Terms Exam - BUS 5000 FINANCIAL ACCOUNTING

Open Market Operations

Open Market Operations

The purchase and sale of securities in the open market by the Federal Reserve (Fed). The Fed conducts open market operations to regulate the supply of money that is on reserve in U.S. banks.By using OMOs, the Fed can adjust the federal funds rate, which in turn influences other short-term rates, long-term rates, and foreign exchange rates.

Downgrade

A negative change in the rating of a stock's expected performance, issued by an analyst for a financial services firm. The analyst is indicating that the company's future prospects have weakened.

Angel Investor

(also known as a private investor, seed investor, or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur's family and friends

Nominal Gross Domestic Product (GDP)

It is given in current prices, without adjustment for inflation. Current price estimates of *term* are obtained by expressing values of all goods and services produced in the current reporting period. Forecast is based on an assessment of the economic climate in individual countries and the world economy, using a combination of model-based analyses and expert judgment. This indicator is measured in growth rates compared to previous year.

Share (stock) Volume

Refers to the total number of shares of a publicly listed company traded during a given period, typically over a single trading day. It can be used to gauge market sentiment and investor activity.

Bond Yield

The annual rate of return on a bond, expressed as a percentage of the bondholder's invested capital. Different from the interest rate because yield takes into account whether the bond is selling at a discount or premium.

Property

Are tangible long-term assets vital to business operations. They are also called fixed assets. They are physical assets that a company cannot easily liquidate or sell, such as equipment, machinery, buildings, and vehicles.

Idiosyncratic Risk (unsystematic risk)

is the inherent risk involved in investing in a specific asset, such as a stock. It is the risk that is particular to a specific investment - as opposed to risk that affects the entire market or an entire investment portfolio.

Exchange Traded Fund (ETF)

Pooled investment security that can be bought and sold like an individual stock. They can be structured to track anything from the price of a commodity to a large and diverse collection of securities. *term* share prices fluctuate all day as the *term* is bought and sold.

Growth Fund

It is a diversified portfolio of stocks that has capital appreciation as its primary goal. It has little to no dividend payouts. The portfolio consists mainly of companies with above average growth that reinvest their earnings into expansion and R&D. Most offer higher potential capital appreciation but usually at above-average risk.

Deflation

the general decline in prices for goods and services, usually associated with a contraction in the supply of money and credit in the economy. During *term*, the purchasing power of currency rises over time.

Fiscal Year-End

The Fiscal year-end is the last day of an entity's 12 month accounting period. The fiscal year may differ from the calendar year which ends Dec. 31, and usually concludes at the end of the month. The entity gets to choose when the fiscal year starts and ends. They might opt to end it after or before a period of busy activity. The fiscal year-end is the date the entity's annual financials will be reported up to for internal records, outside observers, investors, and tax purposes. Financial statements are published after each company's fiscal year.

Generally Accepted Accounting Principles (GAAP)

A common set of accounting rules, practices, and requirements that are set by the Financial Accounting Standards Board (FSAB) as well as the Governmental Accounting Standard Board (GASB)

Accumulated Depreciation

A method of accounting for the annual reduction of an asset's value up to a single point in its usable life. It is the sum of all recorded depreciation of an asset over time to a specific date. Carrying value of an asset is its historical cost minus accumulated depreciation. It can be located on the balance sheet below the line for related capitalized assets.

Discount Rate

The interest rate the Federal Reserve charges commercial banks and other financial institutions for short-term loans. Can also refer to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. Investors and businesses can use the discounted rate for potential investments. It expresses the time value of money in DCF and can make the difference between whether an investment project is financially viable or not.

Leveraged Buyout (LBO)

The acquisition of one company by another using a significant amount of borrowed money to meet the "cost of acquisition" (expense incurred by a business in acquiring a new client or purchasing asset. It is a line item that includes all expenses related to buying an asset)

The borrowed money can be in the form of bonds or loans. The assets of the company being acquired are often used as collateral for the loans along with the assets of the acquiring company.

In an LBO the ratio of debt to equity used for the takeover will be as high as possible. Exact amount of debt depends on market lending conditions and amount of cash flow the company is expected to generate after takeover. The bonds issued in the buyout aren't usually investment grade because of this high debt to equity ratio.

