Financial Literacy

Accounting

The process of keeping financial records

Managerial Accounting

Type of accounting that involves reporting financial data to internal users

Accounting System

A consistently applied process for handling a business’s financial information.

Accounting Cycle

A series of several steps used by businesses to maintain their financial records.

Transactions

These include sales, purchases, and returns.

Journal

special book or computer program in which transactions are recorded in the order they occur.

Cash Accounting Method

Used to record income and expenditures at the time the money changes hands; credit is counted when the expense is paid by the vender.

Accural Method

journalize income and expenditures at the time they occur, even if no money changes hands at that time.

Ledger

Accounting record for a specific department or area of the business

Trial balance

listing of the business’s different accounts and their current balances, found in different ledgers.

Accounting Standards

certain rules business must use when summarizing accounting information e.g. International Financial Reporting Standards

Balance Sheet

captures the business’s financial condition at a particular moment.

Assets

anything of value that the business owns e.g. cash, buildings, equipment

Liabilities

debts that the business owes

Owner’s equity

amount the owner has invested in the business (Assets-Liabilities)

Income Statement

How much money a business has lost or made in a specific amount of time.

Cash Flow Statement

financial summary estimating when, where, and how much money will flow into and out of a business during a specific period of time.

Cash Flow

the movement of funds into and out of a business (Total cash receipts - total cash paid out)

Beginning Cash Balane

first part of a cash flow statement, amount of money a business has available at the beginning of each month

Cash Receipts

Second part of the cash flow statement, specific sources of money flowing into a business

Total Cash Receipts

Third part of the cash flow statement, determined by adding all the sources of income that the business lists under cash receipts

Total Cash Available

Fourth part of the cash flow statement, amount of cash a business will have available to spend each month: (total cash receipts + beginning cash balance)

Cash Payments

fifth part of the cash flow statement, refers to the sources of cash flowing into a business (cost of goods, fixed expenses, variable expenses)

Total Cash Paid Out

Sixth part of the cash flow statement, all cash payments added up e.g. cost or goods, fixed expenses, variable expenses

Ending Cash Balance

Seventh part of the cash flow statement, amount of cash a business has left at the end of the month (total cash paid out - total cash available)

Accounting Equation

Assets= Liabilities + Owner’s equity

Liquidity

something’s ability to be converted into cash

Current assets

can be converted into cash in one year or less (are liquid)

Fixed assets

cannot be converted into cash within a year (not very liquid) e.g. machinery and land

Accounts payable

outstanding bills a company needs to pay (classified as a liability)

Notes

additional data in the form of footnotes on a balance sheet

Profit

Income left over once all expenses are paid

Revenue

the total amount of money earned by a business

Cost of goods sold/ Cost of sales

includes all direct costs to obtain and/or produce the goods or services that a business sells e.g. raw materials, packaging, labor, unsold items, stolen items, supplies, shipping, etc.

Gross profit

Cost of Goods Sold - Revenue = Gross Profit

Operating Expenses

all other expenses associated with business e.g. payroll, utilities, advertising, insurance, rent, interest, administrative costs, etc.

Net Income

 the business’s final profit or the money the business makes after all expenses have been deducted and taxes have been paid. Most important section, because it answers the question: “is this business profitable”

Gross Profit Margin Ratio

Gross profit/Total Revenue =

Finance

Business function that involves all money and encompasses all the tools and analyses that financial manages use to manage money

Risk Management

Within the finance function refers to using financial instruments to manage exposure to risk. e.g. credit risk and market risk

Credit Risk

risk of financial loss due to non-payment from a debtor or customer

Market Risk

risk of financial loss due to the decreased value of an investment

Administration of Assets

decisions about investments

Acquisition of Funds

decisions about financing

Financing

process of funding a business venture

Capital Investment Decisions

determine which projects the business will invest in, how the investments will be financed, and whether or not to pay dividends to the company’s shareholders

Working Capital Management

focuses on the company’s current balance of assets and liabilities

Capital Budgeting

determining what projects, a business should invest in

Capital Structure

The “optimal mix” of financing

Debt Funding

taking out a loan from a bank or other lending institution

Equity Funding

raising money by selling shares in the company

Cash Conversion Cycle

Ratio that refers to the number of days between a company paying for raw materials and receiving cash from selling the products made from those raw materials

Return on Capital

measure of how well a business generates cash flow in relation to the capital it has already invested in itself, and it is usually expressed as a percentage

Incrementalism

the diminishing of ethical values over time

Short-term gratification

pursuit of instant satisfaction rather than delaying rewards for greater long-term benefits

Sunk Costs

costs that have already been incurred and thus cannot be recovered

Financial Information

any record or data related to an individual’s or business’s financial activities

Vertical Analysis

Financial statement users calculate ratios and percentages to arrive at useful information that pertains to a specific accounting period

Horizontal Analysis

requires information from financial statements over a number of accounting periods, allows financial statement users to analyze trends in the data over a longer period of time than one accounting period

Gross Profit Margin

shows how well management is controlling costs (GPM = Gross Profit / Total Revenue)

Operating Profit Margin

measure of the business’s quality of operation (OPM = Operating Income / Total Revenue)

Net Profit Margin

Shows how much profit is generated from each dollar of a business’s revenue (NPM = Net Profit / Total Revenue

Working Capital

used as a measurement of a business’s liquidity (WC = Current Assets - Current Liabilities)

Current Ratio

Measure of a business’s ability to pay its current liabilities (CR = Current Assets/ Current Liabilities

Quick Ratio

measure of how much of a business’s assets can be converted into cash immediately (QR = (Current Assets- Inventory) / Current Liabilities)

Debt-to-Equity Ratio

measure of what amount of the business is indebted (D/E Ratio = Total Liabilities / Equity)

Operating Cash Flow-to-Sales Ratio

measure of how much cash in generated from every dollar from sales (Operating Cash Flow-to-Sales Ratio = Net Operating Cash Flow / Revenue)