Understanding Finance/Business

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May 7, 2015


For the answers scroll down:

What is (term starting with letter) – A?
Accounts payable
Accounts receivable
Accrual accounting
Assets
Audit

What is (term starting with letter) – B?
Bad debts
Balance sheet
Balloon payment
Bank reconciliation
Bankrupt
Bankruptcy
Benchmark
Bill of sale
Bookkeeping
Bootstrapping
Break-even point
Budget

What is (term starting with letter) – C?
Capital
Capital cost
Capital gain
Capital growth
Cash
Cash accounting
Cash book
Cash flow
Cash incoming
Cash outgoing
Chart of accounts
Chattel Mortgage
Commercial bill
Contingent liability
Cost of goods sold
Credit
Creditor
Credit limit
Credit rating
Credit history
Current asset
Current liability

What is (term starting with letter) – D?
Debit
Debt
Debt consolidation
Debt finance
Debtor
Default
Depreciation
Disbursements
Discount
Double-entry bookkeeping
Drawings

What is (term starting with letter) – E?
Encumbered
Equity
Equity finance
Excise duty

What is (term starting with letter) – F?
Facility
Factoring
Finance
Financial year
Financial statement
Fixed asset
Fixed cost
Fixed interest rate
Float
Forecast
Fringe benefits
Fully drawn advance

What is (term starting with letter) – G?
Goodwill
Gross income
Gross profit
Guarantor

What is (term starting with letter) – H?
Hire-purchase

What is Microeconomics?
What is Macroeconomics?
What is Keynesian Economics?
What is a haircut?
What is a Minsky moment?
What does ‘Over-The-Counter Market’ mean?
What is a blue-chip stock?
What is short selling?
What is the CBOE Volatility Index (VIX)?
What is the Relative Strength Index – RSI?
What is a bull market?
What is a bear market?
What is a hedge fund?
What is the debt ceiling?
What is the Prime Interest Rate?
What is the Fed Funds Rate?
What is the IMF?

Accounts payable
A record of all short-term (less than 12 months) invoices, bills and other liabilities yet to be paid. Examples of accounts payable include invoices for goods or services, bills for utilities and tax payments due.

Accounts receivable
A record of all short-term (less than 12 months) expected payments, from customers that have already received the goods/services but are yet to pay. These types of customers are called debtors and are generally invoiced by a business.

Accrual accounting
An accounting system that records transactions at the time they occur, whether the payment is made now or in the future.

Assets
Are things you own. These can be cash or something that can be converted into cash such as property, vehicles, equipment and inventory.

Audit
A physical check performed by an auditor or tax official on a business’ financial records to check that everything is accounted for correctly.

Bad debts
Money owed to you that is unlikely to be paid to you in the foreseeable future.

Balance sheet
A snapshot of a business as of a particular date. It lists all of a business’ assets and liabilities and works out the net assets.

Balloon payment
A final lump sum payment due on a loan agreement. Loans with a larger final ‘balloon payment’ have lower regular repayments over the term of the loan.

Bank reconciliation
A cross-check that ensures the amounts recorded in the cashbook match the relevant bank statements.

Bankrupt
An individual is bankrupt when they cannot pay their debts and aren’t able to reach an agreement with their creditors.

Bankruptcy
A process where an individual is legally declared bankrupt and their assets and financial affairs are administered by an appointed trustee.

Benchmark
A set of conditions against which a product or business is measured.

Bill of sale
A legal document used in the purchase of property or other assets that details what was purchased, where the purchase took place, and for how much.

Bookkeeping
The process of recording the financial transactions of a business.

Bootstrapping
Where a business funds growth purely through personal finances and revenue from the business.

Break-even point
The exact point when a business’ income equals a business’ expenses.

Budget
A listing of planned revenue and expenditure for a given period.

Capital
Wealth in the form of money or property owned by a business.

Capital cost
A one-off substantial purchase of physical items such as plant, equipment, building or land.

Capital gain
Is the amount gained when an asset is sold above its original purchase price.

Capital growth
An increase in the value of an asset.

Cash
Includes all money that is available on demand including bank notes and coins, petty cash, certain cheques, and money in savings or debit accounts.

Cash accounting
An accounting system that records transactions at the time money is actually received or paid.

Cash book
A daily record of all cash, credit or cheque transactions received or paid out by a business.

Cash flow
The measure of actual cash flowing in and out of a business.

Cash incoming
Money that is flowing into the business.

Cash outgoing
Money that is flowing out of the business.

Chart of accounts
An index of the accounts a business will use to classify transactions. Each account represents a type of transaction such as Asset, Liability, Owner’s equity, Income, and Expense.

Chattel Mortgage
Is similar to a hire-purchase agreement although the business owns the asset from the start. Chattel mortgages require regular ongoing payments and typically provide the option of reducing the payments through the use of a final ‘balloon’ payment.

