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how do i calculate a capital loss carryover | to calculate a capital loss carryover subtract your capital gains from your capital losses in a tax year if losses exceed gains the excess amount is the carryover then in subsequent years reduce this balance by the amount of the carryover loss used to offset the capital gains or ordinary income for that specific year | |
how long can i carry forward capital losses | capital losses can be carried forward indefinitely until fully utilized or exhausted there is no expiration date for capital loss carryovers can capital loss carryovers be used to offset ordinary income yes capital loss carryovers can be used as a deduction against ordinary income or to offset capital gains can i use capital loss carryovers to offset gains from different asset classes yes you can capital losses from one asset class can be used to offset capital gains from another asset class helping to reduce your overall tax liability | |
what happens to capital loss carryovers if i skip a year of filing taxes | if you skip a year of filing taxes your capital loss carryovers remain available for future use they can be utilized in subsequent tax years as long as you properly report the carryover on the appropriate tax return the bottom linea capital loss carryover allows for the offset of capital gains or deduction against ordinary income in future tax years with unused capital losses from previous years | |
when an individual or business incurs capital losses that exceed their capital gains in a given tax year the excess losses can be carried forward to future years this allows taxpayers to utilize the losses in subsequent years reducing their taxable income and potentially lowering their overall tax liability | correction sept 20 2023 a previous version of this article mistakenly stated that capital loss carryovers could only be used to offset capital gains it has been edited to reflect that capital loss carryovers may also be used as a deduction against ordinary income correction nov 5 2023 this text has been corrected to reflect that a decedent s capital loss is deductible only on their final income tax return and can t be carried over to their heirs | |
what is the capital market line cml | the capital market line cml represents portfolios that optimally combine risk and return it is a theoretical concept that represents all the portfolios that optimally combine the risk free rate of return and the market portfolio of risky assets under the capital asset pricing model capm all investors will choose a position on the capital market line in equilibrium by borrowing or lending at the risk free rate since this maximizes return for a given level of risk investopedia eliana rodgersformula and calculation of the capital market line cml calculating the capital market line is done as follows rp rf rt rf t pwhere rp portfolio returnrf risk free ratert market return t standard deviation of market returns p standard deviation of portfolio returns begin aligned r p r f frac r t r f sigma t sigma p textbf where r p text portfolio return r f text risk free rate r t text market return sigma t text standard deviation of market returns sigma p text standard deviation of portfolio returns end aligned rp rf t rt rf p where rp portfolio returnrf risk free ratert market return t standard deviation of market returns p standard deviation of portfolio returns | |
what the cml can tell you | portfolios that fall on the capital market line cml in theory optimize the risk return relationship thereby maximizing performance the capital allocation line cal makes up the allotment of risk free assets and risky portfolios for an investor cml is a special case of the cal where the risk portfolio is the market portfolio thus the slope of the cml is the sharpe ratio of the market portfolio as a generalization buy assets if the sharpe ratio is above the cml and sell if the sharpe ratio is below the cml cml differs from the more popular efficient frontier in that it includes risk free investments the intercept point of cml and efficient frontier would result in the most efficient portfolio called the tangency portfolio mean variance analysis was pioneered by harry markowitz and james tobin the efficient frontier of optimal portfolios was identified by markowitz in 1952 and james tobin included the risk free rate to modern portfolio theory in 1958 william sharpe then developed the capm in the 1960s and won a nobel prize for his work in 1990 along with markowitz and merton miller 1the capm is the line that connects the risk free rate of return with the tangency point on the efficient frontier of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return the portfolios with the best trade off between expected returns and variance risk lie on this line the tangency point is the optimal portfolio of risky assets known as the market portfolio under the assumptions of mean variance analysis that investors seek to maximize their expected return for a given amount of variance risk and that there is a risk free rate of return all investors will select portfolios that lie on the cml according to tobin s separation theorem finding the market portfolio and the best combination of that market portfolio and the risk free asset are separate problems individual investors will either hold just the risk free asset or some combination of the risk free asset and the market portfolio depending on their risk aversion as an investor moves up the cml the overall portfolio risk and returns increase risk averse investors will select portfolios close to the risk free asset preferring low variance to higher returns less risk averse investors will prefer portfolios higher up on the cml with a higher expected return but more variance by borrowing funds at a risk free rate they can also invest more than 100 of their investable funds in the risky market portfolio increasing both the expected return and the risk beyond that offered by the market portfolio capital market line vs security market linethe cml is sometimes confused with the security market line sml the sml is derived from the cml while the cml shows the rates of return for a specific portfolio the sml represents the market s risk and return at a given time and shows the expected returns of individual assets while the measure of risk in the cml is the standard deviation of returns total risk the risk measure in the sml is systematic risk or beta securities that are fairly priced will plot on the cml and the sml securities that plot above the cml or the sml are generating returns that are too high for the given risk and are underpriced securities that plot below cml or the sml are generating returns that are too low for the given risk and are overpriced | |
why is the capital market line important | portfolios that fall on the capital market line cml in theory optimize the risk return relationship thereby maximizing performance so the slope of the cml is the sharpe ratio of the market portfolio as a generalization investors should look to buy assets if the sharpe ratio is above the cml and sell if the sharpe ratio is below the cml | |
how is capital allocation line cal related to cml | the capital allocation line cal makes up the allotment of risk free assets and risky portfolios for an investor cml is a special case of the cal where the risk portfolio is the market portfolio as an investor moves up the cml the overall portfolio risk and returns increase risk averse investors will select portfolios close to the risk free asset preferring low variance to higher returns less risk averse investors will prefer portfolios higher up on the cml with a higher expected return but more variance | |
are cml and efficient frontier the same | cml differs from the more popular efficient frontier in that it includes risk free investments the efficient frontier is made up of investment portfolios that offer the highest expected return for a specific level of risk the intercept point of cml and efficient frontier would result in the most efficient portfolio called the tangency portfolio | |
