Finance

 What is the Nominal Interest Rate? The nominal interest rate refers to the rate of interest before adjusting for inflation. It also refers to the rate specified in the loan contract without adjusting for compounding. The nominal interest rate is in contrast to the real interest rate regarding the inflation adjustment and effective interest rate regarding the compounding adjustment. Nominal interest rates can be impacted by different factors, including the demand and supply of money, the action of the federal government, the monetary policy of the central bank, and many others. Central banks implement the short-term nominal interest rate as a tool of monetary policy. During an economic recession, the nominal rate is lowered to stimulate economic activities. During inflationary periods, the nominal rate is raised. Central banks set short-term nominal interest rates, which form the basis for other interest rates charged by banks and financial institutions. Nominal interest rates may...

Types of interest rates There are essentially three main types of interest rates: the nominal interest rate, the effective rate, and the real interest rate. What is a Real Interest Rate? An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate.  A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. The real interest rate reflects the rate of time-preference for current goods over future goods. The real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate:  SUMMARY: The real interest rate adjusts the observed market interest rate fo...

  What is an Interest Rate? An interest rate refers to the amount charged by a lender to a borrower for any form of debt given, expressed as a percentage of the principal.  Interest rates are the price you pay to borrow money, or, on the flip side, the payment you receive when you lend money . The asset borrowed can be in the form of cash, large assets such as vehicle or building, or just consumer goods. In the case of larger assets, the interest rate is commonly referred to as the “lease rate.” Interest rates are directly proportional to the amount of risk associated with the borrower. Interest is charged as compensation for the loss caused to the asset due to use. In the case of lending money, the lender could’ve invested the money in some other venture instead of giving it as a loan.  In the case of lending assets, the lender could’ve generated income by making use of the asset himself. Thus, in return for these lost opportunities, interest rates are applied as co...

  FINANCIAL PLANNING PROCESS Most people want to handle their finances so that they get full satisfaction from each available dollar. Typical financial goals include such things as a new car, a larger home, advanced career training, extended travel, and self-sufficiency during working and retirement years. To achieve these and other goals, people need to identify and set priorities. Financial and personal satisfaction are the result of an organized process that is commonly referred to as personal money management or personal financial planning. Personal financial planning  is the process of managing your money to achieve personal economic satisfaction. This planning process allows you to control your financial situation. Every person, family, or household has a unique financial position, and any financial activity therefore must also be carefully planned to meet specific needs and goals. A comprehensive financial plan can enhance the quality of your life and increase your sati...

  What Is a Statement of Retained Earnings ? The statement of retained earnings (retained earnings statement) is a financial statement that outlines the changes in retained earnings for a company over a specified period. This statement reconciles the beginning and ending retained earnings for the period, using information such as net income from the other financial statements, and is used by analysts to understand how corporate profits are utilized. The statement of retained earnings is also known as a statement of owner's equity, an equity statement, or a statement of shareholders' equity. Boilerplate templates of the statement of retained earnings can be found online. It is prepared in accordance with generally accepted accounting principles (GAAP). KEY POINTS: The statement of retained earnings is a financial statement prepared by corporations that details changes in the volume of retained earnings over some period. Retained earnings are profits held by a company in re...

  Format of a cash flow statement There are three sections in a cash flow statement: operating activities, investments, and financial activities. Operating activities:  Operating activities are those cash flow activities that either generate revenue or record the money spent on producing a product or service. Operational business activities include inventory transactions, interest payments, tax payments, wages to employees, and payments for rent. Any other form of cash flow, such as investments, debts, and dividends are not included in this section. The operations section on the cash flow statement begins with recording net earnings, which are  obtained from the net income field on the  company’s income statement . This gives an estimate of the company’s profitability. After this, it lists non-cash items involving operational activities and convert them into cash items. A business’ cash flow statement should show adequate positive cash flow for it...

  What is a cash flow statement? A cash flow statement is an important tool used to manage finances by tracking the cash flow for an organizations. This statement is one of the three key reports (with the income statement and the balance sheet) that help in determining a company’s performance. It is usually helpful for making cash forecast to enable short term planning. The cash flow statement shows the source of cash and helps you monitor incoming and outgoing money. Incoming cash for a business comes from operating activities, investing activities and financial activities. The statement also informs about cash outflows, expenses paid for business activities and investment at a given point in time. The information that you get from the cash flow statement is beneficial for the management to take informed decisions for regulating business operations. Companies generally aim for a positive cash flow for their business operations without which the company may have to b...

  Income statement format with the major components The following information is covered in an income statement. The format for this document may vary depending on the regulatory requirements, the diverse business needs and the associated operating activities. Revenue or sales:  This is the first section on the income statement, and it gives you a summary of gross sales made by the company. Revenue can be classified into two types: operating and non-operating. Operating revenue refers to the revenue gained by a company by performing primary activities like manufacturing a product or providing a service. Non-operating revenue is gained by performing non-core business activities such as installation, operation, or maintenance of a system. Cost of goods sold (COGS):  This is the total cost of sales or services, also referred to as the cost incurred to manufacture goods or services. Keep in mind that it only includes the cost of pr...

  What is income statement? An income statement is a financial statement that shows you the company’s income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business. The income statement is also known as a profit and loss statement, statement of operation, statement of financial result or income, or earnings statement. Importance of an income statement An income statement helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a financial period. The business owners can refer to this document to see if the strategies have paid off. Based on their analysis, they can come up with the best solutions to yi...

What's On the Balance Sheet? The  balance sheet  is a snapshot representing the state of a company's finances at a moment in time. By itself, it cannot give a sense of the trends that are playing out over a longer period. For this reason, the balance sheet should be compared with those of previous periods. It should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing. A number of ratios can be derived from the balance sheet, helping investors get a sense of how healthy a company is. These include the debt-to-equity ratio and the acid-test ratio, along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company's finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet. T he purpose of a balance sheet is to give interested parties an idea of the company's financial position, ...

  ELEMENTS OF BALANCE SHEET: A balance sheet has three elements:  Owners equity, liabilities and assets . The statement shows the owners' equity and liabilities on the left and the assets on the right. It is defined as Assets = owners' equity + liabilities. Assets Within the assets segment, accounts are listed from top to bottom in order of their liquidity – that is, the ease with which they can be converted into cash. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot. Here is the general order of accounts within current assets: Cash and cash equivalents  are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as hard currency. Marketable securities  are equity and debt securities for which there is a liquid market. Accounts receivable  refers to money that customers owe the company, perhaps including an allow...