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Investment banking indicates a special section of banking that offers financial advice to institutional investors, seeking to assist them with raising capital.

Explanation :

 

Investment banking is a separate section of banking that deals with capital creation for institutional investors, including large corporations and governments. Large investment banks such as Citigroup, Goldman Sachs or Morgan Stanley, to name a few, offer a wide range of financial services pertaining to mergers and acquisitions, debt restructuring, proprietary trading, leveraged finance, and so on. In addition, investment banks maintain a large share of the underwriting of initial public offerings  (IPOs) and new debt as well as in the placement of new stocks.

In a nutshell :

 

• Investment banking deals primarily with the creation of capital for other companies, governments, and other entities.
• Investment banking activities include underwriting new debt and equity securities for all types of corporations, aiding in the sale of securities, and helping to facilitate mergers and acquisitions, reorganizations, and broker trades for both institutions and private investors.
• Investment bankers help corporations, governments, and other groups plan and manage the financial aspects of large projects

An incremental cost or differential cost is a business planning analysis that looks at the additional cost to the company if a particular action is taken. In other words, if a company decides to take action on a new project, what extra expenses will the new project create?

Explanation :

Manufacturers look at incremental costs when deciding to produce another product. Oftentimes new products can use the same assembly lines and raw materials as currently produced products. Unfortunately, most of the time when manufacturers take on new product lines there are additional costs to manufacture these products. Management must look at these incremental costs and compare them to the additional revenue before it decides to start producing the new product.

In a nutshell :

 

• Incremental cost is the amount of money it would cost a company to make an additional unit of product.
• Companies can use incremental cost analysis to help determine the profitability of their business segments.
• A company can lose money if incremental cost exceeds incremental revenue.

Income approach is a valuation method used for real estate appraisals that is calculated by dividing the capitalization rate by the net operating income of the rental payments. Investors use this calculation to value properties based on their profitability.

Explanation :

 

Being one of the most widely implemented valuation methods, the income approach analyzes the expected economic benefits that investors anticipate from a real estate investment. The method discounts the property’s expected cash flows in their present value  using the capitalization rate of the property.

The capitalization rate represents the risk of investment and is calculated based on a property’s Interest before Depreciation, Interest, and Taxes (IBDIT) considering the current interest rate  on the property’s mortgages, the equity investment in the property, and a risk factor to reflect the real estate investment risks.

In a nutshell :

• The income approach is a real estate valuation method that uses the income the property generates to estimate fair value.
• It’s calculated by dividing the net operating income by the capitalization rate. A buyer should pay special attention to the condition of the property, operating efficiency, and vacancy when using the income approach. 

An imputed cost, also known as a hidden or implicit cost, is the price of production factors  that a firm owns and utilizes. It is called “imputed” because the firm does not report it on its financial statements as a separate cost.

Explanation :

 

Although implicit costs  do not require financial expenditure, it is a cost of production. If the factors of production were not used to produce a particular good, they could be used for other productive activities, thereby generating additional income for the firm. Put simply imputed costs are the opportunity costs that the firm gives up when using its resources. For instance, if a company uses its own buildings for production, it loses the income from renting it or selling to a third party. As this is not a financial expenditure, the firm does not report it on its financial statements.

In a nutshell :

• Imputed costs are those incurred when using an asset as opposed to investing it or the costs arising from following one particular action and foregoing another.
• Imputed costs are hidden costs as they are not explicit and, therefore, do not appear on financial statements. This means that there is no cash outlay for an imputed cost. An imputed cost is also known as an “implicit cost”, an “implied cost”, or an “opportunity cost.”

An imprest system is a method to account for petty cash by maintaining a balance in a fund that equals petty cash receipts plus additional cash in the fund.

Explanation :

 

Most companies set up a special fund called a petty cash fund for small purchases and office expenditures. The petty cash fund is exactly like it sounds. It is a petty amount of cash– maybe only $50 to $100. Companies use these funds to buy small items like office supplies and postage instead of going through the hassle of writing a check for every book of stamps. An imprest system is used to run and manage a petty cash fund.