are cml and security market line sml the same | the cml is sometimes confused with the security market line sml the sml is derived from the cml while the cml shows the rates of return for a specific portfolio the sml represents the market s risk and return at a given time and shows the expected returns of individual assets and while the measure of risk in the cml is the standard deviation of returns total risk the risk measure in the sml is systematic risk or beta | |
what are capital markets | capital markets are those where savings and investments are channeled between suppliers and those in need suppliers are people or institutions with capital to lend or invest they typically include banks and investors those who seek capital in this market are businesses governments and individuals the most common capital markets are the stock market and the bond market they seek to improve transactional efficiencies by bringing suppliers together with those seeking capital and providing a place where they can exchange securities yurle villegas investopediaunderstanding capital marketsthe term capital market is a broad one that s used to describe the in person and digital spaces in which various entities trade types of financial instruments these venues can include the stock market the bond market and the currency and foreign exchange forex markets most markets are concentrated in major financial centers such as new york london singapore and hong kong 1capital markets are composed of the suppliers and users of funds suppliers include households through the savings accounts and products they hold with banks as well as institutions such as pension and retirement funds life insurance companies charitable foundations and nonfinancial companies that generate excess cash the users of the funds distributed on capital markets include home and motor vehicle purchasers nonfinancial companies and governments financing infrastructure investment and operating expenses capital markets are used primarily to sell financial products such as equities and debt securities equities are stocks that represent ownership shares in a company debt securities such as bonds are interest bearing ious these markets are divided into two categories capital markets are a crucial part of a functioning modern economy because they move money from the people who have it to those who need it for productive use primary vs secondary marketscapital markets are composed of primary and secondary markets a company engages in the primary capital market when it publicly sells new stocks or bonds for the first time such as in an initial public offering ipo this market is sometimes referred to as the new issues market the company that offers the securities hires an underwriting firm when investors purchase securities on the primary capital market the firm reviews it and creates a prospectus outlining the price and other details of the securities to be issued all issues on the primary market are subject to strict regulation companies must file statements with the u s securities and exchange commission sec and other securities agencies and they must wait until their filings are approved before they can go public 3small investors are often unable to buy securities on the primary market because the company and its investment bankers want to sell all the available securities in a short period to meet the required volume they must focus on marketing the sale to large investors who can buy more securities at once marketing the sale to investors can often include a roadshow or a dog and pony show in which investment bankers and the company s leadership travel to meet with potential investors and convince them of the value of the security that s being issued the secondary market includes venues overseen by a regulatory body like the sec where these previously issued securities are traded between investors issuing companies don t have a part in the secondary market the new york stock exchange nyse and nasdaq are examples of secondary markets the secondary market has two categories the auction and the dealer markets the auction market is home to the open outcry system where buyers and sellers congregate in one location and announce the prices at which they re willing to buy and sell their securities the nyse is one such example people trade through electronic networks in dealer markets most small investors trade through dealer markets | |
are capital markets the same as financial markets | there s a great deal of overlap at times but there are some fundamental distinctions between these two terms financial markets encompass a broad range of venues where people and organizations exchange assets securities and contracts with each other they re often secondary markets capital markets are used primarily to raise funding to be used in operations or for growth usually for a firm | |
what is a primary vs a secondary market | new capital is raised via stocks and bonds that are issued and sold to investors in the primary capital market traders and investors subsequently buy and sell those securities among each other on the secondary capital market where no new capital is received by the firm | |
which markets do firms use to raise capital | companies that raise equity capital can seek private placements via angel or venture capital investors however they re able to raise the largest amount through an initial public offering ipo when shares are listed publicly on the stock market for the first time debt capital can be raised through bank loans or securities issued in the bond market the bottom linecapital markets are a very important part of the financial industry they bring together suppliers of capital and those who seek it for their own purposes this can include governments that want to fund infrastructure projects businesses that want to expand and even individuals who want to buy a home capital markets are divided into two categories the primary market where companies list new issues for the first time and the secondary market which allows investors to purchase already issued securities the key benefit of these markets is that they allow money to move from those who have it to those who need it for their own purposes | |
what is a capital project | a capital project is a long term capital intensive investment to build upon add to or improve a capital asset capital projects are defined by their large scale and large cost relative to other investments that involve less planning and resources understanding capital projectsa capital project is a large scale project with a high cost that is capitalized or depreciated regular capital investments such as new facilities structures or systems may be necessary to accelerate growth within a company or government for example if a company wants to build a new warehouse or purchase new manufacturing equipment to increase efficiency on the factory line capital projects typically consist of the public sector building or maintaining infrastructure such as roads railways and dams and companies upgrading expanding or replacing their facilities and equipment capital projects must be managed appropriately for they require a significant commitment of company resources and time the project assumes a calculated risk with the expectation that the capital asset pays off management of risk is a key driver of successful project development and delivery of a capital project examples of capital projectsthe most common examples of capital projects are infrastructure projects such as railways roads and dams in addition these projects include assets such as subways pipelines refineries power plants land and buildings capital projects are also common in corporations corporations allocate large amounts of resources financial and human capital to build or maintain capital assets such as equipment or a new manufacturing project in both cases capital projects are typically planned and discussed at length to decide the most efficient and resourceful plan of execution capital projects are big investments and therefore face a lot of scrutiny especially when paid for with public funds or the money of a publicly traded company the goal is for these investments to pay off but sometimes they are poorly planned and executed and end up losing significant capital capital project fundingthese projects are big take time to complete and can cost a lot of money meaning it is often necessary to obtain equity or debt financing to make them happen to receive funding capital projects are obligated to prove how the investment provides an improvement additional capacity new useful feature or benefit reduced costs analysts might use the return on new invested capital ronic calculation to evaluate if the return on a project is worthy of the capital investment additional funding sources for these projects include bonds grants bank loans existing cash reserves company operation budgets and private funding these projects may require debt financing to secure funding debt financing may also be required for infrastructure such as bridges however the bridge cannot be seized if the builder defaults on the loan debt financing ensures that the financier can recover funds if the builder defaults on the loan economic conditions and regulatory changes can affect the start or completion of capital projects as in the case of brexit which caused the cancellation or delays of some projects in britain 123in the united states congress is responsible for funding public capital projects such as roads power lines bridges and dams 4 | |