Returns are generated in a LBO in three ways: 1. Company pays down its debt and this increased the amount of equity in the company. 2. Investors are able to improve profit margins by improving sales and reducing expenditures. 3. The company will be sold at the end of the investment period at a higher multiple than the investment company paid (margin expansion)

Internal Controls

The accounting and auditing processes used in a company's finance department that ensure the integrity of financial reporting and regulatory compliance.

Stock Buybacks

The repurchasing of common stock by a company in order to reduce the number of outstanding share on the market place & increasing relative ownership of investors; by decreasing number of shares, the earnings per share (EPS) will be higher

Intangible Assets

Nonphysical assets used over the long term. They are often intellectual assets, and as a result, it's difficult to assign a value to them because of the uncertainty of future benefits. examples: Trademarks, patents, goodwill, copyrights

Capital Asset Pricing Model (CAPM)

Describes the relationship between systematic risk, or the general perils of investing, and expected return for assets, particularly stocks. It is a finance model that establishes a linear relationship between the required return on an investment and risk.

EBITDA

Short for earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income. It's used to assess a company's profitability and financial performance.

Floating Interest Rate

An interest rate that changes periodically. The rate of interest moves up and down, or "floats," reflecting economic or financial market conditions.

Real Estate Investment Trust (REIT)

Companies that own, operate, or finance income-producing real estate across a wide range of property sectors, Allowing real estate owners to earn income from real estate without having to buy, manage, or finance properties themselves. REITs qualify for special tax treatment if they distribute at least 90% of their profits as dividends.

Small Cap Stock

A stock from a public company whose total market value, or market capitalization, is about $250 million to $2 billion.

Stock Split

It happens when a company increases the number of its shares to boost the stock's liquidity. The share price is reduced and the number of shares increases; overall market value remains the same. For example, with a 2-1 *term*, the number of shares doubles and the stock price gets reduced by ½.

Liquidation

The process of bringing a business to an end and distributing its assets to claimants.

Efficient Market Hypothesis

A hypothesis that states that share prices reflect all available information and consistent alpha generation (adding value through good stock picking) is impossible.

Paul Volcker

An American economist who served as the 12th chairman of the Federal Reserve from 1979 to 1987. He was primarily known for his hard stand against the inflation of the 1970's. He raised interest rates to over 20% to slow the economy down and thus suffocate inflation. This caused the 1981-82 recession but inflation was low after that.

Price-to-Earnings-to-Growth Ratio (PEG)

This ratio is a valuation metric that helps determine a stock's relative value by considering its price, earnings per share, and expected growth.

Real Interest Rate

The rate of interest an investor, saver, or lender receives after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.

Duration (for bonds)

Measures how sensitive a bond's price is to interest rate changes. It's a key factor in fixed income investing and is expressed in years

Registered Security

A security registered with the SEC under the Securities Exchange Act of 1934. The Exchange Act requires a class of securities to be registered under the following circumstances:

Securities exchange listing. Before a company's securities can begin to trade on a "national securities exchange" such as the New York Stock Exchange or Nasdaq, a company must register that class of securities (debt or equity) with the SEC under Section 12(b) of the Exchange Act.

Size thresholds. Companies with both total assets greater than $10 million and either 2,000 or more equity shareholders, or 500 or more equity shareholders who are not accredited investors, must register that class of equity securities with the SEC. Companies that are banks or savings and loan companies must register equity securities if they have both total assets greater than $10 million and 2,000 or more equity shareholders.

By registering securities, a company becomes subject to the periodic and current reporting requirements.

In addition, all securities offered and sold in the US must be registered with the SEC or must qualify for an exemption from the registration requirements. The Securities Act of 1933, as amended has two basic objectives:

To require that investors receive financial and other significant information concerning securities being offered for public sale.

To prohibit deceit, misrepresentations, and other fraud in the sale of securities.

The SEC accomplishes these goals primarily by requiring that companies disclose important financial information when they register their securities

Headline Inflation

The total inflation in an economy. The figure includes inflation in a basket of goods that includes commodities like food and energy. It is different from core inflation, which excludes food and energy prices while calculating inflation.

Return on Invested Capital (ROIC)

It assesses a company's efficiency in allocating capital to profitable investments. It is calculated by dividing net operating profit after tax (NOPAT) by invested capital. It gives a sense of how well a company is using its capital to generate profits.

Internal Rate of Return (IRR)

The discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment.

Preferred Stock

This stock gives stockholders a higher claim to dividends or asset distribution than common stockholders. Also, it is a fixed dividend. The details of each stock depend on the issue.

