Archives: Resources

Stagflation is the economic phenomenon in which unemployment increases along with rising inflation causing demand to remain stagnant in a given period. In fact, it is an indication of an inefficient market, as traditionally, there is an inverse relationship between unemployment rates and inflationary pressures.

Explanation: 

 Usually, inflationary pressures are observed in economies with high growth rates, which increase the demand for products, and consequently, supply. The high economic growth creates more jobs, thus compressing unemployment down.During stagflation, unemployment and inflation rise together either as a result of a poor economic policy and regulations or due to an abrupt increase in the price of oil, which lowers the entire output of an economy.

In a nutshell: 

• Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
• Stagflation was first recognized during the 1970s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock. The prevailing economic theory at the time could not easily explain how stagflation could occur.Since the 1970s, rising price levels during periods of slow or negative economic growth have become somewhat of the norm rather than an exceptional situation.

Solvency refers to the long-term financial stability of a company and its ability to cover its long-term obligations. In other words, it’s the ability of a company to meet short and long-term debts as they become due.

Explanation:

Both investors and creditors are concerned with the solvency of a company. Investors want to make sure the company is in good financial standings and can continue to grow, generate profits, and produce dividends. Basically, investors are concerned with receiving a return on their investment and an insolvent company that has too much debt will not be able to generate these types of returns.Creditors, on the other hand, are concerned with being repaid. If companies can’t generate enough revenues to cover their current obligations, they probably won’t be able to pay off new obligations.

In a nutshell: 

• Solvency is the ability of a company to meet its long-term debts and other financial obligations.
• Solvency is one measure of a company’s financial health, since it demonstrates a company’s ability to manage operations into the foreseeable future.
• Investors can use ratios to analyze a company’s solvency.
• When analyzing solvency, it is typically prudent to conjunctively assess liquidity measures as well, particularly since a company can be insolvent but still generate steady levels of liquidity.

Shares, often called stocks or shares of stock, represent the equity ownership of a corporation divided up into units, so that multiple people can own a percentage of a business. When a business decides to incorporate, a corporate charter is filed with the state government. Many corporations tend to incorporate and domicile in Delaware because of the freedom and insignificant reporting fees required by the Delaware government. Regardless, most corporations are organized in their home state.

Explanation:

The charter sets the number of shares that are authorized. You can think of the authorizing process as creating the amount of shares that can later be sold to investors. The authorized number of shares varies between companies and represents the total number of shares that the company can use for equity  financing.

In a nutshell: 

• Shares represent equity ownership in a corporation or financial asset, owned by investors who exchange capital in return for these units.
• Common shares enable voting rights and possible returns through price appreciation and dividends.
• Preferred shares do not offer price appreciation but can be redeemed at an attractive price and offer regular dividends.
• Most companies have shares, but only the shares of publicly traded companies are found on stock exchanges.

Shareholders, often called stockholders, are the owners of a corporation. Shareholders are the people or entities that legally own the stock certificates for a corporation. When a business incorporates, it files a corporate charter with the state government. The charter sets up all of the rules, bylaws, and stock information for the new company.

Explanation:

One of the most important sections of the corporate charter lists the number of shares that are authorized as well as the par value  of each share. Not all companies are required to set a par value, but most do for a variety of reasons.When the newly formed corporation issues shares to investors, these investors become shareholders. These issued shares are recorded in the common stock equity account on the balance sheet . Most balance sheets list out the number of shares outstanding as well as the total number of shares that are authorized. Corporations typically do not issue all other authorized shares at once. Usually a significant portion of authorized shares stay unissued. This ensures the company will be able to raise capital by equity financing.

In a nutshell: 

• A shareholder is any person, company, or institution that owns shares in a company’s stock.
• A company shareholder can hold as little as one share.
• Shareholders are subject to capital gains (or losses) and/or dividend payments as residual claimants on a firm’s profits.
• Shareholders also enjoy certain rights such as voting at shareholder meetings to approve the members of the board of directors, dividend distributions, or mergers.
• In the case of bankruptcy, shareholders can lose up to their entire investment.