Commercial bill
also known as a bill of exchange) is a form of commercial loan that can be offered on an interest only basis, or reducing basis. Commercial bills typically require some sort of security and suit short-term funding needs such as inventory.

Contingent liability
A liability that only needs to be paid if a particular event or circumstance occurs.

Cost of goods sold
The total direct costs of producing a good or delivering a service.

Credit
Alending term used when a customer purchases a good or service with an agreement to pay at a later date (e.g. an account with a supplier, a store credit card or a bank credit card).

Creditor
A person or business that allows you to purchase a good or service with an agreement to pay at a later date. A creditor is also anyone who you owe money to, such as a lender or supplier.

Credit limit
A dollar amount that cannot be exceeded on a credit card or the maximum lending amount offered for a loan.

Credit rating
A ranking applied to a person or business based on their credit history that represents their ability to repay a debt

Credit history
A report detailing an individual’s or business’ past credit arrangements. A credit history is often sought by a lender when assessing a loan application.

Current asset
An asset in cash or that can be converted into cash within the next 12 months.

Current liability
A liability that is due for payment in the next 12 months.

Debit
In double-entry bookkeeping a debit is an entry made on the left hand side of a journal or ledger representing an asset or expense.

Debt
Any amount that is owed including bills, loan repayments and income tax.

Debt consolidation
The process of combining several loans or other debts into one for the purposes of obtaining a lower interest rate or reducing fees.

Debt finance
Money provided by an external lender, such as a bank or building society.

Debtor
A person or business that owes you money.

Default
A failure to pay a loan or other debt obligation.

Depreciation
The process of expensing an asset over a period of time. An asset is depreciated to spread the cost of the asset over its useful life.

Disbursements
Money that is paid out by a business.

Double-entry bookkeeping
Is a bookkeeping method that records each transaction in two accounts, both as a debit and a credit.

Drawings
Personal expenses paid for from a business account.

Encumbered
An encumbered asset is one that is currently being used as security or collateral for a loan.

Equity
The value of ownership interest in the business, calculated by deducting liabilities from assets. See also owner’s equity.

Equity finance
Is money provided to a business in exchange for part ownership of the business. This can be money invested by the business owners, friends, family, or investors like business angels and venture capitalists.

Excise duty
An indirect tax levied on certain types of goods produced or manufactured in Australia including petrol, alcohol, tobacco and coal.

Facility
- a predetermined arrangement such as an account offered by a financial institution to a business (e.g. a bank account, a short-term loan or overdraft).

Factoring
Is when a factor company buys a business’ outstanding invoices at a discount. The factor company then chases up the debtors. Factoring is a way to get quick access to cash, but can be quite expensive compared to traditional financing options.

Finance
Money used to fund a business or high value purchase.

Financial year
A twelve month period typically from 1 July to 30 June.

Financial statement
A summary of a business’ financial position for a given period. Financial statements can include a profit & loss, balance sheet and cash flow statement.

Fixed asset
A physical asset used in the running of a business.

Fixed cost
A cost that cannot be directly attributed to the production of a good or service.

Fixed interest rate
When the interest rate of a loan remains the same for the term of the loan or an agreed timeframe.

Float
Is when a private company offers shares in the company to the public for the first time. See Initial public offering.

Forecast
A prediction of future financial transactions. Forecasts are often used to help plan a more accurate budget.

Fringe benefits
Non-monetary benefits such as company cars and mobile phones, included as part of a salary package.

Fully drawn advance
Is a long term loan with the option to fix the interest rate for a period. These loans are usually secured and can be used to fund a new business or equipment.

Goodwill
An intangible asset that represents the value of a business’ reputation.

Gross income
The total money earned by a business before expenses are deducted.

Gross profit
(also known as net sales) The difference between sales and the direct cost of making the sales.

Guarantor
A person who promises to pay a loan in the event the borrower cannot meet the repayments. The guarantor is legally responsible for the debt.

Hire-purchase
A type of finance contract where a good is purchased through an initial deposit and then rented while the good is paid off in instalments plus interest charges. Once the good is fully paid the ownership of the good transfers to the purchaser.

What is Microeconomics?
Microeconomics is a branch of economics that studies the behavior of individuals and small impacting players in making decisions on the allocation of limited resources (see scarcity). Typically, it applies to markets where goods or services are bought and sold. With macroeconomics, microeconomics is one of the two most general fields in economics.

What is Macroeconomics?
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies. With microeconomics, macroeconomics is one of the two most general fields in economics.

What is Keynesian Economics?
Keynesian economics is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.

What is a haircut?
is a percentage that is subtracted from the market value of an asset that is being used as collateral. The size of the haircut reflects the perceived risk associated with holding the asset. However, the lender has a lien for the entirety of the asset. The higher the haircut, the safer the loan is for a lender.

For example, United States Treasury bills, which are seen as fairly safe, might have a haircut of 10%, while for stock options, which are seen as highly risky, the haircut might be as high as 30%. In other words, a $1000 treasury bill will be accepted as collateral for a $900 loan, while a $1000 stock option might only allow a $700 loan.

