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What is Off-Balance-Sheet-Financing?
A company might use this maneuver in order to keep their debt to equity levels in check. The most frequently used types of off-balance-sheet-financing are joint ventures, research and development partnerships, and operating leases. Continue reading...
What is a Balance Sheet?
A company's balance sheet gives a picture of how all the assets, liabilities, and equities of the company "balance out." The basic accounting equation is Total Assets = Total Liabilities + Equity, and a Balance Sheet is going to detail these parts to show how everything adds up at the time of the report. With things equal on both sides of the equation, the company's books are balanced, the same way someone might go back through the carbon copies of checks they've written and "balance the checkbook" to make sure all checks written have been accounted for. Continue reading...
What is Retained Earnings?
A company may reinvest earnings instead of paying out dividends. These earnings do not necessarily sit in a retained earnings account, but are used to improve the business and make it more profitable. This could even include paying off debt. Retained earnings is found in the Shareholder’s Equity portion of a company’s balance sheet. Despite the fact that earnings have not been dispensed to them in the form of dividends or share buybacks, shareholders will see the value of their stock appreciate when earnings are retained and used to grow the business. Continue reading...
What is Liability?
As a general statement, a liability refers to some form of currency (money or service) that is owed from one party to another, typically in the form of debt or a balance outstanding. On a balance sheet, a company’s liabilities would include its loans, accounts payable, outstanding debt. Short-term liabilities are generally those owed within a year, whereas long-term liabilities might stretch beyond that. Continue reading...
What are Current Assets?
Current Assets are items on a balance sheet that are either cash or are going to be cash in the near future. The current assets section of a balance sheet is an indication of cash flows and liquidity. The assets are usually listed in order of liquidity, or the amount of time that it will take for them to become cash. This section includes cash, accounts receivable, prepaid expenses, inventory, supplies, and temporary investments. (The order given here is not necessarily the order of liquidity found on a balance sheet.) Continue reading...
What are Accounts Payable?
On a balance sheet, Accounts Payable is a section under ‘Liabilities’ that details the obligations the company has to pay off short-term debts. Goods and services rendered to a company by suppliers, banks, utilities, and so forth will need to be paid for in the short term, and these bills are accounted for in the Accounts Payable. In a Company's Balance Sheet, the Payables will appear in the Current Liabilities section, and these tend to have cycles of 30-90 days in which they should be paid. Continue reading...
What Does Debt Mean?
Debt is money owed from one party or parties to another, plain and simple. Whether it’s money borrowed, loaned, credit, or a good sold for which payment has yet to be received, debt lives on just about every company and government’s balance sheet. Debt has a negative connotation generally, but it is not always a bad thing - in fact, having certain type of debt is good! Especially if the corporation or person borrows money at an attractive interest rate in order to invest in an asset that they expect to generate a higher return. In order to maintain a good credit standing, it is imperative that a borrower make interest payments on time and never default on debt. Continue reading...
What Does Asset Mean?
Any item of economic value that a person or entity owns, benefits from, or has use of in generating income. Assets can generally be converted to cash, but economic circumstances often determine whether the asset can be sold at fair value. Some common examples of assets are cash, stocks, paid-for real estate, inventory, office equipment, jewelry, artwork, or other property of value that can be counted towards a person’s estate or a corporation’s balance sheet. Continue reading...
What is Long-Term Debt?
Long-term debt refers to the duration of a liability/amount owed, and to qualify it must be due at least 12 months out. The period is in reference to 12+ months from the date of the balance sheet. A company will typically take on long-term debt in the form of a mortgage for property owned, or as capital for growth raised through bond sales or other debentures. Continue reading...
What is an Adjunct Account?
An adjunct account increases the valuation of a liability account. An adjunct account is commonly used when accounting for a bond issue sold at a premium. The par value of the bonds sold is included in one line as a credit to Bonds Payable, and the increased premium in placed in another line as a credit to Premium on Bonds payable. The technical term for the account into which a discounted bond’s discount is placed is a Contra Account. Continue reading...
How Many Dollars do We Have in Circulation?