what are capital projects in government | government capital projects are large scale costly projects to maintain or improve public assets such as parks roads and schools | |
what is a noncapital project | most public offices set thresholds for what qualifies as a capital project for example in the commonwealth of virginia a capital project is defined as a project that creates at least 5 000 gross square feet of building space or exceeds 3 million in total project cost projects that fall under each jurisdiction s thresholds which can also include life expectancy may instead be called noncapital projects 5 | |
what makes a capital project successful | careful planning and realistic estimates do affordable funding needs to be secured costs need to be managed well and the project must have a very good chance of becoming profitable one or two setbacks could turn a capital project into a financial disaster the bottom linecapital assets are key revenue generators and the backbone of many companies those wishing to expand and become more profitable will need to invest in capital projects and do so in the most cost effective way possible over time it is smart well executed investments that separate the good stocks from the weak ones | |
what is capital stock | capital stock is the amount of common and preferred shares that a company is authorized to issue according to its corporate charter capital stock can only be issued by the company and is the maximum number of shares that can ever be outstanding the amount is listed on the balance sheet in the company s shareholders equity section investopedia dennis madambaunderstanding capital stockcapital stock can be issued by a company to raise capital to grow its business issued shares can be bought by investors who seek price appreciation and dividends or exchanged for assets such as equipment needed for operations the number of outstanding shares which are shares issued to investors is not necessarily equal to the number of available or authorized shares authorized shares are those that a company is legally able to issue the capital stock while outstanding shares are those that have actually been issued and remain outstanding to shareholders issuing capital stock can allow a company to raise money without incurring a debt burden and the associated interest charges the drawbacks are that the company would be relinquishing more of its equity and diluting the value of each outstanding share the amount that a company receives from issuing capital stock is considered to be capital contributions from investors and is reported as paid in capital and additional paid in capital in the stockholder s equity section of the balance sheet the common stock balance is calculated as the nominal or par value of the common stock multiplied by the number of common stock shares outstanding the nominal value of a company s stock is an arbitrary value assigned for balance sheet purposes when the company is issuing shares and is generally 1 or less it has no relation to the market price example of capital stockif a company obtains authorization to raise 5 million and its stock has a par value of 1 it may issue and sell up to 5 million shares of stock the difference between the par value and the sale price of the stock is logged under shareholders equity as additional paid in capital if the stock sells for 10 5 million will be recorded as paid in capital while 45 million will be treated as additional paid in capital consider apple aapl which has authorized 12 6 million shares with a 0 00001 par value the 12 6 million is its capital stock meanwhile as of june 27 2020 apple had issued 4 283 939 shares and had 4 443 236 outstanding treasury stock vs preferred stock vs common stockfirms can issue some of the capital stock over time or buy back shares that are currently owned by shareholders previously outstanding shares that are bought back by the company are known as treasury shares authorized stock refers to the maximum number of shares a firm is allowed to issue based on the board of directors approval those shares can be either common or preferred stock shares a business can issue shares over time so long as the total number of shares does not exceed the authorized amount authorizing a number of shares is an exercise that incurs legal costs and authorizing a large number of shares that can be issued over time is a way to optimize this cost preferred stock is listed first in the shareholders equity section of the balance sheet because its owners receive dividends before the owners of common stock and have preference during liquidation its par value is different from the common stock and sometimes represents the initial selling price per share which is used to calculate its dividend payments total par value equals the number of preferred stock shares outstanding times the par value per share for example if a company has 1 million shares of preferred stock at 25 par value per share it reports a par value of 25 million formula and calculation of capital stockpublic companies must report the value of their capital stock on the shareholder s equity section of their quarterly balance sheet the formula for valuing capital stock is cs nsi pvps where cs capital stock nsi number of shares issued pvps par value per share begin aligned text cs text nsi times text pvps textbf where text cs text capital stock text nsi text number of shares issued text pvps text par value per share end aligned cs nsi pvps where cs capital stocknsi number of shares issuedpvps par value per share note that different classes of stock may have different par values types of capital stockin addition to the classes of shares listed above there are additional categories to describe shares according to their place in the market valuation of capital stockcapital stock is typically valued based on its par value as well as the value of additional paid in capital this represents the excess over the par value that investors pay the company for their shares | |
when a company sells shares in an initial public offering the ipo price is normally well above the par value this difference will be listed as additional paid in capital in addition any secondary offerings or share buybacks will also affect the value of the capital stock | advantages and disadvantages of capital stockequity stock sales represent one of the most common ways for a company to raise capital however there are some disadvantages unlike taking loans or issuing bonds a company is not required to repay capital investors at a set schedule in addition it is inexpensive for a company to issue new shares which can be sold at a much higher price than the cost of issuing the securities capital stock represents ownership of the company s equity if a company s founders sell the majority of its voting shares to outside investors they risk losing the ability to control the company s future moreover even if it only sells a small number of shares securities laws will require the company to publish details of its financial health | |
