Basic Financial Terms
Basic financial terms refer to fundamental concepts and terminology used in the field of finance. These terms include concepts such as assets, liabilities, revenue, expenses, profit, and cash flow. Understanding these terms is essential for effectively managing and analyzing the financial aspects of a business.
6 Key excerpts on "Basic Financial Terms"
eBook - ePubExecutive Finance and Strategy
How to Understand and Use Financial Information to Set Strategic Goals
- Ralph Tiffin(Author)
- 2014(Publication Date)
- Kogan Page(Publisher)
...Examples of possible formats are given later in the chapter and again in Chapter 6 on published financial statements. Financial position – the balance sheet We all know intuitively what an asset is – money, gold, a building; and also what a liability is: a debt, a loan that has to be repaid, a tax bill. Here are the accounting standard definitions: The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows: (a) An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. (b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. (c) Equity is the residual interest in the assets of the entity after deducting all its liabilities. A simple balance sheet and a layout used for management purposes The layout below gives clarity to the fact that there are the two classes of financial strategy available in the business world, strategies that deliver by: (1) making profitable and efficient use of assets and (2) structuring the business’s financing or funding. This simple example (Table 3.8) is formatted to show the two sides of a balance sheet from a management and a strategic perspective. TABLE 3.8 Example Two basic definitions: Net assets employed: tangible, intangible and financial assets (buildings, equipment, inventories, receivables, cash) less liabilities principally relating to operating activities and due to be settled within a short period (a year or much less). This is the net worth of the business or capital employed in the business as visibly seen, recorded, measured and managed by the executives and employees. Finance: this is what finances the business, ie the capital employed in the business, but from the perspective of the investor...
eBook - ePubFinance for Sport and Leisure Managers
An Introduction
- Robert Wilson, John Joyce(Authors)
- 2007(Publication Date)
- Routledge(Publisher)
...However, the bottom line, for you, is that if you grasp the concepts, principles and guidelines discussed above, which are the building blocks of accountancy, you will be able develop with them. We will regularly see the effects of these concepts throughout the remainder of this book and consequently your knowledge and appreciation of them will grow. MORE ACCOUNTING TERMINOLOGY You may have come across one or two terms now that you may not be fully comfortable with so before we move on it is worth reinforcing some of the more regularly used terms so that you can begin to use them when communicating accounting information – we touched on some of these in Chapter 1. KEY TERMS ASSETS These are items or resources that have a value to the business and things that are used by the business and for the business. Normally we will classify assets as either fixed or current. The basic difference being that a fixed asset is something that the business intends to keep and use for some time whereas a current asset is held for the business to convert into cash during trading. Some good examples here are business premises, motor vehicles that are fixed assets and stock and cash, which are current assets. INTANGIBLE FIXED ASSET These are things that have a value but are not tangible. For example a royalty – it has a value (people have to pay you) but it is not a physical item – goodwill, patents and tradeworks. TANGIBLE FIXED ASSETS These are tangible, i.e. they are physical items, for example property, equipment, machines, vehicles, furniture. LIABILITIES Amounts owed by the business to people other than the owner. Normally we will see liabilities classified as either payable within one year e.g. bank overdrafts, supplier accounts, or payable after one year e.g. longer-term bank loans. CAPITAL This is generally considered to be the owners’ stake in the business and may also be called equity...
eBook - ePub- Vibrant Publishers(Author)
- 2019(Publication Date)
- Vibrant Publishers(Publisher)
...Overview of Financial Statements As mentioned in the previous section, financial statements are made up of three primary items: a) Balance Sheet, b) Income Statement and c) Statement of Cash Flows. In the below sections we will describe what goes in each of them and their significance. Balance Sheet A balance sheet is a snapshot of a company’s source and application of funds on any given date. Companies prepare balance sheet every quarter and it reflects the company’s state on the last day of the quarter. There are three items that go in a balance sheet: a) Assets, b) Liabilities and c) Owners’ Equity (also called Stockholders’ Equity). Each is described below. Assets These are economic resources of a firm that provide probable future economic benefit due to ownership or control as a result of past transactions or events. Each part of this definition is important. Firstly, “probable benefit” points to a future benefit that ownership of the asset could fetch, like higher sales due to ownership of a machine or new business due to ownership of an office building. Secondly, asset is something that should provide “future economic benefit”. This makes anything you own an asset only if it is expected to bring benefit in future, irrespective of past benefits. Finally, “ownership or control as a result of past transactions or events” means that the company should have either ownership or control over the asset to reap the benefit and it will always be due to a past transaction, like buying a building or acquiring an equipment. Following are some examples of Assets: a) Cash b) Accounts Receivable c) Inventory d) Prepaid expenses e) Land f) Buildings g) Fixtures and equipment h) Marketable securities i) Goodwill (this asset has to be specifically bought in an economic transaction to be recognized as an asset) Assets appear either on the left-hand side of the balance sheet (in side-by-side format) or at the top (in columnar format)...