A service industry is an economic segment that provides certain intangible activity that fulfills a particular need. Companies within this industry perform tasks that are useful to their customers.

Explanation:

• The service sector is the third sector of the economy, after raw materials production and manufacturing.
• The service sector includes a wide variety of tangible and intangible services from office cleaning to rock concerts to brain surgery.
• The service sector is the largest sector of the global economy in terms of value-added and is especially important in more advanced economies.

In a nutshell:

• The service sector is the third sector of the economy, after raw materials production and manufacturing.
• The service sector includes a wide variety of tangible and intangible services from office cleaning to rock concerts to brain surgery.
• The service sector is the largest sector of the global economy in terms of value-added and is especially important in more advanced economies.

Securities are negotiable financial instruments issued by a company or government that give ownership rights, debt rights, or rights to buy, sell, or trade an option.

Explanation: 

Securities are traded on the exchange markets. Although the term refers to all types of financial instruments, there are differences in its legal definitions, which mostly consider equities and fixed income as securities. Nevertheless, securities can be stocks, bonds, mutual funds, interest-bearing Treasury bills, notes, derivatives, warrants, and debentures. Furthermore, interests in oil-drilling programs are also considered securities. The legal entity that issues securities is the issuer of the security. Securities differ in their level of inherent risk. For example, equities are considered riskier than bonds, but also some equities are riskier than other equities. Depending on the level of risk that an investor wants to accept, he selects the relevant securities. Moreover, securities differ in their level of liquidity. Highly liquid securities like bonds, equities and money market instruments are traded more frequently because investors can increase their price by buying more securities and realizing a higher return on investment.

In a nutshell: 

• Securities are fungible and tradable financial instruments used to raise capital in public and private markets.
• There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.
• Public sales of securities are regulated by the SEC.
• Self-regulatory organizations such as NASD, NFA, and FINRA also play an important role in regulating derivative securities.

Salvage value also called residual or scrap value is the estimated worth of an asset at the end of its useful life. In other words, salvage value is the price management believes it can sell an asset for after the asset is deemed unusable because of time, abuse, and obsolescence. For non-accountants, the term scrap value makes more sense because this is the value of the asset after it can no longer be used. Scrap value is the amount of money that can be salvaged from the used assets.

Explanation: 

Salvage value is used in calculating depreciation and making equipment purchase decisions. Management will often consider the estimated salvage value of an asset when deciding to make a new equipment purchase because a salvage value will often lower the total cost of the asset over time since the salvage value can be recouped when the asset is later sold.

In a nutshell: 

• Salvage value is the book value of an asset after all depreciation has been fully expensed.
• The salvage value of an asset is based on what a company expects to receive in exchange for selling or parting out the asset at the end of its useful life.
• Companies may depreciate their assets fully to $0 because the salvage value is so minimal.Salvage value will influence the total depreciable amount a company uses in its depreciation schedule.

 A sales discount is a cash discount that manufacturers often give retailers for paying off accounts during the discount period. A sales discount is useful for both the retailer and the manufacturer. The retailer can pay less for its inventory while the manufacturer can receive its cash sooner.

Explanation:

Most retailers buy inventory on account or on credit. Rarely does a retail chain pay manufacturers  for inventory and supplies in cash. Most of the time the retailer has an account or line of credit with the manufacturer to buy inventory. These retailers can often receive a cash discount or sales discount if the balance on their account is paid off in a certain period of time.Remember, cash flow is important to any business. Manufacturers and wholesalers don’t want to have outstanding accounts receivable. They want cash to pay their own bills and meet their own current liabilities.

In a nutshell: 

• A sales discount is a reduced price offered by a business on a product or service. 
• Learn how to include discounts on invoices. 
• A sales discount, also commonly known as just a ‘discount’ provides customers of a business with a reduced rate on one or more of the products or services being offered.