when a company issues shares it dilutes the value of existing shares in the market potentially devaluing the equity held by older investors in order to raise the value of outstanding shares the company must either increase its market capitalization or issue a buyback | allow companies to raise cheaply and easily unlike loans or bonds equity capital is interest free and does not have a set repayment schedule stock issuances can dilute the value of existing shares company founders may lose control over the direction of their company strict securities laws and transparency requirements make it | |
how long should you hold stock for long term capital gains | if you hold stock or other assets for more than one year it is taxed at the long term capital gains rate which is generally lower for all but the wealthiest investors for short term trades you are taxed at your ordinary income level | |
how do you avoid the capital gains tax | the capital gains tax is a tax on the profits from selling securities or other investments most investors can reduce their capital gains taxes by holding their investments for over one year if you sell before one year the gains are taxed at your ordinary income level which is generally higher than the long term capital gains tax rate if you suffer a capital loss you can use those losses to offset other gains | |
what is capital stock in accounting | in accounting and finance capital stock represents the value of a company s shares that are held by outside investors it is calculated by multiplying the par value of those shares by the number of shares outstanding the bottom linecapital stock is another term for the ownership shares of a company s equity represented as either preferred or common stock corporations typically sell their shares to investors in order to raise capital to fund their business operations in exchange investors receive partial ownership of the company including dividends or voting power | |
what is capital structure | capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth equity capital arises from ownership shares in a company and claims to its future cash flows and profits debt comes in the form of bond issues or loans while equity may come in the form of common stock preferred stock or retained earnings short term debt is also considered to be part of the capital structure investopedia matthew collinsdynamics of debt and equityboth debt and equity can be found on the balance sheet company assets also listed on the balance sheet are purchased with debt or equity capital structure can be a mixture of a company s long term debt short term debt common stock and preferred stock a company s proportion of short term debt versus long term debt is considered when analyzing its capital structure | |
when analysts refer to capital structure they are most likely referring to a firm s debt to equity d e ratio which provides insight into how risky a company s borrowing practices are usually a company that is heavily financed by debt has a more aggressive capital structure and therefore poses a greater risk to investors this risk however may be the primary source of the firm s growth | debt is one of the two main ways a company can raise money in the capital markets companies benefit from debt because of its tax advantages interest payments made as a result of borrowing funds may be tax deductible debt also allows a company or business to retain ownership unlike equity additionally in times of low interest rates debt is abundant and easy to access equity allows outside investors to take partial ownership of the company equity is more expensive than debt especially when interest rates are low however unlike debt equity does not need to be paid back this is a benefit to the company in the case of declining earnings on the other hand equity represents a claim by the owner on the future earnings of the company optimal capital structurecompanies that use more debt than equity to finance their assets and fund operating activities have a high leverage ratio and an aggressive capital structure a company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure that said a high leverage ratio and an aggressive capital structure can also lead to higher growth rates whereas a conservative capital structure can lead to lower growth rates analysts use the d e ratio to compare capital structure it is calculated by dividing total liabilities by total equity savvy companies have learned to incorporate both debt and equity into their corporate strategies at times however companies may rely too heavily on external funding and debt in particular investors can monitor a firm s capital structure by tracking the d e ratio and comparing it against the company s industry peers it is the goal of company management to find the ideal mix of debt and equity also referred to as the optimal capital structure to finance operations | |
why do different companies have different capital structure | firms in different industries will use capital structures better suited to their type of business capital intensive industries like auto manufacturing may utilize more debt while labor intensive or service oriented firms like software companies may prioritize equity | |
how do managers decide on capital structure | assuming that a company has access to capital e g investors and lenders they will want to minimize their cost of capital this can be done using a weighted average cost of capital wacc calculation to calculate wacc the manager or analyst will multiply the cost of each capital component by its proportional weight | |
how do analysts and investors use capital structure | a company with too much debt can be seen as a credit risk too much equity however could mean the company is underutilizing its growth opportunities or paying too much for its cost of capital as equity tends to be more costly than debt unfortunately there is no magic ratio of debt to equity to use as guidance to achieve real world optimal capital structure what defines a healthy blend of debt and equity varies depending on the industry the company operates in its stage of development and can vary over time due to external changes in interest rates and regulatory environment | |
what measures do analysts and investors use to evaluate capital structure | in addition to the weighted average cost of capital wacc several metrics can be used to estimate the suitability of a company s capital structure leverage ratios are one group of metrics that are used such as the debt to equity d e ratio or debt ratio the bottom linecapital structure is the specific mix of debt and equity that a company uses to finance its operations and growth debt consists of borrowed money that must be repaid often with interest while equity represents ownership stakes in the company the debt to equity d e ratio is a commonly used measure of a company s capital structure and can provide insight into its level of risk a company with a high proportion of debt in its capital structure may be considered riskier for investors but may also have greater potential for growth | |
what is capitalism | capitalism is an economic system in which private individuals or businesses own capital goods at the same time business owners employ workers who receive only wages labor doesn t own the means of production but instead uses them on behalf of the owners of capital the production of goods and services under capitalism is based on supply and demand in the general market also known as the market economy this is in contrast to a planned economy or a command economy in which prices are set through central planning the purest form of capitalism is free market or laissez faire capitalism here private individuals are unrestrained they may determine where to invest what to produce or sell and at which prices to exchange goods and services the laissez faire marketplace operates without checks or controls today most countries practice a mixed capitalist system that includes some degree of government regulation of business and some extent of public ownership of select industries 1understanding capitalismcapitalism is one type of system of economic production and resource distribution instead of planning economic decisions through centralized political methods as with socialism or feudalism economic planning under capitalism occurs via decentralized competitive and