C708 FINANCE TERMS.
Designed to boost confidence and grades!
Valuation - Answer: the ability to accurately estimate what an asset is worth in
"economic terms". The estimated amount of money that a rational person would pay
based on the economic benefits that the asset is expected to produce
Risk - Answer: uncertainty. Investors are risk averse, meaning they dislike risk and try
to avoid it.
Factors that determine value - Answer: Cash flow, risk, time, opportunity costs
Perfect competition - Answer: there are so many competitors and similar products that
prices are driven to their minimum level. In the long run, companies do not make an
economic profit.
Weak form EMH - Answer: long-term returns in excess of the market are possible by
conducting superior fundamental research and analysis of stocks, bonds, and markets.
Semi-strong form EMH - Answer: it is believed that asset prices reflect all publicly
available information, and that prices instantly change to reflect new public information.
Strong form EMH - Answer: it is believed that asset prices reflect all publicly available
and non-public "insider" information, and that prices instantly change to reflect both
types of information.
Efficient markets - Answer: essential to determining fair valuations , allow an efficient
transfer of capital from savers to businesses in need of capital to grow their operations,
and provide liquidity to investors who may want to sell their investments because the
need cash
1
APPHIA - Crafted with Care and Precision for Academic Excellence.
,Liquidity - Answer: facilitates transactions, provides cash for borrowers, promotes the
efficient flow of capital in an economy
Insider trading - Answer: an individual who buys or sells financial assets based on
information that has not yet been released to all other market participants
SEC (Securities and Exchange Commission) - Answer: an agency of the United States
federal government, and has the primary responsibility of enforcing US securities laws,
proposing new rules, and regulating the participants of financial markets; its mission is
to protect investors
FRB (Federal Reserve Board) - Answer: protects consumers and governs the banking
institutions; also controls the changes in money supply and interest rates, known as
monetary policy, in order to keep the economy stable. When banks are in financial
trouble, the FRB is their last resort lending source to stay liquid
FINRA (Financial Industry Regulatory Authority) - Answer: a not-for-profit entity that
regulates securities firms for the purpose of protecting investors. Licensed individuals
and firms, such as brokerage houses, must adhere to FINRA guidelines
PCAOB (Public Company Accounting Oversight Board) - Answer: the regulating body
that keeps an eye on accounting practices, including auditors and audit reports;
governed under the SEC and was the result of the 2002 Sarbanes Oxley Act (SOX): a
regulation put into place under fraudulent activity in a company called Enron was
reported by its auditors, Arthur Andersen.
Perquisites (Perks) - Answer: benefits to employees beyond their compensation
packages and are often cost-effective investments
Excessive perquisite - Answer: an expense that benefits an executive while producing
no increase in owners' wealth
2
APPHIA - Crafted with Care and Precision for Academic Excellence.
, Agency cost - Answer: a cost that arises because of the separation of ownership from
control of the business assets; any cost that arises due to an agency conflict or problem
Social responsibility - Answer: the good of society is at odds with the welfare of
corporate shareholders
Income statement - Answer: shows a company's revenues and profits over some time
period, usually a year or a quarter; sometimes called the profit and loss statement or the
consolidated statement of earnings
Gross margin or Gross profit - Answer: sales minus COGS
Operating expenses - Answer: indirect costs, which include sales, general and
administrative (SG&A) expense, depreciation and amortization expenses, and research
and development expenses (R&D)
Operating margin or Earnings before interest and taxes (EBIT) - Answer: Sales minus
COGS and operating expenses
Net income or Net profit - Answer: the "bottom line"; sales minus COGS, operating
expenses, non-operating expenses (interest expense and taxes)
Balance sheet or statement of financial position - Answer: shows a company's financial
position at a point in time; contains assets, liabilities, and equity (assets and liabilities
must equal assets). The only cash a company has in its cash account is on the asset
side of the balance sheet; the right side of the balance sheet informs us about the
sources of the firm's financing, while the left side tells us what the firm has done with
those funds
Financial position - Answer: what the company owns and owes
3
APPHIA - Crafted with Care and Precision for Academic Excellence.