NYSE

An American stock exchange in the Financial District of Lower Manhattan in New York City. It is the largest stock exchange in the world by market capitalization

Dividend Yield

A ratio, and one of several measures that helps investors understand how much return they are getting on their investment.

Formula: dividend yield = Annual Dividends per share/price per share

Payout Ratio

A financial metric that shows the proportion of earnings a company pays its shareholders in the form of dividends. It's expressed as a percentage of the company's total earnings but it can refer to the dividends paid out as a percentage of a company's cash flow in some cases. The formula is dividends per share divided by earnings per share, or total dividends divided by net income.

Convertible Bonds

A fixed-income corporate debt security that yields interest payments but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond's life and is usually at the discretion of the bondholder.

Unrealized Loss

A "paper" loss that results from holding an asset that has decreased in price, but not yet selling it and realizing the loss.

They reflect the difference between the investment's current market value and its purchase price, and they are considered "unrealized" because they have not been turned into actual cash.

Recession

A significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth indicate a *term*.

Berkshire Hathaway

A holding company run by Warren Buffett that owns a diverse range of private businesses and significant minority interests in public companies such as Apple. It has a market capitalization of over $715 billion and is the sixth-largest public company in the world.

Tapering

A type of central bank activity in which stimulative policies implemented by a central bank to stimulate economic growth are gradually withdrawn.

Index Fund

A type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index. Known for being low-cost because there are minimal trading fees and passive management.

Examples: Schwab S&P 500 Index Fund, Vanguard S&P 500 Index Fund

Roth IRA

An individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Contributions are made with after-tax money.

Expense Ratio

The fund's total annual operating expenses, including management fees, distribution fees, and other expenses, expressed as a percentage of average net assets. Actively managed funds typically have expense ratios between .5%-1%, Index funds .05% or less.

Sector Fund

An investment fund that invests solely in businesses that operate in a particular industry or sector of the economy. Sector funds are commonly structured as mutual funds or exchange traded funds (ETFs).

Quantitative Easing

A form of monetary policy used by central banks to increase the domestic money supply and spur economic activity. It may cause higher inflation than desired if the amount of easing required is overestimated and too much money is created by the purchase of liquid assets. The purpose of this operation is to ease the availability of credit and to reduce interest rates, which thereby encourages businesses to invest more and consumers to spend more.

Stagflation

The simultaneous appearance in an economy of slow growth, high unemployment, and rising prices. A combination of three negatives: slower economic growth, higher unemployment, and higher prices. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.

P/E ratio

Measures a company's share price relative to its earnings per share (EPS). A high ratio can mean that a stock's price is high relative to earnings and possibly overvalued. A low ratio might indicate that the current stock price is low relative to earnings. It is one of the most widely used metrics for investors and analysts to determine stock valuation. It shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares with its industry group or a benchmark like the S&P 500 Index.

Reverse Stock Split

A type of corporate action that consolidates the number of existing shares of stock into fewer (higher-priced) shares. It divides the existing total quantity of shares by a number such as five or 10, which would then be called a 1-for-5 or 1-for-10 reverse split, respectively.

Earnings Per Share (EPS)

A financial metric that measures a company's profitability by dividing its net income by the number of outstanding shares of common stock:

EPS = (Net income - Preferred dividends) / Average number of outstanding common shares

Outstanding Stock

A company's stock currently held by all its shareholders, include share blocks held by institutional investors and restricted shares owned by the company's officers and insiders. These shares appear on a company's balance sheet under Capital Stock

Market Capitalization

the value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price.

Pink Sheet

Over-the-counter (OTC) trading, or stocks that trade outside of a public stock exchange. Companies that trade on this may not meet the requirements to list on a major exchange like the New York Stock Exchange (NYSE) or NASDAQ, or they may prefer to trade OTC.

Inflation Targeting

A central bank strategy of specifying an inflation rate as a goal and adjusting monetary policy to achieve that rate.

Dollar Cost Averaging

Investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. Investors may lower their average cost per share and reduce the impact of volatility on their portfolios.

CUSIP Number

A unique nine-digit identification number assigned to financial securities in the United States and Canada. These numbers help facilitate trades and settlements by providing a constant identifier to help distinguish the securities within a trade.

Rule of 72

A quick formula used to estimate the number of years required to double the invested money at a given annual rate of return. If you have an investment that earns an annual return of 6%.

Divide 72 by the annual return rate: 72/6​=12

It will take 12 years for your money to double.