voluntary decisions capitalism is essentially an economic system in which the means of production factories tools machines raw materials etc are organized by one or more business owners also known as capitalists capitalists then hire workers to operate the means of production in return for wages workers have no claim on the means of production or on the profits generated from their labor these belong to the capitalists 1as such private property rights are fundamental to capitalism most modern concepts of private property stem from john locke s theory of homesteading in which human beings claim ownership by mixing their labor with unclaimed resources once owned the only legitimate means of transferring property are through voluntary exchange gifts inheritance or the re homesteading of abandoned property 2private property promotes efficiency by giving the owner of resources an incentive to maximize the value of their property the more valuable a resource is the more trading power it provides the owner in a capitalist system the person who owns the property is entitled to any value associated with that property for individuals or businesses to deploy their capital goods confidently a system must exist that protects their legal right to own or transfer private property a capitalist society relies on the use of contracts fair dealing and tort law to facilitate and enforce these private property rights | |
when property isn t privately owned but rather is shared by the public a problem known as the tragedy of the commons can emerge with a common pool resource which all people can use and none can limit access to all individuals have an incentive to extract as much use value as they can and no incentive to conserve or reinvest in the resource privatizing the resource is one possible solution to this problem along with various voluntary or involuntary collective action approaches 3 | under capitalist production the business owners retain ownership of the goods being produced if a worker in a shoe factory were to take home a pair of shoes that they made it would be theft this concept is known as the alienation of workers from their labor capitalism and the profit motiveprofits are closely associated with the concept of private property by definition an individual only enters into a voluntary exchange of private property when they believe the exchange benefits them in some psychic or material way in such trades each party gains extra subjective value or profit from the transaction the profit motive or the desire to earn profits from business activity is the driving force of capitalism it creates a competitive environment in which businesses compete to be the low cost producer of a certain good in order to gain market share if it is more profitable to produce a different type of good then a business is incentivized to switch 4voluntary trade is another related mechanism that drives activity in a capitalist system the owners of resources compete with one another over consumers who in turn compete with other consumers over goods and services all this activity is built into the price system which balances supply and demand to coordinate the distribution of resources 1a capitalist earns the highest profit by using capital goods such as machinery and tools most efficiently while producing the highest value good or service by contrast the capitalist suffers losses when capital resources aren t used efficiently and instead create less valuable outputs capitalism is a system of economic production markets are systems of distribution and allocation of goods already produced while they often go hand in hand capitalism and free markets refer to two distinct systems precursors to capitalism feudalism and mercantilismcapitalism is a relatively new type of social arrangement for producing goods in an economy it arose largely along with the advent of the industrial revolution some time in the late 17th century 5 before capitalism other systems of production and social organization were prevalent capitalism grew out of european feudalism up until the 12th century a very small percentage of the population of europe lived in towns skilled workers lived in the city but received their keep from feudal lords rather than a real wage and most workers were serfs for landed nobles however by the late middle ages rising urbanism with cities as centers of industry and trade became more and more economically important under feudalism society was segmented into social classes based on birth or family lineage lords nobility were the landowners while serfs peasants and laborers didn t own land but were under the employ of the landed nobility the advent of industrialization revolutionized the trades and encouraged more people to move into towns where they could earn more money working in a factory than existing at a subsistence level in exchange for labor mercantilism gradually replaced the feudal economic system in western europe and became the primary economic system of commerce during the 16th to 18th centuries mercantilism started as trade between towns but it wasn t necessarily competitive trade initially each town had vastly different products and services that were slowly homogenized over time by demand 6after the homogenization of goods trade was carried out in broader and broader circles town to town county to county province to province and finally nation to nation when too many nations were offering similar goods for trade the trade took on a competitive edge that was sharpened by strong feelings of nationalism on a continent that was constantly embroiled in wars colonialism flourished alongside mercantilism but the nations seeding the world with settlements weren t trying to increase trade most colonies were set up with an economic system that smacked of feudalism with their raw goods going back to the motherland and in the case of the british colonies in north america being forced to repurchase the finished product with a pseudo currency that prevented them from trading with other nations it was economist adam smith who noticed that mercantilism was a regressive system that was creating trade imbalances between nations and keeping them from advancing his ideas for a free market opened the world to capitalism 7adam smith s ideas were well timed as the industrial revolution was starting to cause tremors that would soon shake the western world the often literal gold mine of colonialism had brought new wealth and new demand for the products of domestic industries which drove the expansion and mechanization of production as technology leaped ahead and factories no longer had to be built near waterways or windmills to function industrialists began building in the cities where there were now thousands of people to supply labor capitalism involved reorganizing society into social classes based not on ownership of land but ownership of capital in other words businesses capitalists were able to earn profits from the surplus labor of the working class who earned only wages thus the two social classes defined by capitalism are the capitalists and the laboring classes 8industrial tycoons were the first people to amass wealth often outstripping both the landed nobles and many of the money lending banking families for the first time in history common people could have hopes of becoming wealthy the new money crowd built more factories that required more labor while also producing more goods for people to purchase during this period the term capitalism originating from the latin word capitalis which means head of cattle rose to prominence in 1850 french socialist louis blanc used the term to signify a system of exclusive ownership of industrial means of production by private individuals rather than shared ownership 9pros and cons of capitalismmore efficient allocation of capital resourcescompetition leads to lower consumer priceswages and general standards of living rise overallspurs innovation and inventioncreates inherent class conflict between capital and laborgenerates enormous wealth disparities and social inequalitiescan incentivize corruption and crony capitalism in the pursuit of profitproduces negative effects such as pollutionmore efficient allocation of capital resources labor and means of production follow