DECA - Finance Cluster

Flashcards containing relevant information for DECA's Finance Cluster Exam

Income Statement

A financial statement showing the revenue, expenses, and net profit for a fiscal period

Balance Sheet

A financial statement showing what a company owns and owes (assets, liabilities, shareholders' equity)

Cash Flow Statement

A financial statement showing where money is coming from and how it is being spent; only includes cash sales

EPS

Net income/available common stock shares; shows how much a company makes for each share of its stock

Debt-to-Equity Ratio

Liabilities/shareholders' equity; the lower, the better

Dividend

The portion of a corporate's profits paid out to its shareholders

Bull Market

Period of rising prices

Bear Market

Period of declining prices

Appreciation

Increase in monetary value

Depreciation

Decrease in monetary value

Inflation

Happens when the amount of income and spending grow faster than the production, prices rise, resulting in inflation, a general and progressive increase in prices; bank doesn't want too much inflation and will therefore increase interest rates.

Deflation

Happens when people spend less than production, resulting in deflation, a general and progressive decrease in prices; bank will lower interest rates to stimulate more borrowing

Deleveraging

The reduction of debt

Recession

Period of reduced economic activity during which credit isn't easily available; lowering interest rates help to stimulate borrowing

Expansion

Period of increased economic activity during which credit is easily available (increase in spending and prices)

Mutual Fund

Fund that allows investor to pool their money to invest in many securities from a variety of companies

Stock

A share of ownership in a corporation

Bond

A promise to repay a loan with interest

Common Stock

Entitles the owner to vote at meetings & receive dividends; last priority in the case of bankruptcy or liquidation

Preferred Stock

Owner has no voting rights but has priority over common investors in the case of bankruptcy

Security

A financial instrument that has monetary value

Debt Securities

Represent money borrowed & must be repaid

Equity Securities

Represent ownership interest held by shareholders in an equity

Insolvent

unable to pay debt (bankrupt)

Liquidation

The ability of a company to turn its services/goods into cash (e.g. selling off inventory)

Central Government

Collects taxes & spends money

Central Bank

Decides the amount of money & credit in the economy (control interest rates and the printing of money)

Credit

Generally defined as an agreement in which the lender borrows money and agrees to pay back the debt

Market Price

The current price at which an asset can be bought/sold

Revolving Credit

Credit that is automatically renewed as debts are paid off; requires commitment fee (initial fee)

Installment Credit

Credit that requires scheduled, periodic payments

Difference between debit and credit card

1. Debit card does not allow the borrower to go into debt; money is deducted directly from the checking account2. They have daily limits of spending

Checking Account

Allows for numerous withdrawals and unlimited deposits, very liquid; commercial CA is used by businesses, Joint CA is usually used by martial partners

Saving Account

Provides the same liquidity as CA but earns interest; limited withdrawals; interest rate is between 0.5 to 1%

Net Worth

Assets - liabilities

ROI (Return on Investment) or ROR (Rate of Investment)

(Current Value of Investment - Initial Value)/Initial Value * 100%

Rule of 72

The number of years it takes for a certain amount to double in value: 72/interest (e.g. ROR)

6 Economic Influences

FER, Government Policy and Spending, Global Events, Financial Markets, Interest Rates

3 Most Major Economic Influences

GDP (Gross Domestic Product), Unemployment Rate, Inflation

Bank Rate

IR at which the bank borrows money from the government

Capital Gains

Monetary gain made from selling an asset for more than what it cost you

Credit Limit

How much can be charged to the card per month

Advantages of Credit Cards

1. Convenience2. Immediate Access3. Security (when you lose the card, you don't actually lose the money)4. Rewards (points, services etc.)5. Bill Consolidation (don't have to make many little payments)6. Record history (the company does it for you, no need to make your own balance sheets)

Disadvantage of Credit Cards

Interest & fee misjudgment; it's tempting to spend until or over what you can't pay back

Annual Fee

Charged once per year to you CC account in exchange for the benefits that come with the card

APR

Annual Percentage rate; the annual rate of interest charged on the balance of your credit card

Four types of APR

Introductory APR, Purchase APR, Penalty APR, & Cash Advance APR

Introductory APR

Promotional APR: a lower APR for a limited time period, like an incentive for people to create bank accounts

Purchase APR

Default rate applied to standard credit cards; gives you a grace period

Grace Period

The time between the billing date and the payment due date, where interest does not apply

Cash Advance APR

Rate charged for taking out cash from CC

Penalty APR

Rate charged when you violate card terms/conditions; occurs when two billing cycles are missed (60 days)

Average Outstanding Balance

The balance of an unpaid, interest-bearing, loan (revolving/credit card debt, etc.)

