DSST Principles of Finance key terms

A financial statement showing a firm's assets, liabilities, and owners' equity at a single point in time, based on the identity that assets equal liabilities plus equity.

A financial statement summarizing revenues, expenses, and resulting profit or loss over an accounting period, ending with net income available to owners.

A financial statement that reports cash inflows and outflows classified as operating, investing, and financing activities during a period.

Earnings before interest and taxes; operating profit calculated by subtracting operating expenses from revenue, excluding financing costs and tax effects.

Cash generated by operations after subtracting capital expenditures needed to sustain the business; the cash available to pay creditors and owners.

A measure such as the current ratio or quick ratio comparing short-term assets with short-term obligations to judge a firm's ability to meet near-term debts.

Current assets divided by current liabilities; a broad indicator of whether short-term resources cover obligations coming due within one year.

Cash, marketable securities, and receivables divided by current liabilities; a stricter liquidity test that excludes inventory because it may be slow to convert to cash.

The amount a present sum or stream of payments will grow to at a given interest rate over a stated number of periods through compounding.

The current worth of a future cash amount or stream, found by discounting at an appropriate rate to reflect time and risk.

The process of earning interest on previously accumulated interest, causing a balance to grow faster than under simple interest.

The interest rate used to convert future cash flows into present values; it reflects the opportunity cost and risk of the cash flows.

A series of equal cash payments occurring at regular intervals for a fixed number of periods, such as a loan installment or lease payment.

A stream of equal cash payments expected to continue forever; its present value equals the payment divided by the discount rate.

The true annual interest rate after accounting for compounding within the year, allowing fair comparison of loans or investments with different compounding frequencies.

A stated annual rate that ignores intra-year compounding; it understates the true cost when interest compounds more than once a year.

Current assets minus current liabilities; the net short-term investment a firm makes to support its day-to-day operations.

The length of time from paying suppliers for inventory until collecting cash from customers, combining days inventory, days receivable, and days payable outstanding.

Cost of goods sold divided by average inventory; it shows how many times inventory is sold and replaced during a period.

Credit sales divided by average accounts receivable; a higher figure indicates faster collection of money owed by customers.

Short-term financing suppliers extend by allowing a buyer to pay later, often with a discount offered for early payment.

Unsecured short-term debt issued by large, creditworthy firms to raise working capital, typically maturing in days to a few months.

A long-term debt security in which the issuer promises periodic interest payments and repayment of principal at maturity.

The fixed annual interest stated on a bond as a percentage of its face value, determining the cash interest paid each period.

The single discount rate that equates a bond's expected future cash flows to its current market price, assuming it is held to maturity.

Equity that typically pays a fixed dividend and ranks ahead of common stock in claims on earnings and assets, usually without voting rights.

Residual ownership in a corporation carrying voting rights and a claim on remaining earnings and assets after all other claims are satisfied.

A valuation method pricing a stock as the next dividend divided by the difference between required return and expected dividend growth.

The sum of a project's expected cash flows discounted at the required rate minus its initial cost; a positive result suggests value creation.

The discount rate at which a project's net present value equals zero; it is compared with the required rate to accept or reject.

The time required for cumulative cash inflows to recover a project's initial investment, ignoring the time value of money.

The process of evaluating and selecting long-term investments whose benefits are expected to extend beyond one year.

A cost already incurred that cannot be recovered and therefore should be ignored when deciding whether to proceed with a project.

The additional cash a firm receives or pays because it undertakes a project, measured as the difference from the no-project situation.

The minimum return a firm must earn on investments to satisfy its lenders and owners, reflecting the risk of its financing mix.

The blended required return on a firm's debt and equity, weighted by their proportions in the capital structure and adjusted for taxes.

The return shareholders require on their investment, often estimated with the dividend growth model or the capital asset pricing model.

The effective interest rate a firm pays on borrowed funds, usually measured after tax because interest expense is tax deductible.

A model stating that required return equals the risk-free rate plus beta times the market risk premium, linking expected return to systematic risk.

A measure of how much a security's returns move relative to the overall market; values above one indicate greater systematic risk.

Market-wide risk from economy-wide factors that cannot be eliminated by diversification, as opposed to firm-specific risk.

Spreading investments across many assets to reduce unsystematic risk without necessarily sacrificing expected return.