capital in this system because supply follows demand competition leads to lower consumer prices capitalists are in competition against one another and so will seek to increase their profits by cutting costs including labor and materials costs mass production also usually benefits consumers wages and general standards of living rise overall wages under capitalism increased helped by the formation of unions more and better goods became cheaply accessible to wide populations raising standards of living in previously unthinkable ways spurs innovation and invention in capitalism inequality is the driving force that encourages innovation which then pushes economic development creates inherent class conflict between capital and labor while capitalists enjoy the potential for high profits workers may be exploited for their labor with wages always kept lower than the true value of the work being done generates enormous wealth disparities and social inequalities capitalism has created an immense gap between the wealthy and the poor as well as social inequalities can incentivize corruption and crony capitalism in the pursuit of profit capitalism can provide incentives for corruption emerging from favoritism and close relationships between business people and the state produces negative effects such as pollution capitalism often leads to a host of negative externalities such as air and noise pollution and these costs paid for by society rather than the producer of the effect capitalism vs socialismin terms of political economy capitalism is often contrasted with socialism the fundamental difference between the two is the ownership and control of the means of production in a capitalist economy property and businesses are owned and controlled by individuals in a socialist economy the state owns and manages the vital means of production however other differences also exist in the form of equity efficiency and employment the capitalist economy is unconcerned about equitable arrangements the primary concern of the socialist model is the redistribution of wealth and resources from the rich to the poor out of fairness and to ensure equality in opportunity and equality of outcome equality is valued above high achievement and the collective good is viewed above the opportunity for individuals to advance the capitalist argument is that the profit incentive drives corporations to develop innovative new products desired by the consumer and in demand in the marketplace it is argued that the state ownership of the means of production leads to inefficiency because without the motivation to earn more money management workers and developers are less likely to put forth the extra effort to push new ideas or products in a capitalist economy the state doesn t directly employ the workforce this lack of government run employment can lead to unemployment during economic recessions and depressions in a socialist economy the state is the primary employer during times of economic hardship the socialist state can order hiring so there is full employment also there tends to be a stronger safety net in socialist systems for workers who are injured or permanently disabled those who can no longer work have fewer options available to help them in capitalist societies philosopher karl marx was famously critical of the capitalist system of production because he saw it as an engine for creating social ills massive inequalities and self destructive tendencies marx argued that over time capitalist businesses would drive one another out of business through fierce competition while at the same time the laboring class would swell and begin to resent their unfair conditions his solution was socialism through which the means of production would be handed over to the laboring class in an egalitarian fashion 10varieties of capitalismtoday many countries operate with capitalist production but this also exists along a spectrum in reality there are elements of pure capitalism that operate alongside otherwise socialist institutions the standard spectrum of economic systems places laissez faire capitalism at one extreme and a complete planned economy such as communism at the other everything in between could be said to be a mixed economy the mixed economy has elements of both central planning and unplanned private business by this definition nearly every country in the world has a mixed economy 1 | |
when the government owns some but not all the means of production and may legally circumvent replace limit or otherwise regulate private economic interests it is said to be a mixed economy or mixed economic system a mixed economy respects property rights but places limits on them | property owners are restricted as to how they exchange with one another these restrictions come in many forms such as minimum wage laws tariffs quotas windfall taxes license restrictions prohibited products or contracts direct public expropriation antitrust legislation legal tender laws subsidies and eminent domain governments in mixed economies also fully or partly own and operate certain industries especially those considered public goods in contrast with pure capitalism also known as laissez faire capitalism or anarcho capitalism all industries are left up to private ownership and operation including public goods and no central government authority provides regulation or supervision of economic activity in general 11 | |
what is an example of capitalism | an example of capitalist production would be if an entrepreneur starts a new widget company and opens a factory this individual uses available capital that they own or from outside investors and buys the land builds the factory orders the machinery and sources the raw materials workers are then hired by the entrepreneur to operate the machines and produce widgets note that the workers don t own the machines they use or the widgets that they produce instead they receive only wages in exchange for their labor these wages represent a small fraction of what the entrepreneur earns from the venture who benefits from capitalism capitalism tends to benefit capitalists the most these include business owners investors and other owners of capital while capitalism has been praised for improving the standard of living for many people across the board it has by far benefited those at the top | |
why is capitalism harmful | because of how it is structured capitalism will always pit business owners and investors against the working class capitalists are also in competition against one another and so will seek to increase their profits by cutting costs including labor costs at the same time workers seek higher wages fairer treatment and better working conditions these two incentives are fundamentally at odds which creates class conflict | |
is capitalism the same as free enterprise | capitalism and free enterprise are often seen as synonymous in truth they are closely related yet distinct terms with overlapping features it is possible to have a capitalist economy without complete free enterprise and a free market without capitalism any economy is capitalist as long as private individuals control the factors of production however a capitalist system can still be regulated by government laws and the profits of capitalist endeavors can still be taxed heavily free enterprise can roughly be understood to mean economic exchanges free of coercive government influence the bottom linecapitalism is an economic and political system where trade and industry are controlled by private owners for profit its core principles are accumulation ownership and profiting from capital in its purest form capitalism works best when these private owners have assurances that the wealth they generate will be kept in their own pocket which is often a controversial proposition capitalism is the dominant world economic system although it often isn t pure in form in many countries interventions from the state a core trait of socialism are frequent businesses are able to chase profit but within the boundaries set by the government most political theorists and nearly all economists argue that capitalism is the most efficient and productive system of exchange | |
