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An angel investor is an individual who provides small amounts of startup capital and advice to businesses in exchange for an equity stake or convertible debt. These people can be of great assistance in providing funding when a business has just started, and it does not yet have a sufficient product concept to attract the attention of venture capital firms. They also do not usually require much control over the business, and so may not demand a board seat.

Explanation :

Angel investors differ significantly from venture capital firms, which typically invest other people’s money, invest at a somewhat later stage of corporate development, invest more money, and take a more active role in the daily affairs of their investees.Besides funding the business in significantly better terms than a bank or other lender, an angel investor offers expertise and a valuable network of contacts, seeking to see the business propel. Angel investors should be accredited by the Securities Exchange Commission (SEC) and realize an annual income of $200,000, on top of a minimum net worth of $1 million.

In a nutshell :

  • An angel investor is an individual who provides small amounts of startup capital and advice to businesses in exchange for an equity stake or convertible debt.
  • These people can be of great assistance in providing funding when a business has just started, and it does not yet have a sufficient product concept to attract the attention of venture capital firms.
  • They also do not usually require much control over the business, and so may not demand a board seat.
  • Angel investors differ significantly from venture capital firms, which typically invest other people’s money, invest at a somewhat later stage of corporate development, invest more money, and take a more active role in the daily affairs of their investors.

An account balance is the amount of money present in a financial repository during the current accounting period. It is the net difference between the credits and debits posted in any given accounting cycle, added to the balance carried forward from the previous month. Account balance typically represents the difference between total assets and total liabilities. The Types of Account Balance include Credit Cards and Checking Accounts

Explanation :

An account balance represents the available funds, or current account value, of a particular financial account, such as a checking, savings, or investment account. Financial institutions make available the current value of account balances on paper statements as well as through online resources. Account balances in investments holding risky assets may change considerably throughout the day.

In a nutshell :

  • An account balance is a statement that shows the total money available at the start of the accounting period.
  • It is the net difference between the credits and debits posted in any given accounting cycle, added to the balance carried forward from the previous month.
  • Account balance typically represents the difference between total assets and total liabilities.
  • Types of Account Balance include Credit Cards and Checking Accounts
  • An asset is a resource with economic value that a person, company, or country owns with the anticipation of future benefits.
  • An asset is anything that increases a company’s value or benefits its operations and is reported on a firm’s balance sheet.
  • If it is manufacturing equipment or a patent, an asset is something that will generate cash flow, reduce expenses, or improve sales in the future.

Explanation :

Assets represent the company’s economic resources or represent access to other persons or firms who do not have them. The right or other access is legally valid, which means that economic resources can be used at the discretion of the company, and their use may be restricted by the owner

 

For the asset to exist, the company must have its right from the date of the financial statements. An economic resource is rare and capable of generating economic benefits by generating revenue or reducing inflation.

 

Assets can be widely classified into current assets, fixed assets, contingent  (potential) assets, tangible and intangible assets.

Asset Turnover Ratio

Asset turnover ratios are used to measure how effectively a company uses its assets to generate revenue. As an indicator of how well a company is using its assets to generate revenue, asset turnover ratios are a useful metric.
An asset turnover ratio higher than 1.0 indicates a company is more efficient at creating revenue from its assets, while a low asset turnover ratio indicates the company is not generating sales from its assets efficiently.
Formula: net sales / Average total sales  Or Revenue / Assets

In a Nutshell :

  • This measure measures how effectively companies use their assets to make sales.
  • It helps investors determine how effective companies are at managing their assets.
  • A company’s asset turnover ratio can be affected by both large asset sales and large asset purchases in a given year.
  • This ratio is used by investors as a measure of similar companies within a category.

Types of assets 

  • Current Asset
A company’s current assets are those assets that are expected to become readily available for sale, consumption, use, or exhaustion through standard business operations within a year.
The current assets appear in a company’s balance sheet, one of the annual financial statements that have to be completed. Current assets are also known as liquid assets.
The list of liquid assets includes Cash, Cash Equivalents, Stock or Inventory, Receivables, Marketable Securities, Prepaid Expenses, and Other Liquid Assets.

