Important Financial Terminology
Audit
In terms of tax, an audit refers to the review of a taxpayer's tax return for accuracy. In term of accounting, an audit is the examination and verification of a company's financial statements and records.
Accounting professionals, usually Certified Public Accountants (CPAs) perform audits. These auditors must be independent, unbiased, and qualified to provide an auditor's report (also called an opinion).
There are four major steps in the audit process:
1. Defining the terms of the engagement between the auditor and the client
2. Planning the scope and conduct of the audit
3. Compiling the audited information
4. Reporting the results of the index audit.
Bad Debts
Bad debt is the portion of a loan or portfolio of loans a lender considers to be uncollectible. In personal finance, bad debt generally refers to high-interest consumer debt. Bad debt when it applies to transactions between companies is an inevitable part of doing business. Ultimately, not all payments owed to a company will be paid, so all companies have accounts for bad debt expenses and allowance for doubtful accounts (ADA). Therefore when investors and other outside people evaluate a company based on its income statement, the figure for net income has already been adjusted for bad debt.
Balance Sheet
The balance sheet is a financial report that lists a company's assets (what it owns) and liabilities (what it owes to others) the balance sheet has mainly two components. The first component gives a detailed list of a company's assets, including long-term assets (such as real estate and machinery), current assets (anything that can easily be converted to cash in less than a year),and cash. The second component is a list of company's liabilities, or what it owes others. This is always an important section for investors to read because even the most stable of companies will face problems if it has an unusually high amount of debt on its books It outlines stockholders' equity, and provides information on common and preferred stock, retained earnings, and capital surplus.
Bonds
A bond is a long-term debt instrument. There are government bonds and corporate bonds.Bonds are issued by governments or corporations in order to raise funds. A firm issues bonds and receives money in return. For example, a firm may sell a 5-year bond and gets $1,000 right away. After the issue, the firm must pay interest to the bondholder. This interest payment is called coupon payment. It is a percentage of the face value of the bond,which is normally $1,000. The coupon payments are made either annually or semiannually.At the end of year 5, the firm will have to return the original $1,000 to the bondholder.There can be many variations of bonds in terms of interest payments, denomination currency, place of issue and special provisions. As a result, you may hear people taking about all kinds of ―bonds‖: callable bond, convertible bond, Euro-bond, currency-bond,cocktail bond, discount bond, floating rate bond, to name a few.
Break-even point
The break-even point is the point at which gains equal losses. The basic idea behind break-even point is to calculate the point at which revenues begin to exceed costs.
Capital
In economics, capital, capital goods, or real capital are those already-produced durable goods that are used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process. Capital is distinct from land in that capital must itself be produced by human labor before it can be a factor of production. At any moment in time, total physical capital may be referred to as the capital stock (which is not to be confused with the capital stock of a business entity.) in Marxian economics, capital is used to buy something only in order to sell it again to realize a financial profit, and for Marx capital only exists within the process of economic exchange—it is wealth that grows out of the process of circulation itself and forms the basis of the economic system of capitalism.Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc.
Cash Budget
Cash budget is a review or projection of cash inflows and outflows. It can be used as a tool for analyzing the revenues and costs of a company or individual.
Example: A cash budget is a planning tool used by companies and individuals to evaluate projected cash flows during a specified period of time (e.g. monthly, quarterly, annually).
For example, if a company's cash budget forecasts itemized inflows (income) of Rs1,00,000 and itemized cash payments (expenses) of Rs.50,000, management can feel fairly certain that it will have enough cash to pay all of its bills.