According to the Federal Reserve, there are over 1.7 trillion U.S. Dollars in circulation. This number has been drastically increasing throughout the last few years, mostly due to programs such as Quantitative Easing. As of 2016, QE programs have ended and the Fed's balance sheet is shrinking, but M2 money supply still remains at elevated levels. What is the Size of our National Debt? What is Currency in Circulation? Continue reading...
What are foreign deposits?
Foreign deposits are taken in by international branch locations of US-based banking institutions. Banks are not obligated to pay FDIC premiums on these deposits. Foreign deposits are placed by customers into a US-based bank branch which is located in international locations. Because it is outside of Federal jurisdiction, banks are not subject to the same capital reserve requirements and do not have to pay FDIC insurance on the deposits. Continue reading...
What is a Spin-off?
A spin-off is when a division or subsidiary of a company is separated from the parent corporation and starts to offer its own shares. The term can also colloquially refer to a situation where a group of talent leaves the larger company to start their own firm doing similar work as they used to do. As far as the SEC is concerned, the definition of a spin-off must include the shareholders of the parent corporation being offered a substantially proportionate amount of shares in the new company. Continue reading...
What is a Non-Current Asset?
A non-current asset is an asset on the balance sheet that is not expected to convert into unrestricted cash within a year’s time. Non-current assets may include such things as intellectual property and production/operations equipment - meaning they likely do not have a need to convert to cash. From a balance sheet standpoint, non-current assets are capitalized rather than expensed - meaning the company can allocate the asset’s cost of the asset over the number of years for which the asset will be used, instead of allocating it all in the year it was purchased. Continue reading...
What is Financial Liquidity?
Financial liquidity refers to the ease with which an asset can be converted to cash. Assessing financial liquidity is important on a corporation’s balance sheet, as it serves as an indication of how readily a company can pay off debts or weather a crisis. Continue reading...
What are pink sheets?
The Pink Sheets used to be printed on pink paper and contained the bid and ask prices of penny stocks which were not listed on major exchanges. Today the Pink Sheets are operated online by OTC Markets Inc but fulfill the same role. The Pink Sheets will list penny stocks which may or may not be found on other micro-cap exchanges. To be listed on the Pink Sheets, there are no listing requirements, such as cap-size; companies must only file one form and which provides some current financial information, but update information may not be required as time goes on, and hence companies listed only on the pink sheets are considered the most speculative and risky equity plays an investor can make. Continue reading...
What is Profit and Loss (P&L) Statement?
A Profit and Loss Statement, also referred to as an “income statement,” is a corporate statement that summarizes the revenues, costs and expenses incurred by a company during a specific time period, such as a quarter or a fiscal year. The main difference between a P&L statement and a balance sheet is that the P&L is designed to show changes in line items over the period analyzed, versus a balance sheet which simply shows a comprehensive snapshot of a company’s asset and liabilities on a set date. Continue reading...
What is a Credit Crunch?
A credit crunch is when access to liquidity dries up dramatically in rapid fashion, or becomes less accessible due to a spike in borrowing rates. Central banks will often step-in to try and curb the lack of liquidity by offering the markets access to cash at lower than market rates, in the event of a crisis. Perhaps the most famous credit crunch in history occurred in late 2007 and early 2008, when bank balance sheets became highly leveraged overnight due to mark-to-market accounting rules that were applied to the mortgage backed security portfolios on their balance sheets. Continue reading...
What is a foreign currency swap?
These are generally referred to as currency swaps or cross-currency swaps , since “foreign” is a little redundant (currencies are from different countries anyway). Central banks and large institutions sometimes swap principal amounts and loan interest in their domestic currency in exchange for a foreign currency, to provide liquidity and a hedge. Currency swaps are where banking institutions, particularly central banks, exchange a loan in one currency for a loan in another currency. Continue reading...
What Does it Mean to Deleverage?
When a company “deleverages,” it means it is attempting to shrink the amount of debt on its books relative to its assets. In some cases the act of deleveraging requires a company to sell-off/liquidate key assets in order to pay down debt, which ultimately means downsizing as well. A company may choose to deleverage as a strategic tactic, but often times they are forced to as a result of economic circumstances. Continue reading...