What is a Minsky moment?
Is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets no longer is sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans

What does ‘Over-The-Counter Market’ mean?
A decentralized market, without a central physical location, where market participants trade with one another through various communication modes such as the telephone, email and proprietary electronic trading systems. An over-the-counter (OTC) market and an exchange market are the two basic ways of organizing financial markets. In an OTC market, dealers act as market makers by quoting prices at which they will buy and sell a security or currency. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was effected. In general, OTC markets are therefore less transparent than exchanges and are also subject to fewer regulations.

What is a blue-chip stock?
A blue chip is stock in a corporation with a national reputation for quality, reliability, and the ability to operate profitably in good times and bad. The most popular index which follows U.S. blue chips is the Dow Jones Industrial Average. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

What is short selling?
In finance short selling (also known as shorting or going short) is the practice of selling securities or other financial instruments that are not currently owned, with the intention of subsequently repurchasing them (“covering”) at a lower price.

In the event of an interim price decline, the short seller will profit, since the cost of repurchase will be less than the proceeds received upon the initial (short) sale. Conversely, the short seller will incur a loss in the event that the price of a shorted instrument should rise prior to repurchase. The potential loss on a short sale is theoretically unlimited in the event of an unlimited rise in the price of the instrument, however in practice the short seller will be required to post margin or collateral to cover losses, and any inability to do so on a timely basis would cause its broker or counterparty to liquidate the position.

What is the CBOE Volatility Index (VIX)?
VIX is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period.

The idea of a volatility index, and financial instruments based on such an index, was first developed and described by Prof. Menachem Brenner and Prof. Dan Galai in 1986. Professors Brenner and Galai published their research in the academic article “New Financial Instruments for Hedging Changes in Volatility,” which appeared in the July/August 1989 issue of Financial Analysts Journal. In a subsequent paper, Professors Brenner and Galai proposed a formula to compute the volatility index.

Professors Brenner and Galai wrote “Our volatility index, to be named Sigma Index, would be updated frequently and used as the underlying asset for futures and options… A volatility index would play the same role as the market index play for options and futures on the index.”

The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized. For example, if the VIX is 15, this represents an expected annualized change of 15% over the next 30 days; thus one can infer that the index option markets expect the S&P 500 to move up or down 15%/√12 = 4.33% over the next 30-day period. That is, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the magnitude of the change in the S&P 500 in 30-days will be less than 4.33% (up or down).

What is the Relative Strength Index – RSI?
A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula: RSI = 100 – 100/(1 + RS*)

*Where RS = Average of x days’ up closes / Average of x days’ down closes.

What is a bull market?
A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains.

What is a bear market?
A bear market is a steady drop in the stock market over a period of time. It is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle.

What is a hedge fund? Hedge funds are private, actively managed investment funds. They invest in a diverse range of markets, investment instruments, and strategies and are subject to the regulatory restrictions of their country. U.S. regulations limit hedge fund participation to certain classes of accredited investors

Hedge funds are often open-ended, and allow additions or withdrawals by their investors. A hedge fund’s value is calculated as a share of the fund’s net asset value, meaning that increases and decreases in the value of the fund’s investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.

Most hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling. Hedge fund managers typically invest money of their own in the fund they manage, which serves to align their own interests with those of the investors in the fund. A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund, and a performance fee if the fund’s net asset value increases during the year. Some hedge funds have a net asset value of several billion dollars. As of 2009, hedge funds represented 1.1% of the total funds and assets held by financial institutions. As of April 2012, the estimated size of the global hedge fund industry was US 2.13 trillion.

What is the debt ceiling? Once a little-known aspect of the U.S. government’s fiscal management process, the debt ceiling exploded into the public consciousness following the intense debate that took place in the summer of 2011. As its name would suggest, the debt limit is simply the maximum amount that the U.S. government can borrow at any given time. Currently, the limit is set at $16.394 trillion. Each year, the government spends more than it takes in, and this gap must be funded with debt, or more specifically, bonds issued by the U.S. Treasury. By law, however, the Treasury can’t issue new debt once the country is at its borrowing limit – and this limit, or ceiling, needs to be agreed to by Congress.

What is the Prime Interest Rate? The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. Adjustments to the prime rate are made by banks at the same time; although, the prime rate does not adjust on any regular basis. The Prime Rate is usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate.

What is the Fed Funds Rate? The Fed Funds Rate is a short-term rate objective of the Federal Reserve Board. The actual Fed Funds Rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The real rate changes daily but is usually close to the target rate desired by the Federal Reserve.

What is the IMF? The International Monetary Fund (IMF) is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. Its objectives are to stabilize international exchange rates and facilitate development through the encouragement of liberalising economic policies in other countries as a condition of loans, debt relief, and aid. It also offers loans with varying levels of conditionality, mainly to poorer countries. Its headquarters are in Washington, D.C.



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