HOMEWORK CHAPTER 2 (Part 1)

Give definition of the following terms

i. Balance sheet

A financial statement that reports a company's assets, liabilities, and shareholder equity at a specific
point in time

ii. Income statement

A financial statement that shows you the company's income and expenditures

iii. Balance sheet identity

A simple mathematical calculation derived from the listed assets and liabilities

iv. Liquidity and it’s important

The degree to which a security can be quickly purchased or sold in the market at a price reflecting its
current value

v. Financial leverage

An investment strategy of using borrowed money—specifically, the use of various financial instruments
or borrowed capita to increase the potential return of an investment

vi. Accounting value and market value

A company's book value is the amount of money shareholders would receive if assets were liquidated
and liabilities paid off

vii. Current assets (gross working capital)

All the assets of a company that are expected to be sold or used as a result of standard business
operations over the next year

viii. Accounts receivable

The balance of money due to a firm for goods or services delivered or used but not yet paid for by
customers

ix. Inventory

It refers to all the items, goods, merchandise, and materials held by a business for selling in the market
to earn a profit

x. Prepaid expenses

A prepaid expense is an asset on a balance sheet that results from a business making advanced
payments for goods or services to be received in the future

xi. Fixed assets

It refer to long-term tangible assets that are used in the operations of a business.
xii. Other assets

A grouping of accounts that is listed as a separate line item in the assets section of the balance sheet

xiii. Accounting book value

Book value is the accounting value of the company's assets less all claims senior to common equity (such
as the company's liabilities)

xiv. Debt

An amount of money borrowed by one party from another, often for making large purchases that they
could not afford under normal circumstances.

xv. Equity

The amount of capital invested or owned by the owner of a company.

xvi. Debt capital

It refers to fund or assets generated by borrowing from a lender. A business owner takes on debt to get
capital

xvii. Current debt

Debt due to be paid within 1year

xviii. Accounts payable

liability of firm for goods purchased from supplier on credit

xix. Other payables

interest payable and income taxes payable that are to be paid within 1 year

xx. Accrued expenses

Expenses that have been incurred but not yet paid in cash

xxi. Short-term notes

Amount borrowed from a creditor that are due within 1 year

xxii. Long-term debt

Loans from banks or other sources that lend money for longer than 12 months

xxiii. Preferred stockholders

Investors who own the firm’s preffered stock

xxiv. Common stockholders

Investors who owns the firms’s common stocks. Common stockholders are the residual owners of the
firm
xxv. Par value and paid-in capital

The amount of the firm receives from selling stock to investors

xxvi. Treasury stock

The firm's stock that has been issued and reacquired by the firm.

xxvii. Retained earnings

The cumulative earnings that have been retained and reinvested in the firm over its life (cumulative
earnings cumulative dividends)

xxviii. Financing cost

The interest paid to creditors/bondholders

xxix. Tax expenses

Amount of taxes owned based on taxable income

xxx. Revenue

Income from sales of product and services

xxxi. Cost of goods sold

Cost of producing goods/services to be sold

xxxii. Operating expenses

Expenses related to marketing and distributing the product or services and administration cost
(example, marketing and selling, general and administration, depreciation expenses)