Target Date Funds

Funds that aim to manage investment risk as retirement approaches. They invest in riskier assets early in an investor's career for higher returns, then shift to safer investments as retirement nears to protect accumulated savings from market volatility. These funds typically include a mix of stocks, bonds, and other investments.

Traditional IRA

An individual retirement account that allows individuals to direct pre-tax income towards investments that can grow tax-deferred.

Yield Trap

A situation where an investor is lured into buying a stock by its high dividend yield, only to find that the stock price drops significantly.

Bear Market

A market condition where securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.

Activist Investor

A type of investor, typically a specialized hedge fund, buys a significant minority stake in a publicly traded company in order to change how it is run.

Accredited Investor

is a person or entity that is allowed to invest in securities that are not registered with the Securities and Exchange Commission (SEC).

Financial Criteria
- Net worth over $1 million, excluding primary residence
- Annual Income over $200,000

Professional Criteria
- Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
- Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company)
- Any "family client" of a "family office" that qualifies as an accredited investor
- For investments in a private fund, "knowledgeable employees" of the fund

Multiplier Effect

The proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital. For example, An original increase of government spending of $100 causes a rise in aggregate expenditure of $100. But that $100 is income to others in the economy, and after they save, pay taxes, and buy imports, they spend $53 of that $100 in a second round. In turn, that $53 is income to others.

Retail Investor

Also known as an individual investor, is a non-professional investor who buys and sells securities or funds that contain a basket of securities such as mutual funds and exchange traded funds (ETFs).

Bull Market

A financial market in which prices are rising or are expected to rise.

Yield Curve

a line that plots the yields or interest rates of bonds that have equal credit quality but different maturity dates.

CAPEX

Are purchases of significant goods or services that will be used to improve a company's performance in the future.

Diversified Fund

an investment fund that is broadly invested across multiple market sectors, assets, and/or geographic regions.

S&P 500 Index

A benchmark stock market index, market-cap weighted, that includes 500 of the largest publicly traded companies in the U.S., representing a broad cross-section of the economy. It reflects the performance of major sectors and serves as a gauge for the overall health of the U.S. stock market. The index affects financial markets by influencing investment decisions and performance benchmarks. It's crucial because it provides a comprehensive snapshot of market trends, helps investors assess portfolio performance, and serves as a standard for comparison with other investments. Its movements are widely followed and can impact investor sentiment and economic outlooks.

Blue Chip Stock

A stock issued by a large, well-established, financially-sound company with an excellent reputation. Normally, such companies have operated for many years, have dependable earnings, and usually pay dividends to investors.

Blue chip companies are large, stable companies with excellent reputations, and often include big household names.

Many investors turn to blue chips for their longstanding, rising dividends.

Blank Check Company

A publicly-traded, developmental stage company that has no established business plan. It may be used to gather funds as a startup or, more likely, it has the intent to merge or acquire another business entity.

Shrinkflation

Process of item shrinking in size and/or quantity but the price point remains the same.

Private Credit

Investments provided by non-bank entities to fund private businesses

Venture Capitalist

A private equity investor who provides capital to companies with high growth potential in exchange for an equity stake.

Beta (in relation to stocks)

A measure of a stock's volatility compared to the market, such as the S&P 500 Index, individual stocks are ranked according to how much they deviate from the market, the market has a beta of 1.0. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0.

Concentrated Fund

Strategy in which a mutual fund invests in a smaller number of stocks or bonds rather than spreading out investments across many different ones in order to potentially beat an index fund returns. It has the potential for higher risk/return than an index fund because each stock will have a greater impact on the fund's returns.

Full Employment

An economic situation in which all available labor resources are being used in the most efficient way possible. *term* embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time.

True *term* is an ideal—and probably unachievable—situation in which anyone who is willing and able to work can find a job, and unemployment is zero.

Collateralized Mortgage Obligations (CMOs)

Refers to a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment. Organized by maturity and level of risk, CMOs receive cash flows as borrowers repay the mortgages that act as collateral on these securities. In turn, CMOs distribute principal and interest payments to their investors based on predetermined rules and agreements.

Initial Public Offering (IPO)

When a private company sells shares of its stock for the first time to the public and becomes a public company. When a company makes this transition, it is no longer in the hands of the private owners and investors but is now under public ownership. Every public company has had an IPO, from small businesses listed on the exchanges to the biggest companies, such as Apple and Amazon.

