends on the time taken into reference.
Understanding Volatility.
Price fluctuations of securities on the stock market are natural and given. This rate of change is what makes up most of the market risk. This measurement of change is what volatility is, which calculates the level of change, and thus the risk associated with it. The calculations enable investors and traders to assess the movement of the security with its price and thereby predict possible future trends. Volatility measures the quickness with which the indices or the market moves, thereby giving a broad assumption on the amount of risk. Volatility is measured using standard deviation, variance, beta coefficients, option pricing models etc. By measuring the standard deviation, technical analysts try to study the possible prices to which the security will climb or fall or continue with respect to its current position. It is the square root of variance, which also measures the dispersion of the security’s price. Volatility is not a singular concept; it can be calculated over various periods of time like weekly, daily, quarterly or annually. Historical volatility measures the past performance of the assets and pushes analysts to check if price patterns may repeat. It is a common type of validity calculated for most securities, and is expressed as a percentage. Implied volatility is used in options trading to find the volatility of the underlying asset. The interpretation of the volatility is what matters. If an asset is highly volatile, it means that the asset may climb to higher prices and therefore hold greater risk. Although there are exceptions; it greatly depends on the time taken into reference.
Value Chain
A value chain is a business concept defining the broad spectrum of actions necessary to produce a product or service. In businesses that manufacture products, a supply chain involves the steps that include taking a product from creation to delivery, and everything in between—such as sourcing of raw materials, production processes, and marketing activities.
An organisation performs an overview of the value-chain by evaluating the specific processes involved in each phase of its operation. The aim of a value-chain analysis is to maximise the efficiency of production so that a business can produce maximum value at the least possible cost.
Understanding the Value Chain.
Because of ever-increasing competition for unbeatable prices, exceptional goods and consumer loyalty, companies need to constantly analyse the value they generate to maintain their competitive edge. A value chain will help a company identify inefficient areas of its company, then adopt strategies that will optimise its processes for optimal productivity and profitability.
Besides ensuring that production processes are smooth and effective, companies need to keep consumers feeling confident and safe enough to remain loyal. Analysis of the value chains will also assist with this.
An organisation performs an overview of the value-chain by evaluating the specific processes involved in each phase of its operation. The aim of a value-chain analysis is to maximise the efficiency of production so that a business can produce maximum value at the least possible cost.
Understanding the Value Chain.
Because of ever-increasing competition for unbeatable prices, exceptional goods and consumer loyalty, companies need to constantly analyse the value they generate to maintain their competitive edge. A value chain will help a company identify inefficient areas of its company, then adopt strategies that will optimise its processes for optimal productivity and profitability.
Besides ensuring that production processes are smooth and effective, companies need to keep consumers feeling confident and safe enough to remain loyal. Analysis of the value chains will also assist with this.
Weighted Average Cost of Capital (WACC)
The weighted average cost of capital (WACC) is a calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.
A firm’s WACC increases as the beta and rate of return on equity increase because an increase in WACC denotes a decrease in valuation and an increase in risk.
WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the value. In the above formula, E/V represents the proportion of equity-based financing, while D/V represents the proportion of debt-based financing. The WACC formula thus involves the summation of two terms.
Who Uses WACC?
Securities analysts frequently use WACC when assessing the value of investments and when determining which ones to pursue. For example, in discounted cash flow analysis, one may apply WACC as the discount rate for future cash flows in order to derive a business’s net present value. WACC may also be used as a hurdle rate against which companies and investors can gauge return on invested capital (ROIC) performance. WACC is also essential in order to perform economic value-added (EVA) calculations.
Investors may often use WACC as an indicator of whether or not an investment is worth pursuing. Put simply, WACC is the minimum acceptable rate of return at which a company yields returns for its investors. To determine an investor’s personal returns on an investment in a company, simply subtract the WACC from the company’s returns percentage.
A firm’s WACC increases as the beta and rate of return on equity increase because an increase in WACC denotes a decrease in valuation and an increase in risk.
WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the value. In the above formula, E/V represents the proportion of equity-based financing, while D/V represents the proportion of debt-based financing. The WACC formula thus involves the summation of two terms.
Who Uses WACC?
Securities analysts frequently use WACC when assessing the value of investments and when determining which ones to pursue. For example, in discounted cash flow analysis, one may apply WACC as the discount rate for future cash flows in order to derive a business’s net present value. WACC may also be used as a hurdle rate against which companies and investors can gauge return on invested capital (ROIC) performance. WACC is also essential in order to perform economic value-added (EVA) calculations.
Investors may often use WACC as an indicator of whether or not an investment is worth pursuing. Put simply, WACC is the minimum acceptable rate of return at which a company yields returns for its investors. To determine an investor’s personal returns on an investment in a company, simply subtract the WACC from the company’s returns percentage.
Withholding Tax
A withholding tax is the amount an employer withholds from an employee’s wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year.
Working Capital
Working capital, also known as net working capital (NWC), is the difference between a company’s current assets (cash, accounts receivable/customers’ unpaid bills, inventories of raw materials and finished goods) and its current liabilities, such as accounts payable and debts.
Working capital is a measure of a company’s liquidity, operational efficiency, and short-term financial health. If a company has substantial positive working capital, then it should have the potential to invest and grow. If a company’s current assets do not exceed its current liabilities, then it may have trouble growing or paying back creditors, or even go bankrupt.
Working capital estimates are derived from the array of assets and liabilities on a corporate balance sheet. Current assets listed include cash, accounts receivable, inventory, and other assets that are expected to be liquidated or turned into cash in less than one year. Current liabilities include accounts payable, wages, taxes payable, and the current portion of long-term debt, due within one year. To calculate working capital, compare the former to the latter—specifically, subtract one from the other. The standard formula for working capital is current assets minus current liabilities. Working capital is used to refer to the funds required by a business in order to carry on with their day-to-day operations. This is calculated by reducing the current liabilities from the current assets of the business. The operating liquidity of a company is measured in terms of its working capital. Positive working capital is a sign of sufficient funds for efficient operability and growth. It enhances the solvency and credit-worthiness of the organisation. Negative working capital could lead to difficulties in making payments and bankruptcy. How to Calculate Working Capital and Working Capital Ratio? Working capital = Current assets – Current liabilities *Working capital ratio = Current assets / Current liabilities * Current assets include the cash in hand, bank balances, accounts receivable, and inventory held. Current liabilities include accounts payable and short-term loans that are payable within 12 months.
Working capital is a measure of a company’s liquidity, operational efficiency, and short-term financial health. If a company has substantial positive working capital, then it should have the potential to invest and grow. If a company’s current assets do not exceed its current liabilities, then it may have trouble growing or paying back creditors, or even go bankrupt.
Working capital estimates are derived from the array of assets and liabilities on a corporate balance sheet. Current assets listed include cash, accounts receivable, inventory, and other assets that are expected to be liquidated or turned into cash in less than one year. Current liabilities include accounts payable, wages, taxes payable, and the current portion of long-term debt, due within one year. To calculate working capital, compare the former to the latter—specifically, subtract one from the other. The standard formula for working capital is current assets minus current liabilities. Working capital is used to refer to the funds required by a business in order to carry on with their day-to-day operations. This is calculated by reducing the current liabilities from the current assets of the business. The operating liquidity of a company is measured in terms of its working capital. Positive working capital is a sign of sufficient funds for efficient operability and growth. It enhances the solvency and credit-worthiness of the organisation. Negative working capital could lead to difficulties in making payments and bankruptcy. How to Calculate Working Capital and Working Capital Ratio? Working capital = Current assets – Current liabilities *Working capital ratio = Current assets / Current liabilities * Current assets include the cash in hand, bank balances, accounts receivable, and inventory held. Current liabilities include accounts payable and short-term loans that are payable within 12 months.
Yield to Maturity
Yield to maturity (YTM) is a term that is related very closely to bonds and measures the cash flow of the investment over a period of time. It is the total return expected on a bond when the bond matures and is expressed as an annual return, which is why it is considered a long term bond yield.
Yield to maturity is quite similar to current yield except it accounts for the present value of a bond’s future coupon payments. Bonds are marketable securities, so their prices tend to fluctuate with the moving interest rates in the economy which makes them a pretty risky long-term investment.
Yield to maturity is quite similar to current yield except it accounts for the present value of a bond’s future coupon payments. Bonds are marketable securities, so their prices tend to fluctuate with the moving interest rates in the economy which makes them a pretty risky long-term investment.
Zero-Coupon Bond
A zero-coupon bond, also known as an accrual bond, is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
Understanding Zero-Coupon Bond.
Some bonds are issued as zero-coupon instruments from the start, while others bonds transform into zero-coupon instruments after a financial institution strips them of their coupons, and repackages them as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much more so than coupon bonds.
A bond is a portal through which a corporate or governmental body raises capital. When bonds are issued, investors purchase those bonds, effectively acting as lenders to the issuing entity. The investors earn a return in the form of coupon payments, which are made semi-annually or annually, throughout the life of the bond.
Understanding Zero-Coupon Bond.
Some bonds are issued as zero-coupon instruments from the start, while others bonds transform into zero-coupon instruments after a financial institution strips them of their coupons, and repackages them as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much more so than coupon bonds.
A bond is a portal through which a corporate or governmental body raises capital. When bonds are issued, investors purchase those bonds, effectively acting as lenders to the issuing entity. The investors earn a return in the form of coupon payments, which are made semi-annually or annually, throughout the life of the bond.