A bear market is a period of at least two months of declining stock prices that leads to a falling total stock market value. In this depressed market, the major indexes such as the S&P 500 and the Dow Jones Industrial Average decline by at least 15 percent.

Explanation:

This type of market is the result of declining investor confidence. As investors do not trust the market, they massively sell their securities, thereby causing multiple losses in the major indexes. As the losses grow bigger, investor confidence declines further until the stock market crashes. A bearish market usually follows an economic recession with high inflation  that slows down economic growth further. The unemployment rate is high, and consumer spending is low as consumers do not have the disposable income to buy basic goods.

In a nutshell :

  • Bear markets occur when prices in a market decline by more than 20%, often accompanied by negative investor sentiment and declining economic prospects.
  • Bear markets can be cyclical or longer-term. The former lasts for several weeks or a couple of months and the latter can last for several years or even decades.
  • Short selling, put options, and inverse ETFs are some of the ways in which investors can make money during a bear market as prices fall.

A budget deficit is a financial loss during a period where expenses exceed revenues. This concept is often used in business but more commonly used to refer to governmental spending in excess of revenues collected.

Explanation:

A deficit is a state of financial health that affects a large variety of businesses, organizations, and governments. These organizations include a wide specter of professionals that all must monitor their budgets: accountants, business owners, financial professionals, governmental figures, and many more. One of the most famous budget deficits is that of the United States government, but the most common is by ordinary businesses that are mismanaged or poorly executed.

In a nutshell:

  • A deficit occurs when expenses exceed revenues, imports exceed exports, or liabilities exceed assets in a particular year.
  • Governments and businesses sometimes run deficits deliberately, to stimulate an economy during a recession or to foster future growth.
  • The two major types of deficits incurred by nations are budget deficits and trade deficits.

A bull market is when the financial markets experience rising stock prices for an extended period of time. Usually, in a bull market, stock prices rise by at least 15 percent, while 80 percent of all stock prices are on a rising spike.

Explanation:

The sustained increase in the market prices is the result of increased investor confidence. As investors trust the market, they massively buy more shares, thereby trusting the financial markets with their money. As the gains grow higher, investor confidence rises as well. Investor expectations about the economy also affect the stock market. If investors trust their government, they invest their money in the stock market, causing the stock prices to rise. Furthermore, investors actively participate in a bull market by seeking to take advantage of market opportunities and earn a higher return relative to the risk they have accepted.

Example:

The characteristics of this aggressive and optimistic market vary at any given time period, but, overall a bull market occurs as a result of rising investor confidence. Investor sentiment plays a fundamental role in how investors perceive the economy and the market and what prospects they have. Rising investor confidence leads to gains in the major indexes, including the S&P 500, and the Dow Jones Industrial Average, causing a momentum in the market.

In a nutshell:

  • A bull market is a period of time in financial markets when the price of an asset or security rises continuously.
  • The commonly accepted definition of a bull market is when stock prices rise by 20% after two declines of 20% each.
  • Traders employ a variety of strategies, such as increased buy and hold and retracement, to profit off bull markets.

A business cycle, also called economic cycle, is a period of changing economic activity consisting of expansions and contractions as measured by real GDP. In other words, it’s a period of time where the economy grows, peaks, shrinks, and bottoms out. Then the cycle repeats itself.

Explanation:

 

 A standard cycle has four main phases: expansion, peak, recession , and trough. As consumer confidence starts to build, the economy experiences an expansion. Employment, sales, production, income, and other economic indicators increase. Then some type of economic event happens and indicators start to lag. This is the peak. Consumers typically become concerned about their finances and start saving more money and spending less, creating a recession. The same indicators that increased in the expansion now start to decrease. This continues until it hits rock bottom and rebounds. You can think of this like a wave of economic activity. The wave comes in, peaks, and descends until the next one comes in.

In a nutshell:

  • Business cycles consist of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales.
  • The alternating phases of the business cycle are expansions and contractions (also called recessions). Recessions start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.
  • The severity of a recession is measured by the three D’s: depth, diffusion, and duration, and the strength of an expansion by how pronounced, pervasive and persistent it is.