 

Explanation
Compared with current assets, long-term assets represent assets that can’t be easily converted into cash within a year. These include equipment, buildings, land, vehicles, etc.
Current Assets are important to businesses because they can be used to fund day-to-day operations and to keep the business running smoothly. Liquid assets are defined as all assets and resources that can be converted into cash quickly, so the term also represents the company’s current assets.

 

In a nutshell
      • All the assets that the company plans to sell or use in the coming year in order to carry out its regular business operations are considered its current assets.
      • Current Assets are important to businesses because they can be used to fund day-to-day operations and to keep the business running smoothly.
      • Liquid assets include Cash, Cash Equivalents, Stock or Inventory, Receivables, Marketable Securities, Prepaid Expenses, and Other Liquid Assets.
  •  Fixed Asset
Fixed assets are long-term assets, which means that the assets have a useful life of more than one year. Fixed assets are long-term assets that companies have purchased and are utilizing in their production processes. The list of fixed assets includes Buildings, Computer Equipment, Land, Furniture & Fixtures, Machinery, etc.
They can’t be converted into cash easily and can’t be readily sold or consumed by a company. Instead, they’re used by the company to produce goods and services. To reduce the recorded cost of tangible assets, depreciation is applied to fixed assets over time.
All Fixed Assets are depreciated except for Land. The land is the only asset that is not depreciated since it is considered to have an indefinite useful life. This makes land unique among all asset types since it is the only asset type that cannot be depreciated.

 

In a Nutshell
      • Fixed assets are long-term assets, which means that the assets have a useful life of more than one year.
      • The list of fixed assets includes Buildings, Computer Equipment, Land, Furniture & Fixtures, Machinery, etc.
      • Fixed assets are long-term assets that companies have purchased and are utilizing in their production processes.
      • The land is the only asset that is not depreciated since it is considered to have an indefinite useful life.
  •  Contingent Asset
A contingent asset is a potential benefit, which is largely dependent on circumstances beyond the company’s control. Hence, contingent assets are also known as potential assets. Gains that cannot be determined, or whose exact value cannot be determined, cannot be recorded on a balance sheet.

 

Explanation
When the realization of cash flows associated with a contingent asset becomes reasonably certain, the asset is transferred to the balance sheet. When this occurs, the asset is recognized in that period. An asset’s establishment is influenced by various factors, including a lack of knowledge about the asset’s economic value, or by an uncertain outcome of an event. Assets that are contingent on past events may appear, but details will not be collected until future events occur. Contingent liabilities refer to possible losses that could arise depending on a future event.
Example : Lawsuit, Product Warranty,  Pending Investigation or Pending Cases.

 

In a nutshell
      • A contingent asset is a potential benefit, which is largely dependent on circumstances beyond the company’s control.
      • Contingent assets are also known as potential assets
      • Gains that cannot be determined, or whose exact value cannot be determined, cannot be recorded on a balance sheet.
      • Assets that are contingent on past events may appear, but details will not be collected until future events occur.
  •  Tangible Asset
It is an asset that has a physical form as well as for which a monetary value is fixed. Tangible assets can be converted into a monetary value by trading in various markets, though their liquidity may differ. The list of tangible assets that are also known as physical assets include cash, inventory, vehicles, equipment, buildings, and investments.

 

Explanation
Companies maintain their balance sheets in part due to the role that assets play in their net worth and core operations. An asset management program can be a key component of maintaining a comprehensive balance sheet.In order for the balance sheet to be accurate, assets must equal liabilities in the simple equation assets – liabilities = shareholders’ equity.
These are the most common types of assets in most industries. They are easy to understand and are often easier to value since they have a discrete value and usually a physical form.

 

In a nutshell
      • It is an asset that has a physical form as well as for which a monetary value is fixed.
      • This is because tangible assets are usually the main type of assets in most industries.
      • The list of tangible assets that are also known as physical assets include cash, inventory, vehicles, equipment, buildings, and investments.

 

  • Intangibles Assets
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched, or physically measured, and are created through time and effort, and are identifiable as a separate asset. It’s having a useful life greater than one year. The list of Intangible Assets include Trademarks, Copyright, patents and Goodwill

 

Explanation
Intangible assets are an important source of strong competitive advantage for business and central to creating customer value, as well as shareholder/stakeholder value. … a business  reputation, often measured by goodwill and brand recognition, is crucial for promoting sales, building trust, and increasing customer loyalty. These assets are generally recognized as part of an acquisition, where the acquirer is allowed to assign some portion of the purchase price to acquired intangible assets

 

In a nutshell
      • It is an asset that cannot be seen, touched, or physically measured and identified as a separate asset.
      • It’s having a useful life greater than one year
      • The list of Intangible Assets include Trademarks, copyright, patents and Goodwill.