Minimum Payment

The minimum amount of money you could pay every grace period on your CC

Credit Score

Between 300-900; 650+ is good; measured based on the three C's

Collateral

An asset pledged for the repayment of a loan

Debt Ratio

total liabilities/total assets (percentage); anything over 100% = more debt than asset

Portfolio Analysis

The process by which management evaluates the products and businesses that make up a company

Comprehensive Insurance

Car insurance that covers theft and vandalism, rather than just a collision

Gap Insurance

Covers the difference between what you owe on a car and what the insurance company says it is worth

Dynamic Equilibrium

A state of balance between continuing processes (e.g. balance between market supply and demand)

Underwriters (individual)

Calculate the risk of loss, establishpremium rates, and design insurance policies to cover risk

Sunk Costs

Costs made in the past that cannot be recovered

Hedge Funds

Private investment (limited partnership) that let wealthy investors avoid some financial regulations in global markets

Sole Proprietorship

Business owned by one person with no legal entity; no government regulationAdv.: owner only pays personal income taxDis.: Hard to get capital funding (stocks, bonds, lines of credit to loan etc.)*Unlimited Liability (if the business goes bad, owner has to pay for it all)

Better Business Bureau (BBB)

A non-profit business organization that provides info on local companies to consumers.

Excise Tax

Tax on specific goods such as gas, alcohol, tobacco, etc.

Small Business Administration (SBA)

Gov't. agency that provides resources to new/small businesses.

Interstate Commerce Commission

Agency that sets the laws for all businesses that do business across states lines

Stop Orders/Stop-Loss Orders

Order to buy/sell a security when its price hits a particular point; *to limit losses or lock in profits*

Difference between Stop Orders and Limit Orders

Limit orders are visible to the market; it's a request to sell or buy a security at a specified price.Stop orders aren't visible to the market and will trigger a limit order until the stop order price has been met.

Market Order

Request by the investor (usually through a broker) to buy/sell a security at the best available price in the current market; good for high-volume securities

Dual Taxation

Corporate profits taxed and shareholders' dividends taxed

Installment Buying

Buying a product by promising to make periodic payments until the fee has been covered

Lien

The right to sell a debtor's collateral

Secondary Circulation

Total people who didn't but it but still read it

Speculative Stocks

Stocks issued by firms that have not yet established themselves

Economic Utility

the amount of satisfaction felt by a consumer from using a product or service

Discretionary Income

The money (income) left after necessities have been bought and paid for

Firewall Protection

Used to prevent unauthorized access to your network

Pump and Dump

Investment scam: scammers buy a small stock and hype it up to other investors, causing its price to rise. They then sell the stock when the price is high, leaving the victims to deal with the rapid price decline afterwards.

Pyramid Scheme

An illegal form of multi-level marketing strategy that tries to collect initial fees (eg for signing up for something) from as many people as possible

Ponzi Scheme

Investment Scam: lures new investors to purchase securities by promising high rates of return with little to no risk at all

Phishing (pronounced "fishing")

Online Scam: lures people to give sensitive info by tricking them that they're using a trustworthy, legitimate website

Roth Individual Retirement Account (Roth IRA)

A personal savings plan; contributions to the Roth IRA are taxed but earnings on the growing funds in the account are non-taxed.

Regulatory Guidelines

Gov't rules and regulations that must be followed by financial institutions; following these guidelines is the process of compliance

GRC Software (3 functions)

Governance, Risk, and Compliance Software:1. Identifies/measures corporate risk levels2. Checks to see if employees are following company-wide policies3. Ensures compliance with reporting requirements set by federal & state agencies*It is not for ensuring compliance with union demands, product standards, or contigency plans*

Contingency Plan

A plan designed to take a possible future event into account (eg contingency plan for dealing with bankruptcy)

Transmittal

A letter that should always accompany important business papers sent by mail; lets the receiver know exactly what should be in the package

Grapevine

An oral communication trend in which info is passed around through the company but is not verified/officially announced

Annual Report

Not a financial statement but contains the three; excellent to see how a business is doing over the course of a year

Vertical Analysis

Single items on a balance sheet are written as percentages of the bottom line (easy to see the bigger picture, and the correlation between the items and the net income); After doing so, the analyst can develop common-sizefinancial statements that allow him/her to compare performance across several years for a singlecompany or across several different companies.

Horizontal Analysis

AKA trend analysis; items in a company's financial statements are compared over a certain period of time by choosing one year's worth of entries as a baseline, while every other year represents percentage differences in terms of changes to that baseline; does not involve making common-sized financial statements

4 Types of Business Ownership

Sole proprietorship, partnership, co-operation, & corporation

Corporation

A business that has its own rights, privileges, and liabilities separate from its owners; ownership of business is divided into small parts*Shareholders of corporations have limited liability, meaning they cannot be held responsible for debts of a corporation

Three Types of Corporations

Private corporation, Public corporation, Crown corporation

3 Sections of a Cash Flow Statement

1. Operating Activities (current liabilities and current assets)2. Investing Activities (investment in long-term assets, for e.g.)3. Financing Activities (dividends, bonds, stocks, etc.)

Matrix Organizational Structure

A combo of the functional structure and the divisional structure

Functional Structure

Common organizational structure: organization is divided into smaller groups based on specialized areas such as IT, marketing, finance

Divisional Structure

Organizational structure that groups each specialized area into a division (e.g. marketing, finance, and IT small group for one certain product)