Asset Impairment

An asset that has a market value less than the value listed on the company's balance sheet. When an asset is deemed to be impaired, it will need to be written down on the company's balance sheet to its current market value.

David Giroux

The portfolio manager for several strategies and funds at T. Rowe Price, including the Capital Appreciation Strategy, and serves as head of Investment Strategy and chief investment officer for T. Rowe Price Investment Management. With a career at T. Rowe Price since 1998, he has won numerous awards, including Morningstar's Fund Manager of the Year twice, and holds a CFA designation and a B.A. in finance and political economy from Hillsdale College. His investment philosophy primarily follows "growth at a reasonable price". He manages both the T. Rowe Price Capital Appreciation Equity ETF and the T. Rowe Price Capital Appreciation mutual fund.

Peter Lynch

One of history's most successful investors, managed the Magellan Fund at Fidelity from age 33, achieving an annualized return of 29.2% over 13 years, more than double the S&P 500, before retiring at 46 in 1990. *person*'s investment strategy involves choosing familiar companies, evaluating their business models and growth potential, focusing on undervalued stocks with high return potential, and emphasizing diversification to manage risk. He popularized the expression "10-bagger" meaning buying a stock that subsequently over time increases in value by 10X.

Laissez-Faire Economics

An economic philosophy of free-market capitalism that opposes government intervention, developed by the French Physiocrats in the 18th century. Advocates believe government involvement hinders economic success, while critics argue that it can lead to inequality despite its potential for fostering prosperity. The purpose of a *term* economy is to promote a free and competitive market driven by the natural forces of supply and demand, free from government or authoritative intervention.

High Yield Bonds

(also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. *term* are more likely to default, so they pay a higher yield than investment-grade bonds to compensate investors.

Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios. However, some high-yield bonds are fallen angels, which are bonds that lost their good credit ratings.

Federal Funds Rate

Refers to the target interest rate range set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. The FOMC is the policymaking body of the Federal Reserve System. It meets eight times a year to set the target federal funds rate, which is part of its monetary policy. This is used to help promote economic growth.

Big 4 Accounting Firms

Measured by revenue, the *term* include Deloitte, Ernst & Young (EY), PricewaterhouseCoopers (PwC), and Klynveld Peat Marwick Goerdeler (KPMG). The companies provide auditing services, tax, strategy and management consulting, valuation, market research, assurance, and legal advisory services. All four are leading sources of tax law interpretation and accounting and auditing standards. These four firms audit the financial statements of approximately 90% of publicly held companies. Their annual revenues range from $36 billion to $64 billion each.

Laffer Curve

A mound-shaped indicator, was designed to find the 'ideal' tax rate that would help the government, as well as the people it serves, prosper. *term* is a tax theory suggesting an inverted U-shaped relationship between tax rates and the amount of tax revenue collected by governments.

The ideal, or optimal, rate of taxation for an economy is the one that falls right at the top of the inverted U. A tax rate that is too high will yield less tax revenue because people and businesses will lose incentive to make additional profits.

SEC Form 10-K

A comprehensive report filed annually by a publicly traded company about its financial performance and is required by the U.S. Securities and Exchange Commission (SEC). The forms allow investors to have fundamental information about companies so they can make informed investment decisions.

Vanguard

Introduced in 1975 (founded by Jack Bogle; see term #105) and offers an impressive lineup of low-cost mutual funds and exchange-traded funds (ETFs) aimed at buy-and-hold investors. The firm can keep its low-cost edge across the fund spectrum based on a unique ownership structure; the management company is owned by the shareholders of the funds. It appeals to buy-and-hold investors, retirement savers, and investors who want access to professional advice.

Arrived Homes

Founded in 2019. The company is best suited to serve long-term investors looking to earn passive income or benefit from property value appreciation over time. This investment platform offers a streamlined and simplified approach to owning residential investment properties.

Dow Jones Industrial Average (DJIA)

A stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq.

Russell 2000

A market index composed of 2,000 small-cap companies.

Capital Gains Tax

Tax on the sale of an asset such as property, cars, homes, or investments.

Wash Sale

a transaction in which an investor sells or trades a security at a loss and purchases "a substantially similar one" 30 days before or 30 days after the sale. It is done to obtain the benefit of a tax loss, but if the sell and re-buy occur within 30 days of each other, the tax loss is disallowed.

SEC Form 10-Q

Quarterly reports of company overall business and financial position.

Fisher Effect

an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates.