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AAEC 3302 Agribusiness Finance Definitions of Terms

A

Accrual accounting: An accounting method in which revenues are recognized when earned rather than when received, and expenses are recognized when incurred or charged rather than when paid. Accrual adjustments: Adjustments that are made to cash receipts and expenses for changes in inventories, accounts receivable and payable, investments in growing crops, and other accrued and payable expenses. Agribusiness finance: The economic study of the acquisition and use of capital in agribusiness. Amortization: Repayment of a loan in a series of payments where each payment covers interest and principal. Fully amortized: The periodic loan payments are sufficient to fully pay the entire principal balance over the term of the loan. Partially amortized: The periodic loan payments make some reduction in the principal balance but are not sufficient to fully pay the entire principal of over the term of the loan. Amortization schedule: A table that details the payments, balance, interest paid, and reduction in principal for a amortized loan. Annual percentage rate: The true interest rate for a loan or investment, usually referred to as APR. Annuity: A series of equal, periodic cash flows over a finite period of time. Annuity due: An annuity in which the cash flows occur at the beginning of each period. Ordinary annuity: An annuity in which the cash flows occur at the end of each period. Annuity-equivalent: A method used to compare investments with unequal time horizons.

Assets: Economic resources owned by a business and represents the total capital invested. Capital asset: Non-current (or long term assets) owned by a business or by a person. An asset with an economic life greater than one year. Current asset: Cash and any other asset that, in the normal course of operations, is expected to be converted into cash or consumed in the production process within one year or normal operating cycle. Non-current asset: An asset having a useful life greater than one year. Usually not purchased for resale, but is to be used over time in the production of products or services.

B

Balance sheet: A financial statement that reports the value of assets, liabilities, and owner equity on a specific date. Balloon payment: A lump-sum payment of principal due at the end of the term of a loan; represents the principal due at the end of a partially amortized loan. Basis: The difference between the original cost of an asset and it's accumulated depreciation. Book value: (see basis.) Business risk: The uncertainty or variation in income or returns of a business over time due to the nature of the business.

C

Capital: A general term referring to the financial resources invested in a business. There are two types of capital: debt capital and equity capital. Capital asset: found under assets. Capital budgeting: The process of planning expenditures on assets whose returns will extend beyond one year. Capital gain or loss: The difference between the book value or basis of an asset and the sale price of the asset. Capital lease: found under lease.

Cash flow budget: An informal financial statement prepared to forecast future cash flows; used in the planning process and to determine the need for an operating line of credit. Cash flow statement: A summary of all cash transactions affecting the business during a given period. Transactions are classified as operating, investing or financing. Certainty-equivalent: A method in a net present value analysis where the projected cash flows are reduced to a more certain value to account for risk. Compounding: The time value of money process of finding the future value of a present sum or series of payments. Compound interest: When interest is earned and converted to principal more than once during the time of an investment. Conversion period: The interval between successive conversions of interest to principal. Compound rate: The rate per conversion period that is charged on the outstanding balance at the beginning of that period. Corporation: A legal entity which, while being composed of natural persons, exists completely separately from them. This separation gives the corporation unique powers which other legal entities lack. The extent and scope of its status and capacity is determined by the law of the place of incorporation. Cost basis: Original cost of an asset less accumulated depreciation. Coupon rate (bond): The rate at which interest is paid on a bond. Current asset: found under assets. Current liabilities: found under liabilities.

D

Debt capital: Refers to liabilities as listed in a balance sheet. Deed-of-trust: A three party legal instrument that establishes a security interest in real property for a lender. The parties consist of the borrower, lender and trustee. Deferred taxes: The estimated amount of income taxes owed if assets were liquidated at the market value shown on the balance sheet.

Deferred taxes on current assets: The portion of deferred taxes that relates to income which would arise by the sale of taxable current assets less taxable current liabilities. Deferred taxes on non-current assets: The portion of deferred taxes that relates to the taxable capital gain which would arise by the sale of non-current assets taking into account the applicable cost basis. Discounting: The time value of money process of finding the present value of a future sum or series of payments. Discount rate: The interest rate used for a specific asset-pricing problem.

E

Equity capital: The value of the owner's investment in a business; the owner's claim on assets of the business. Net worth: same as equity. Owner equity: same as equity. Valuation equity: The portion of equity recognized as the difference between the market value of non-current assets and their cost basis less deferred taxes on non-current assets.

F

Face value of a bond: The amount that will be paid at maturity; most bonds have a face value of $1,000. Family living withdrawals: The total amount of money withdrawn from farm and nonfarm revenues for personal consumption. Also is used as a proxy for unpaid operator and family labor and management. Financial efficiency: The ability to control costs and utilize assets efficiently. Financial risk: The risk associated with fixed financial obligations; refers to the loss of equity capital under unfavorable business conditions when financial leverage is used. Foreclosure: The legal process of recovering real estate collateral when the borrower is in default on a loan. Fully amortized loan: found under amortization.

Future value: The value in the future of a present sum or a series of payments invested at a given interest rate.

G

GAAP: Generally accepted accounting principles. Concepts, philosophies, and procedures that guide accounting practices and standards for different industries. Gross revenue: The total of all revenues received for goods produced for sale or for serviced rendered in a specific period of time from business activities.

H-I

Income statement: A statement summarizing income and expenses during a period of time, usually a year. Internal rate of return: The discount rate at which the sum of the present value of the cash inflows equals the sum of the present value of the cash outflows (the discount rate which gives a NPV of zero); the compound rate of interest earned by an investment. Interest: The expense incurred or the revenue generated from lending money.

J-K-L

Lease: A contractual agreement between a lessor and lessee for the use of an asset, with the lessee paying rent to the lessor. Capital lease: A long-term contractual arrangement in which someone acquires control of an asset in return for rental payments and usually runs for several years and cannot be canceled without a penalty. Operating lease: A short-term lease in which the rental payments are usually based on the time the lessee uses the asset. Leverage: The degree to which a business is financed by debt capital; the extent to which debt capital is combined with equity capital to control assets. Liabilities: Future financial obligations which requires the payment of money to someone else; same as debt. Current liabilities: Obligations which must be paid during the next 12 months.

Current portion of non-current liability: That portion of the principal of a long term debt that is scheduled and due to be paid within 12 months. Non-current liabilities: Obligations due after one year or whose original maturity was beyond one year. Lien: A claim or encumbrance on property. Liquidity: A measure of the ability of a business to meet financial obligations as they come due. Also, the ease with which assets can be converted to cash without disrupting an ongoing business.

M-N

Market Value: The estimated amount of cash you would receive for selling an asset today, after deducting all expenses of the sale. Maturity date (bond): The date when a bond will pay the face value. Net income: The total of net farm income plus net non-farm income after income and social security taxes, but before family living withdrawals. Net income from operations: Gross revenues minus operating and interest expenses. Net present value: A capital budgeting method that is the discounted future cash flows minus the initial cost of the investment. Net worth: found under equity. Nominal interest rate: The interest rate "as stated"; includes the real rate, inflation expectations and risk premium. Non-current asset: found under assets. Non-current liabilities: found under liabilities.

O-P

Operating lease: found under lease. Ordinary annuity: found under annuity.

Owner equity: found under equity. Owner withdrawals: Payments made to the owners of a business from the accumulated earnings from the business. Partially amortized loan: found under amortization. Partnership: A type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested. General partnership: The most basic form of a partnership, in which all partners manage the business and are personally liable for its debts. Limited partnership: A form of partnership in which certain "limited partners" relinquish their ability to manage the business in exchange for limited liability for the partnership's debts Patronage Dividends: Represents the portion of a cooperatives' net income or net savings which is distributed to its members based on their proportional patronage of the cooperative. Payback method: A capital budgeting method that gives the number of years required to recover the initial investment amount. Points: Loan fees that are viewed as prepaid interest and raise the APR of a loan. One point is 1% of the loan amount. Present value: The discounted value today of a future sum or series of payments at a given discount rate. Principal: The balance of a loan; the amount owed. Promissory note: The primary legal document in a loan contract; a written promise of the borrower to repay a loan.

Q-R

Real interest rate: Includes only the systematic and regulatory risks and is meant to measure the time value of money. Real rates = Nominal rates minus inflation. Repayment capacity: A measure of the ability of a borrower to pay principal and interest on the non-current liabilities and meet all other financial obligations. Revenue: Cash inflows or other enhancements of assets of a business.

Gross revenue: The total of all revenues received for goods produced for sale or for serviced rendered in a specific period of time from business activities. Value of farm production: A term unique to farm income statements; a measure of the value an agricultural operation has added to products sold; determined by subtracting the cost of feeder livestock and feed purchased from gross revenue. Risk premium: The cost of bearing risk included in an interest rate or discount rate.

S-T

Simple interest: Only the original principal earns interest over the life of the transaction; the product of the principal, time in years, and annual interest rate. Simple rate of return: The total net income provided by an asset divided by the initial investment cost or the average investment cost. Sole proprietorship: A business which legally has no separate existence from its owner. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner Solvency: The degree to which all assets exceed all liabilities; the ability to repay all financial obligations if all assets were sold. Statement of owner equity: The financial statement that summarizes changes in owner equity between the beginning and ending balance sheets of an accounting period. Time value of money: The universal preference for a dollar today versus a dollar at some future point in time. Terminal value: The expected value of an investment at the end of the planning horizon.

U-V-W-X-Y-Z

Valuation equity: found under equity. Value of farm production: found under revenue. Warranty deed: The instrument that transfers title in real property; the seller is guaranteeing that the title is free and clear of any encumbrances.

Weighted average cost of capital: The cost of capital which is the cost of debt capital and the cost of equity capital weighted by the proportion of each in the capital structure of the business. Yield to maturity (bond): The annual percent return a bond will give the investor when held to maturity, takes into account the interest paid and any capital gain or loss. Zero coupon bonds: Bond that do not pay periodic interest payments; the only return is the capital gain between the purchase price and the face value.

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