eBook - ePubFinancial Literacy and Money Script
A Caribbean Perspective
- Christine Sahadeo(Author)
- 2018(Publication Date)
- Palgrave Macmillan(Publisher)
...In the financial statements assets are put into two categories: current assets and fixed assets. Current assets include cash, receivables, inventory, and investments for sale. These values change daily as the entity conducts business. Fixed assets are held and used by the company over a number of years. These include land and building, furniture, equipment, and motor vehicles. Liabilities These are claims against the resources of the business and represent monies the company owes to third parties and include loans taken by the business, accounts payable or creditors (organizations that the business buys goods on credit), and accruals. These are expenses the business has incurred during the accounting period, and which remain unpaid at the end of the period. Accruals for rent and electricity are good examples as these are paid in arrears. Where a supplier’s invoice is not received before the accounts are closed, an accrual for the expense will be made. This is the application of the matching concept and ensures the accuracy of the financial statements—that is all revenues and expenses are recorded in the period in which it occurs. Liabilities are generally included in current liabilities except for long-term loans which are reclassified in to current, medium, and long-term portions accordingly. Owner’s equity is the owners claim against the resources of the business. It represents the owner’s investment in the business plus all retained profits, that is profits after dividend payments. This forms part of the capital of the company. For a sole trader or partnership, amounts withdrawn from the company are deducted from this capital account and referred to as drawings. Let’s say Harry started a business with $200,000 in 2015. He made a profit of $35,000 for that year, and he made no drawings from the business. In 2016 he made a profit of $25,000 and he made drawings totaling $5000. In 2017 he made $25,000 profit and again had drawings of $5000...
eBook - ePubInvestment Valuation
Tools and Techniques for Determining the Value of Any Asset
- Aswath Damodaran(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...The first is a strict categorization of financing into either a liability or an equity based on the nature of the obligation. For an obligation to be recognized as a liability, it must meet three requirements: 1. The obligation must be expected to lead to a future cash outflow or the loss of a future cash inflow at some specified or determinable date. 2. The firm cannot avoid the obligation. 3. The transaction giving rise to the obligation has to have already happened. In keeping with the earlier principle of conservatism in estimating asset value, accountants recognize as liabilities only cash flow obligations that cannot be avoided. The second principle is that the values of both liabilities and equity in a firm are better estimated using historical costs with accounting adjustments, rather than with expected future cash flows or market value. The process by which accountants measure the value of liabilities and equities is inextricably linked to the way they value assets. Since assets are primarily valued at historical cost or at book value, both debt and equity also get measured primarily at book value. The next section examines the accounting measurement of both liabilities and equity. Measuring the Value of Liabilities and Equities Accountants categorize liabilities into current liabilities, long-term debt, and long-term liabilities that are not debt or equity. Next, we will examine the way they measure each of these. Current Liabilities Under current liabilities are categorized all obligations that the firm has coming due in the next year. These generally include: Accounts payable, representing credit received from suppliers and other vendors to the firm. The value of accounts payable represents the amounts due to these creditors. For this item, book and market values should be similar. Short-term borrowing, representing short-term loans (due in less than a year) taken to finance the operations or current asset needs of the business...
eBook - ePubCorporate Finance
Theory and Practice
- Pierre Vernimmen, Pascal Quiry, Yann Le Fur(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
...Indeed, operating income is the product of the company's industrial and commercial activities before its financing operations are taken into account. Operating profit or EBIT may also be called operating income, trading profit or operating result. 5/ EARNINGS AND THE FINANCING CYCLE (a) Debt capital Repayments of borrowings do not constitute costs but, as their name suggests, merely repayments. Just as common sense tells us that securing a loan does not increase wealth, neither does repaying a borrowing represent a charge. The income statement shows only costs related to borrowings. It never shows the repayments of borrowings, which are deducted from the debt recorded on the balance sheet (without flowing through the income statement). We emphasise this point because our experience tells us that many mistakes are made in this area. Conversely, we should note that the interest payments made on borrowings lead to a decrease in the wealth of the company and thus represent an expense for the company. As a result, they are shown on the income statement. Similarly, when a company invests cash in financial products (money market funds, interest-bearing accounts), the interest received is recognised as financial income. The difference between financial income and financial expense is called net financial expense/(income). The difference between operating profit and net financial expense is called profit before tax and non-recurring items. 4 (b) Shareholders' equity From a cash flow standpoint, shareholders' equity is formed through issuance of shares minus outflows in the form of dividends or share buy-backs. These cash inflows give rise to ownership rights over the company. The income statement measures the creation of wealth by the company; it therefore naturally ends with the net earnings (also called net profit)...