In a nutshell :

 

• Imprest refers to a type of cash account maintained by a company used to pay for small incidental or routine expenses.
• A fixed account balance is established in the imprest account and refunded as needed when money is withdrawn for items like payroll, travel, or petty cash.
• Because of its small and fixed nature that is easily monitored, imprest discourages unauthorized or lavish expenses.

Import represents the bringing of foreign goods or services in another country, where the products will be processed, used, sold or exported.

Explanation :

Imports, along with exports, are a key element in a country’s balance of trade as the lower the value of imports, the more positive the balance of trade in an economy. Countries that have high import levels face a trade deficit, and they need to increase their reserves to pay for the imported goods.

Furthermore, there are countries, mostly in the under-developed or the developing economies, which rely on imports of basic commodities, such as oil and industrial materials. Generally, countries tend to import goods or services that they cannot produce at the same low cost or with the same efficiency that other countries can.

In a nutshell :

• An import is a product or service produced abroad and purchased in your home country.
• Imported goods or services are attractive when domestic industries cannot produce similar goods and services cheaply or efficiently.
• Free trade agreements and tariff schedules often dictate which goods and materials are less expensive to import.

An implied contract is a legal agreement that informally arises from the relationship between the parties involved. It is deduced by the actions and intentions involved in the situation.

Explanation :

 

Implied contracts emerge from the dynamics of a relationship. The parties normally assume the contract exists and they submit themselves to it without having a written or oral understanding. These contracts are normally caused by a recurring situation or an expected result. The fact that a situation repeats itself many times may give birth to an implied contract. If one of the parties refuses at some point to deliver its part of the agreement there is a legal basis to argue that a contract existed, even if it was not explicitly drawn. These types of contracts can be applied to both individual and business situations. The most common place we can find these implied contracts is in business-to-customer relationships.

Normally a customer will pay for a service and to some extent, the contract between the parties is implied. The payment triggers the obligation for the business side to deliver a particular good or service but sometimes there’s no written document or verbal agreement about it. It is just a situation where the agreement is deduced by both parties because of the interactions involved.

An implicit cost is an opportunity cost of using a firm’s internal resources that isn’t reported as a separate, distinct expense. In fact, these costs do not explicitly state the cost of using these resources for a project.

Explanation :

 

Implicit costs are costs on which the firm waives any opportunity of earning a profit from the use of its internal resources by third parties, such as the rent that a firm would earn if it leased out a building that it owns instead of using it for its own operations. They are also costs that the firm cannot account for, such as the depreciation of equipment or the cost of hiring an employee. For this reason, they are not recorded on any financial statement. These costs are generally hard to quantify since there is no physical exchange of cash or transaction directly related to them; however, some businesses single out these as costs of potential sources of income.

In a nutshell :

• An implicit cost is a cost that exists without the exchange of cash and is not recorded for accounting purposes.
• Implicit costs represent the loss of income but do not represent a loss of profit.
• These costs are in contrast to explicit costs, which represent money exchanged or the use of tangible resources by a company.
• Examples of implicit costs include a small business owner who may forgo a salary in the early stages of operations to increase revenue.

An impairment, in accounting, is a loss of value of an intangible asset like a copyright or patent that should be reflected on future financial statements in the form of an impairment loss.

Explanation :

 

Most intangible assets like goodwill or patents are amortized over their estimated useful lives. Most of the time an intangible asset’s useful life is defined legally, but not always. Some patents legally expire after 20 years. These patents would obviously be amortized over 20 years. Other intangible assets like copyrights are good for the lifetime of the author plus 70 years. These copyrights would be amortized over a much longer period of time.

In a nutshell :

 

• Impairment can occur as the result of an unusual or one-time event, such as a change in legal or economic conditions, a change in consumer demand, or damage that impacts an asset.
• Assets should be tested for impairment regularly to prevent overstatement on the balance sheet.
• Impairment exists when an asset’s fair value is less than its carrying value on the balance sheet.
• If impairment is confirmed as a result of testing, an impairment loss should be recorded.
• An impairment loss records an expense in the current period that appears on the income statement and simultaneously reduces the value of the impaired asset on the balance sheet.