Accounting, Finance, and Financial Markets Review

Vocabulary practice flashcards covering fundamental accounting terms, financial statements, financial formulas, principles of financial management, types of financing, and stock markets.

Accounting

Recording, organizing, reporting, and analyzing financial activities.

Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Stockholders’ Equity}$$

Assets

What a business owns.

Liabilities

What a business owes.

Equity

Owners’ claims.

GAAP

Accounting principles and rules.

FASB

Organization that sets U.S. accounting standards.

Sarbanes-Oxley Act

Legislation enacted to address accounting scandals and require certain financial reporting practices.

Balance Sheet

A financial statement showing a company’s assets, liabilities, and equity at a specific point in time.

Income Statement

A financial statement showing revenue and expenses over a period of time.

Cash Flow Statement

A financial statement showing actual cash flowing into and out of a business.

Net Income

The condition where revenue exceeds expenses.

Net Loss

The condition where expenses exceed revenue.

Liquidity

Having enough available money to pay bills on time.

Current Ratio

$$\text{Current Assets} \div \text{Current Liabilities}$$

Net Working Capital

$$\text{Current Assets} - \text{Current Liabilities}$$

Net Profit Margin

$$\text{Net Profit} \div \text{Net Sales}$$

Return on Equity

$$\text{Net Profit} \div \text{Owners’ Equity}$$

Inventory Turnover

$$\text{Cost of Goods Sold} \div \text{Average Inventory}$$

Debt-to-Equity Ratio

$$\text{Total Liabilities} \div \text{Owners’ Equity}$$

Financial Management

Managing a company’s money so it can meet its goals.

Goal of a Financial Manager

Maximize the value of the firm for its owners.

Time Value of Money (TVM)

The principle that money today is worth more than the same amount in the future because it can earn returns.

Future Value Formula

$$FV = PV \times (1 + r)^t$$

Compound Interest

Earning interest on your original money and previously earned interest.

Risk-Return Tradeoff

The principle that higher potential returns generally involve higher risk.

Short-Term Financing

Financing used for day-to-day needs, such as cash management and inventory.

Long-Term Financing

Financing used for long-term needs, such as land, buildings, and equipment.

Debt Financing

Borrowing money that must be repaid, usually with interest; owners retain ownership, but the debt must be repaid with interest.

Equity Financing

Raising money by selling ownership shares to investors; funds generally do not need to be repaid, but owners give up some ownership or control.

Common Stock

Ownership shares in a company.

Dividends

Profit payments made to stockholders.

Retained Earnings

Profits reinvested in the company.

Primary Market

The market where new securities are sold.

Secondary Market

The market where existing securities are bought and sold.

P/E Ratio

$$\text{Stock Price} \div \text{Earnings Per Share (EPS)}$$

NYSE

New York Stock Exchange, described as a broker market.

NASDAQ

An electronic marketplace, described as a dealer market.