Amortization is a process by which the book value of a loan or an intangible asset is periodically reduced over a fixed period of time. For loans, amortization implies spreading out loan payments over some period of time. The depreciation of an asset has some similarities to amortization.

Explanation :

An amortization schedule is used to reduce the current balance on a loan. On the other hand, amortization refers to paying off debt over time with regular principal and interest payments.

 

Intangible assets may be amortized by spreading capital expenditures over a specific period of time, of which the useful life of the asset is usually the duration.A few examples of intangible assets are patents, company names, copyrights. </

 

Amortization is important because it makes it easier to understand and forecast one’s business and investment costs. Loan repayments schedules show the distribution of interest vs principal payments, which provides clarity into these terms.

 

Purposes such as outputting the interest payments and calculating for tax purposes should be noted. An intangible asset that is amortized can significantly reduce the amount of tax a company would owe. This means investors can better estimate how accurate a company’s financial statements are going to be, which is helpful for them.

 

Automated amortization functions are available in many accounting and spreadsheet software packages.

Amortization vs Depreciation

Amortization and depreciation are similar concepts, but they refer to different types of assets. Amortization is for intangible assets, while depreciation refers to tangible ones. The main difference between them is that amortization will be paid out evenly over the asset’s lifetime – every year you will pay 1/N of its cost – whereas with depreciation the payments aren’t distributed. Tangible assets are physical things like equipment, factories, inventory, and other pieces of physical property. Intangible assets refer to patents, company names, and even copyrights.

In a nutshell :

  • Amortization is the accounting of debt and is typically used for business loans and intangible assets. It can be accounted for either on an accrual basis or through debt-equity accounting.
  • To link the asset’s cost to its revenue, intangible assets are amortized from time to time.
  • Amortization schedules are forecasts for the repayment of loans over specific time periods. They are often used by financiers.

As the name implies, management costs are the normal costs you incur to run your business. Expenses that fall into the category of administration are those incurred by an organization that does not relate directly to a specific core function, such as manufacturing, production, or sales. 

Explanation:

The administrative expenses of the company consist of payroll expenses for senior executives and expenses associated with supplies or services, such as legal, accounting, and clerical work. Typically, these costs are not included in gross margins because they are indirect in relation to the production of goods or services by the organization.

 

There are some administrative expenses that are fixed in nature because they are incurred as part of the foundation of business operations. These expenses would continue to exist regardless of production levels or sales levels. Maintenance costs can also be described as semi-variable costs.

 

In the same year in which they occur, businesses can deduct from their administrative costs tax refunds that are reasonable, normal, and necessary for their business activities. These expenses must be incurred during normal business hours.

In a nutshell:

  • Costs incurred for business operations but not directly associated with producing products or services are called administrative expenses.
  • Accounting departments may allocate administrative expenses according to a percentage of revenue, expenses, or some other factor.
  • It is common for budget reductions to start with administrative expenses due to their intangibility.
  • A certain level of administrative expenses is inevitable as part of conducting business.

Terminal value is the sum of all cash flows from an investment or project beyond a forecast period based on a specified rate of return. In other words, it’s the estimated value of an asset at maturity adjusted for interest rates and cash flows in today’s dollars. This is important for the calculation of the expected future cash flows using the dividend cash flow valuation model.

Explanation :

The TV determines the value of a project at some future date when exact future cash flows cannot be estimated. Although there are various ways to calculate the terminal value, the most popular approach is the Gordon Growth Model. The GGM assumes that a company will continue to generate a stable growth forever and values a project in perpetuity. The model also assumes that the cash flows of the last projected year are stable and discounts them at weighted average cost of capital  to find the present value of the expected future cash flows.

 

To calculate this ratio using the GGM, we need to know:

  • FCFF = free cash flow in the final year
  • g = perpetuity growth
  • WACC = discount rate

Therefore, the terminal value formula is calculated like this

TV = FCFF x ( 1 + g ) / ( WACC – g )

In a nutshell :

  • Terminal value (TV) determines a company’s value into perpetuity beyond a set forecast period—usually five years.
  • Analysts use the discounted cash flow model (DCF) to calculate the total value of a business. The forecast period and terminal value are both integral components of DCF.
  • The two most common methods for calculating terminal value are perpetual growth (Gordon Growth Model) and exit multiple.