A business is an organization or entity that sells goods or services for a profit. The important part of this definition is that a business is something that operates in order to make a profit. Not all businesses actually are successful enough to make a profit, but their main purpose is to generate profits.

Explanation:

The term business can take on two different meanings. The first refers to an entity that operates for commercial, industrial, or professional reasons. The entity generally begins with a concept (the idea) and a name. Extensive market research  may be required to determine how feasible it is to turn the idea into a business. Businesses often require business plans  before operations begin. A business plan is a formal document that outlines the company’s goals and objectives. It also lists the strategies and ways it plans to achieve these goals and objectives to succeed. Business plans are almost always essential when you want to borrow capital in order to begin operations.

Example:

A sole proprietorship is a business organization, or lack thereof, where the business owner and the business itself is one entity. For example, if you made some lemonade and sold it at the end of your road, you would be considered a sole proprietorship. No legal documents need to be created for failure to start a sole prop. It starts as soon as you start your business. The main disadvantage of a sole prop is that the owner is not protected with limited liability.

In a nutshell:

 

  • A business is defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities.
  • Businesses can be for-profit entities or non-profit organizations.
  • Business types range from limited liability companies, sole proprietorships, corporations, and partnerships.
  • There are businesses that run as small operations in a single industry while others are large operations that spread across many industries around the world.
  • Apple and Walmart are two examples of well-known, successful businesses.

Balance of Trade (BOT) is the difference in the value of all exports and imports of a particular nation over a period of time. A positive or favorable trade balance occurs when exports exceed imports. A negative or unfavorable balance occurs when the opposite happens. Simply put, if a country exports more than what it imports, for a given period of time, it has a positive BOT.

Explanation:

BOT is most often the largest component of a country’s current account or Balance of Payment (BOP) and is a crucial reflection of a country’s business scenario. Moreover, the BOP data also highlights key inferences from the past performances, which help create better strategies for the future. The components contributing heavily to exports/imports can be readily identified and improved upon.

In a nutshell:

  • Balance of trade (BOT) is the difference between the value of a country’s imports and exports for a given period and is the largest component of a country’s balance of payments (BOP).
  • A country that imports more goods and services than it exports in terms of value has a trade deficit while a country that exports more goods and services than it imports has a trade surplus.
  • In 2019, Germany had the largest trade surplus followed by Japan and China while the United States had the largest trade deficit, even with the ongoing trade war with China, beating out the United Kingdom and Brazil.

Backward integration is a method of vertical integration that extends to the previous levels of the supply chain, aiming to protect the quality of a product or a service by gaining control over the raw materials. In other words, it’s when a company purchases a supplier in or a supplier’s rights to materials in an effort to control its supply chain.

Explanation:

Backward integration takes place when a firm enters a merger with a supplier to take advantage of specialized resources and protect the quality of the goods and services produced. Firms participate in backwards integration to protect the supply of raw materials, thereby creating a competitive advantage. Usually, this type of integration creates barriers to entry for the competitors that wish to enter a sector or an industry because the firm controls the scarce resources and the raw materials Furthermore, it creates economies of scale as, due to the merger, the new firm lowers the repair costs as well as the suppliers’ expenses. The only shortcoming that needs attention is that this may also lead to increased monopoly power.

Example:

Company ABC is a manufacturer of frozen food and seeks to acquire one of their suppliers who owns a poultry processing plant. By acquiring the poultry processing plant, the company will be able to control the cost of production, the quality of raw materials, and the quality of the produced food. Furthermore, the company will be able to differentiate its products from its competitors as by assuming control over the supplier it will hinder competitive companies from buying supplies from the poultry processing plant. In doing so, the company will control the scarce resources and the raw materials, but also its costs due to the economies of scale.

In a nutshell:

  • Backward integration is when a company expands its role to fulfill tasks formerly completed by businesses up the supply chain.
  • Backward integration often involves buying or merging with another company that supplies its products.
  • Companies pursue backward integration when it is expected to result in improved efficiency and cost savings.
  • Backward integration can be capital intensive, meaning it often requires large sums of money to purchase part of the supply chain.