Designed to boost confidence and grades!
Valuation - Answer: the ability to accurately estimate what an asset is worth in
"economic terms". The estimated amount of money that a rational person would pay
based on the economic benefits that the asset is expected to produce
Risk - Answer: uncertainty. Investors are risk averse, meaning they dislike risk and try
to avoid it.
Factors that determine value - Answer: Cash flow, risk, time, opportunity costs
Perfect competition - Answer: there are so many competitors and similar products that
prices are driven to their minimum level. In the long run, companies do not make an
economic profit.
Weak form EMH - Answer: long-term returns in excess of the market are possible by
conducting superior fundamental research and analysis of stocks, bonds, and markets.
Semi-strong form EMH - Answer: it is believed that asset prices reflect all publicly
available information, and that prices instantly change to reflect new public information.
Strong form EMH - Answer: it is believed that asset prices reflect all publicly available
and non-public "insider" information, and that prices instantly change to reflect both
types of information.
Efficient markets - Answer: essential to determining fair valuations , allow an efficient
transfer of capital from savers to businesses in need of capital to grow their operations,
and provide liquidity to investors who may want to sell their investments because the
need cash
1
APPHIA - Crafted with Care and Precision for Academic Excellence.
,Liquidity - Answer: facilitates transactions, provides cash for borrowers, promotes the
efficient flow of capital in an economy
Insider trading - Answer: an individual who buys or sells financial assets based on
information that has not yet been released to all other market participants
SEC (Securities and Exchange Commission) - Answer: an agency of the United States
federal government, and has the primary responsibility of enforcing US securities laws,
proposing new rules, and regulating the participants of financial markets; its mission is
to protect investors
FRB (Federal Reserve Board) - Answer: protects consumers and governs the banking
institutions; also controls the changes in money supply and interest rates, known as
monetary policy, in order to keep the economy stable. When banks are in financial
trouble, the FRB is their last resort lending source to stay liquid
FINRA (Financial Industry Regulatory Authority) - Answer: a not-for-profit entity that
regulates securities firms for the purpose of protecting investors. Licensed individuals
and firms, such as brokerage houses, must adhere to FINRA guidelines
PCAOB (Public Company Accounting Oversight Board) - Answer: the regulating body
that keeps an eye on accounting practices, including auditors and audit reports;
governed under the SEC and was the result of the 2002 Sarbanes Oxley Act (SOX): a
regulation put into place under fraudulent activity in a company called Enron was
reported by its auditors, Arthur Andersen.
Perquisites (Perks) - Answer: benefits to employees beyond their compensation
packages and are often cost-effective investments
Excessive perquisite - Answer: an expense that benefits an executive while producing
no increase in owners' wealth
2
APPHIA - Crafted with Care and Precision for Academic Excellence.
, Agency cost - Answer: a cost that arises because of the separation of ownership from
control of the business assets; any cost that arises due to an agency conflict or problem
Social responsibility - Answer: the good of society is at odds with the welfare of
corporate shareholders
Income statement - Answer: shows a company's revenues and profits over some time
period, usually a year or a quarter; sometimes called the profit and loss statement or the
consolidated statement of earnings
Gross margin or Gross profit - Answer: sales minus COGS
Operating expenses - Answer: indirect costs, which include sales, general and
administrative (SG&A) expense, depreciation and amortization expenses, and research
and development expenses (R&D)
Operating margin or Earnings before interest and taxes (EBIT) - Answer: Sales minus
COGS and operating expenses
Net income or Net profit - Answer: the "bottom line"; sales minus COGS, operating
expenses, non-operating expenses (interest expense and taxes)
Balance sheet or statement of financial position - Answer: shows a company's financial
position at a point in time; contains assets, liabilities, and equity (assets and liabilities
must equal assets). The only cash a company has in its cash account is on the asset
side of the balance sheet; the right side of the balance sheet informs us about the
sources of the firm's financing, while the left side tells us what the firm has done with
those funds
Financial position - Answer: what the company owns and owes
3
APPHIA - Crafted with Care and Precision for Academic Excellence.