A trial balance is a list of all general ledger accounts and their balances at a point in time. In essence, it’s a summary of all of the t-account balances in the ledger.

Explanation :

Like a balance sheet, it shows the snapshot of the accounting records on a specific date. A trial balance usually consists of three columns with the account names listed in the first column and the account balances shown as debits and credits in separate columns. The total debits and credits are then summed at the bottom of the report. Since double entry accounting requires that the debits and credits balance, the trial balance debits must always equal the credits. This is a good double check when you are preparing a trial balance. If your debits don’t equal your credits, you probably don’t have all of the accounts listed or there is an error in one of the balances.

In a nutshell :

  • A trial balance is a worksheet with two columns, one for debits and one for credits, that ensures a company’s bookkeeping is mathematically correct. 
  • The debits and credits include all business transactions for a company over a certain period, including the sum of such accounts as assets, expenses, liabilities, and revenues. 
  • Debits and credits of a trial balance being equal ensure there are no mathematical errors, but there could still be mistakes or errors in the accounting systems.

An accounting transaction, also called a business event, is any exchange of economic consideration that can be reasonably measured and affects the firm’s financial position. In other words, transactions are events that change the accounting equation during a period. If assets, liabilities, or equity are changed or affected, chances are there is a transaction of some kind.

Explanation :

Any business event that can’t be measured is not considered a transaction because we don’t record events based on pure estimates. Some type of substantial measurability needs to exist in order to consider it a transaction. For example, natural disasters that destroy large amounts of equipment and adjustments to the fair value of some assets are recorded as transactions because they can be reasonably measured and affect the accounting equation. Signing of business contracts, on the other hand, don’t change the accounting equation, so they are not usually recorded as a transaction.

In a nutshell :

  • A transaction involves a monetary exchange for a good or service.
  • Accrual accounting recognizes a transaction immediately after it is finalized, regardless of when payment is received or made.
  • By contrast, cash accounting, used mostly by smaller businesses, records a transaction only when money is received or paid out.

The meaning of this term varies slightly depending on the content. For example, when using it to define production costs, it measures the total fixed, variable, and overhead expenses associated with producing a good. 

Explanation :

This is a fundamental concept for business owners and executives because it allows them to track the combined costs of their operations. It allows the individuals to make pricing and revenue decisions based on whether total costs are increasing or decreasing. Furthermore, interested individuals can dig into the total cost numbers to separate them into fixed costs and variable costs, and adjust operations accordingly to lower overall costs of production. Management also uses this idea when contemplating capital expenditures. Investors, however, use this concept differently by looking at the funds needed to purchase an

In a nutshell :

Total fixed costs are the sum of all consistent, non-variable expenses a company must pay.

The Tax Reform Act of 1986 is a tax law approved by Congress in 1986 that performed several changes to the previous tax legislation. It was intended to stimulate economic development within the country by relieving tax burdens from individuals.

Explanation :

This tax reform was pushed by Ronald Reagan’s administration and some congressmen to simplify a previously highly-complex tax system. This newly introduced reform reduced the income tax top rate from 50% to 28% and increased the bottom tax rate from 11% to 15%. It also simplified the way taxes were calculated, to avoid the exploitation of the previous more complex legislation. It eliminated tax shelters and loopholes that unfairly reduced the tax bill of many businesses and wealthy individuals. On the other hand, owning a home became more attractive since the deduction on interest paid through mortgages was increased. Finally, among some other major changes, a new depreciation system was imposed on companies. It was called the Modified Accelerated Cost Recovery System (MACRS), and it established a useful life period for the various types of assets. Many other changes were made to previous tax laws through this reform, which was also known as the Second Reagan Tax Cut.

 

In a nutshell :

  • The Tax Reform Act of 1986 was a comprehensive tax reform legislation that was passed into law by President Ronald Reagan.
  • The law effectively lowered the top marginal tax bracket income tax rates while eliminating several loopholes.
  • The 1986 reform was followed up by subsequent bills in 1993 and later.