what is capitalization | capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset rather than being expensed in the period the cost was originally incurred in addition to this usage market capitalization refers to the number of outstanding shares multiplied by the share price which is a measure of the total market value of a company investopedia madelyn goodnightunderstanding capitalizationin accounting capitalization is an accounting rule used to recognize a cash outlay as an asset on the balance sheet rather than an expense on the income statement in finance capitalization is a quantitative assessment of a firm s capital structure here it refers to the cost of capital in the form of a corporation s stock long term debt and retained earnings types of capitalizationthere are two key types of capitalizations one of which is applied in accounting and the other in finance in accounting the matching principle requires companies to record expenses in the same accounting period in which the related revenue is incurred for example office supplies are generally expensed in the period when they are incurred since they are expected to be consumed within a short period of time however some larger office equipment may provide a benefit to the business over more than one accounting period these items are fixed assets such as computers cars and office buildings the costs of these items are recorded on the general ledger as the historical cost of the asset therefore these costs are said to be capitalized not expensed capitalized assets are not expensed in full against earnings in the current accounting period a company can make a large purchase but expense it over many years depending on the type of property plant or equipment involved as the assets are used up over time to generate revenue for the company a portion of the cost is allocated to each accounting period this process is known as depreciation or amortization for intangible assets for leased equipment capitalization is the conversion of an operating lease to a capital lease by classifying the leased asset as a purchased asset which is included on the balance sheet as part of the company s assets the financial accounting standards board fasb issued a new accounting standards update asu in 2016 that requires all leases over twelve months to be both capitalized as an asset and recorded as a liability on the lessee s books to fairly present both the rights and obligations of the lease 1some types of long term assets are capitalized but not depreciated for example the acquisition of land is capitalized however that land is not depreciated but is carried on the balance sheet at historical cost the company may be required to reflect fair market value adjustments though it may not record accumulated depreciation against the asset another aspect of capitalization refers to the company s capital structure capitalization can refer to the book value cost of capital which is the sum of a company s long term debt stock and retained earnings the alternative to the book value is the market value the market value cost of capital depends on the price of the company s stock it is calculated by multiplying the price of the company s shares by the number of shares outstanding in the market if the total number of shares outstanding is 1 billion and the stock is currently priced at 10 the market capitalization is 10 billion companies with a high market capitalization are referred to as large caps a company can be overcapitalized or undercapitalized undercapitalization occurs when earnings are not enough to cover the cost of capital such as interest payments to bondholders or dividend payments to shareholders overcapitalization occurs when there s no need for outside capital because profits are high and earnings were underestimated companies can only raise capital through a few methods the long term goal of a company is to be overcapitalized as it can return funds to investors invest for growth and still earn a profit capitalization thresholdsgenerally a company will set capitalization thresholds any cash outlay over that amount will be capitalized if it is appropriate companies will set their own capitalization threshold because materiality varies by company size and industry for example a local mom and pop store may have a 500 capitalization threshold while a global technology company may set its capitalization threshold at 10 000 financial statements can be manipulated when a cost is wrongly capitalized or expensed if a cost is incorrectly expensed net income in the current period will be lower than it otherwise should be the company will also pay lower taxes in the current period if a cost is incorrectly capitalized net income in the current period will be higher than it otherwise should be in addition assets on the balance sheet will be overstated | |
what does capitalization mean in accounting | capitalization is an accounting rule used to recognize a cash outlay as an asset on the balance sheet rather than an expense on the income statement the cost of fixed assets such as computers cars and office buildings are recorded on the general ledger as the historical cost of the asset and not expensed in full against earnings in the current accounting period these costs are said to be capitalized not expensed | |
how does capitalization impact leased equipment | for leased equipment capitalization is the conversion of an operating lease to a capital lease by classifying the leased asset as a purchased asset which is included on the balance sheet as part of the company s assets leases over twelve months must be capitalized as an asset and recorded as a liability on the lessee s books | |
what does capitalization mean in finance | in finance capitalization is a quantitative assessment of a firm s capital structure here it can refer to the book value cost of capital which is the sum of a company s long term debt stock and retained earnings the alternative to the book value is the market value or market capitalization | |
what costs can be capitalized | companies often set internal thresholds that establish what materiality levels exist for capitalizable assets in general costs that benefit future periods should be capitalized and expensed so that the expense of the asset is recognized in the same period as when the benefit is received in general examples of costs that can be capitalized include development costs construction costs or capital assets such as equipment or vehicles | |
when a small company starts it must create a capitalization strategy that outlines how the company will use its scarce resources to start operations based on initial forecasts business owners may project how much financing they need to ensure profitability and sustainability until the company can be self sustaining whether it is raising equity from a private investor applying for debt or contributing personal capital these funding sources combined comprise of the capitalization strategy | the bottom linecapitalization refers to a few different things across business in accounting capitalization refers to long term assets with future benefit instead of expensing costs as they occur they may be depreciated over time as the benefit is received in finance capitalization refers to the financing structure and sourcing of funds | |
what is the capitalization rate | the capitalization rate also known as cap rate is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property this measure is computed based on the net income that the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage it is used to estimate the investor s potential return on their investment in the real estate market the figure also helps to determine the exit rate or terminal capitalization rate for a property when it is sold at the end of the projected holding period while the cap rate can be useful for quickly comparing the relative value of similar real estate investments in the market it should not be used as the sole indicator of an investment s strength because it does not take into account leverage the time value of money and future cash flows from property improvements among other factors understanding the capitalization ratethe cap rate is the most popular measure through which real estate investments are assessed for their profitability and return potential the cap rate simply represents the yield of a property over a one year time horizon assuming the property is purchased on cash and not on loan the capitalization rate indicates the property s intrinsic natural and un levered rate of return formula for the capitalization rateseveral versions exist for the computation of the capitalization rate in the most popular formula the capitalization rate of a real estate investment is calculated by dividing the property s net operating income noi by the current market value mathematically capitalization rate net operating income current market value | |
