Module One: Glossary

You will understand the concepts of budgets and financial reports, and it is best to know essential terminology. In this module, you will

learn critical financial language and concepts that will help you build your financial vocabulary and knowledge. "There's no business like show business, but several businesses like accounting." - David Letterman

You will learn the following terms and concepts:

• What is finance
• Commonly used terms
• Key players
• Important finance organizations
• Generally Accepted Accounting Principles (GAAP)

Let us begin by understanding what finance is.

The term finance has a broad meaning. According to the online Encarta® World Dictionary, finance could mean the money required to make something, the money at the disposal of an organization, country, or person. Finally, another meaning for finance is the business or art of managing the monetary resources of an organization, country, or person. Many of us are here today to learn how to deal with the finances of our company or organization. This aspect of finance is the focus of this course. Everyday companies capture financial data and store it for later use to compare values with predetermined budgets. In addition, organizations create monthly reports they must deliver to the board of directors and make them public to shareholders and the government. Your involvement in finances may be because you have been promoted to a position that requires you to create and manage a budget. You may also be required to create reports about the finances in your area. Understanding budgets and financial reports are crucial in determining how well a company is doing. Many times, the raw financial data does not give enough information on how the financial position of the company is doing. Analyzing budgets and financial reports help you take action to correct trends that are taking the company off course in terms of budget and financial performance. As you learn about budgets and financial reports, you will see this data as a valuable tool for managing everyday business functions. Before we get deeper into the topic, let us get a basic understanding of common financial terminology.

Commonly Used Terms

• Accounting
• Assets
• Balance sheet
• Budget
• Capital
• Cash flow
• Credit
• Debit
• Depreciation
• Equity
• Expenses
• Financial ratio
• Income
• Income statement
• Liability
• Net income
  
  

Key Players

CEO - They use financial data to steer the organization toward the strategic vision, mission, and goals of the organization.

CFO - They ensure that the financial data is accurate and create reports. In addition, they analyze the information and help the CEO make decisions.

Senior Leadership - They use financial data to control the budgets of several departments and business units.

Accounting - They collect financial data and record them daily in computer systems for compiling at the end of the month.

Department Managers use financial data to manage their areas or business units.

Board of Directors - They use financial data to determine how well the organization is doing and hold leaders accountable for meeting budgets and other obligations.

Government Regulators - They use financial data to determine if the company is being managed according to rules.

Stockholders use financial data to determine if the company is profitable and managed well.

Investors use financial data to determine if they want to purchase stocks in hopes of a financial return.

Creditors use financial data to determine if the company can pay back a new or current loan.

Important Financial Organizations

Several financial organizations help shape the way financial data is structured and reported. Some organizations are private institutions, and others are government-run. Here is a list of the most important financial organizations.

• The United States Securities and Exchange Commission (SEC): The SEC works with private organizations like the AICPA and FASB to help set standards for accounting principles.
• American Institute of Certified Public Accountants (AICPA): This organization publishes audit and accounting guidelines and guides financial reporting topics until the FASB or GASB sets standards. Publish practice bulletins, which focus on reporting issues not handled by the FASB or GASB
• Financial Accounting Standards Board (FASB): This organization publishes the statements of financial accounting standards, statements of financial accounting concepts, interpretations, and technical bulletins related to accounting standards.

This organization also has an Emerging Issues Task Force (EITF), which handles new and unusual financial issues that may be a more significant industry problem.

• Governmental Accounting Standards Board (GASB): This organization deals with government financial reporting issues. It resembles the FASB but deals exclusively with government agencies.
  
  

Understanding GAAP

The Generally Accepted Accounting Principles were developed to give a consistent framework for companies to use in structuring their financial statements. Organizations are required to follow GAAP standards, and most accountants and auditors are familiar with this concept and use it daily. If you are not an accountant or auditor, that is okay. However, understanding GAAP will help you realize the importance of keeping excellent records of your revenue and expenditures in your area. Furthermore, understanding GAAP will increase your financial vocabulary and knowledge of why financial reports must conform to a particular set of standards.

In general, GAAP deals with the following reporting standards:

• When is revenue recognized as actual revenue that can be counted? GAAP prevents the overstatement of revenues by determining when revenue can be claimed or recognized.
• Balance sheet item classification standardizes the items found on the balance sheet to avoid confusion. 
• Outstanding share measurements

You may not have to deal with these principles daily, but understanding their importance in budgets and financial reports will help your credibility because this is a prevalent and fundamental concept in this area.

Lesson Summary

Finance is an essential part of managing a successful business. Understanding and learning financial language and concepts is key to understanding budgets and financials reports. In this module, you will learn about:

• What is finance
• Commonly used terms
• Key players
• Important finance organizations
• Generally Accepted Accounting Principles (GAAP)

Finance is a broad term that means the money required to make something, the money at the disposal of an organization, country, or person, or the business or art of managing monetary resources. We will focus on understanding budgets and financial reports, as they are a valuable tool to measure success. Common terms in finance include: assets, balance sheet, budget, capital, cash flow, credit, debit, depreciation, equity, expenses, financial ratio, income, income statement, liability, and net income. Key players include CEO, CFO, senior leadership, accounting, department managers, board of directors, government regulators, stockholders, investors, and creditors. Important finance organizations include The U.S. Securities & Exchange Commission (SEC), The American Institute of Certified Public Accountants (AICPA), The Financial Accounting Standards Board (FASB), and The Governmental Accounting Standards Board (GASB). Lastly, understanding Generally Accepted Accounting Principles (GAAP) is important as they provide a consistent framework for companies when reporting financial activities.