Back-orders are customer orders not fulfilled because of inventory shortages. In general, a backorder is the list or group of orders that remain unsatisfied until the organization is ready to deliver them.

Explanation:

Every company has limited resources to perform its activities. Under this framework, it is possible to receive customer orders that exceed existing capacity in some periods. This situation can result from either inadequate inventory management or an outstanding demand. Although the company might see this situation like a healthy signal of commercial success, it implies risks.

Example:

Carty Inc. is a firm that manufactures and markets Carty, a brand of women’s shoes. At Christmas time, many women tend to purchase additional shoes. They want to buy new shoes for themselves but also for their friends and relatives. From January to November, Carty Inc receives an average of 1,500 pairs of shoes ordered per month. But in December, the number can go as far as 3,000 pairs. Since the productive capacity is only 2,500 pairs per month, the company used to have severe conflicts to satisfy demand at Christmas season. Many customers were unhappy and tried other brands. In order to solve this issue, the firm decided to produce in advance part of the expected demand for December. The most popular items are now over-produced and stocked during September, October and November. In this way, the firm now can fulfill around 95% of the required items in December thanks to a successful backorder management strategy.

In a nutshell:

  • A backorder is an order for a good or service that cannot be filled immediately because of a lack of available supply. 
  • Backorders give insight into a company’s inventory management. A manageable backorder with a short turnaround is a net positive, but a large backorder with longer wait times can be problematic.
  • Companies with manageable backorders tend to have high demand, while those that can’t keep up may lose customers.

Backflush costing is an accounting system that waits until all of the production processes are completed before recording any direct material usages. In other words, as raw materials and work-in-process inventory are used during the production process, no journal entries are created to record these expenditures. Instead, one main journal entry is used at the end of the production process to record all of the inventory that was used during the manufacturing process.

Explanation : 

Since journal entries were not made as inventory was used, accountants must use standard or normal costing to work backward to assign costs to finished goods. In this sense, the costs associated with producing the products are “flushed back” in the cycle after the fact and assigned to the proper goods and categories.

This costing system is particularly useful for more complex products that require many different stages of manufacturing. Normally, each stage of manufacturing would require a separate journal entry to keep track of costs throughout the production process. This can add up to hundreds of entries for a single product. Now imagine if the company produces a couple hundred products. It adds up to a ton of bookkeeping that is somewhat unnecessary.

Example :

Backflush costing shouldn’t be used for products that take a long time to produce. As more time goes by, it becomes more difficult to assign costs accurately. Think about it this way. You can easily look back at the cycle and assign costs to a product that was produced in one day, but a product that was made over the course of a year might be more difficult. Also, custom orders typically don’t use this system as management would have to create a separate bill for each set of materials used. This costing system is best used for processes with short production times that utilize just in time inventory systems.

In a nutshell:

  • Backflush costing is used by companies who generally have short production cycles, commoditized products, and a low or constant inventory.
  • Backflush costing is an accounting method designed to record costs under specific conditions. 
  • Backflush accounting is another name for backflush costing. 
  • Backflush costing can be difficult to do and not every company meets the criteria to conduct backflush costing.

A balance sheet is one of four basic accounting financial statements  The other three being the income statement, state of owner’s equity, and statement of cash flows.

Explanation: 

The balance sheet uses the accounting equation (assets = liabilities  + owner’s equity) to show a financial picture of the business on a specific day. In other words, a balance sheet lists all of the assets that a company owns as well as the debts owed by the company and the owner’s interest or ownership share in the company.

In a nutshell: 

  • It’s a snapshot of all the assets, liabilities, and equity that the company owns on that specific day.
  •  It’s like a photo taken on that day in the life of the company. 
  • The balance sheet changes everyday that new transactions are posted, so every day’s picture will be a little different.
  • Just like looking through an old family photo book, looking at old balance sheets gives you a history of what the company looked like back on those dates.