where | the net operating income is the expected annual income generated by the property like rentals and is arrived at by deducting all the expenses incurred for managing the property these expenses include the cost paid towards the regular upkeep of the facility as well as the property taxes the current market value of the asset is the present day value of the property as per the prevailing market rates in another version the figure is computed based on the original capital cost or the acquisition cost of a property capitalization rate net operating income purchase pricehowever the second version is not very popular for two reasons first it gives unrealistic results for old properties that were purchased several years decades ago at low prices and second it cannot be applied to the inherited property as their purchase price is zero making the division impossible additionally since property prices fluctuate widely the first version using the current market price is a more accurate representation as compared to the second one which uses the fixed value original purchase price those interested in learning more about capitalization rates may want to consider enrolling in one of the best online real estate schools interpreting the capitalization ratesince cap rates are based on the projected estimates of the future income they are subject to high variance it then becomes important to understand what constitutes a good cap rate for an investment property the rate also indicates the duration of time it will take to recover the invested amount in a property for instance a property having a cap rate of 10 will take around 10 years for recovering the investment different cap rates among different properties or different cap rates across different time horizons on the same property represent different levels of risk a look at the formula indicates that the cap rate value will be higher for properties that generate higher net operating income and have a lower valuation and vice versa there are no clear ranges for a good or bad cap rate and they largely depend on the context of the property and the market say there are two properties that are similar in all attributes except for being geographically apart one is in a posh city center area while the other is on the outskirts of the city all things being equal the first property will generate a higher rental compared to the second one but those will be partially offset by the higher cost of maintenance and higher taxes the city center property will have a relatively lower cap rate compared to the second one owing to its significantly high market value it indicates that a lower value cap rate corresponds to better valuation and a better prospect of returns with a lower level of risk on the other hand a higher value of cap rate implies relatively lower prospects of return on property investment and hence a higher level of risk while the above hypothetical example makes it an easy choice for an investor to go with the property in the city center real world scenarios may not be that straightforward the investor assessing a property on the basis of the cap rate faces the challenging task to determine the suitable cap rate for a given level of risk gordon model representation for cap rateanother representation of the cap rate comes from the gordon growth model which is also called the dividend discount model ddm it is a method for calculating the intrinsic value of a company s stock price independent of the current market conditions and the stock value is calculated as the present value of a stock s future dividends mathematically stock value expected annual dividend cash flow investor s required rate of return expected dividend growth rate rearranging the equation and generalizing the formula beyond dividend required rate of return expected growth rate expected cash flow asset valuethe above representation matches the basic formula of the capitalization rate mentioned in the earlier section the expected cash flow value represents the net operating income and the asset value matches the current market price of the property this leads to the capitalization rate being equivalent to the difference between the required rate of return and the expected growth rate that is the cap rate is simply the required rate of return minus the growth rate this can be used to assess the valuation of a property for a given rate of return expected by the investor for instance say the net operating income of a property is 50 000 and it is expected to rise by 2 annually if the investor s expected rate of return is 10 per annum then the net cap rate will come to 10 2 8 using it in the above formula the asset valuation comes to 50 000 8 625 000 limitations of the cap ratealthough capitalization rate can be a useful metric for properties that provide stable income it is less reliable if a property has irregular or inconsistent cash flows in these circumstances a discounted cash flow model might be a better way to measure the returns from an investment property the capitalization rate is only useful to the extent that a property s income will remain stable over the long term it does not take into account future risks such as depreciation or structural changes in the rental market that could cause income fluctuations investors should take these risks into account when relying on cap rate calculations | |
what is a good cap rate | there is no single value for what makes an ideal capitalization rate and investors should consider their own risk appetites when evaluating a property generally a high capitalization rate will indicate a higher level of risk while a lower capitalization rate indicates lower returns but lower risk that said many analysts consider a good cap rate to be around 5 to 10 while a 4 cap rate indicates lower risk but a longer timeline to recoup an investment 1 there are also other factors to consider like the features of a local property market and it is important not to rely on cap rate or any other single metric | |
what affects the cap rate | there are many potential market factors that can affect the capitalization rate of a property as with other rental properties location plays a major factor in determining the returns of commercial properties with high traffic areas likely to come with a higher capitalization rate it is also important to consider other features of the local market such as competing properties generally properties in a large well developed market will tend to have lower capitalization rates due to competitive pressures from other businesses future trends such as local market growth can also affect the long term capitalization rate for a property finally the amount of capital you invest in a property can also affect the cap rate a renovation that makes a property more attractive could command higher rents increasing the owner s operating income examples of the capitalization rateassume that john has 1 million and he is considering investing in one of the two available investment options one he can invest in government issued treasury bonds that offer a nominal 3 annual interest and are considered the safest investments or two he can purchase a commercial building that has multiple tenants who are expected to pay regular rent in the second case assume that the total rent received per year is 90 000 and the investor needs to pay a total of 20 000 towards various maintenance costs and property taxes it leaves the net income from the property investment at 70 000 assume that during the first year the property value remains steady at the original buy price of 1 million the capitalization rate will be computed as net operating income property value 70 000 1 million 7 this return of 7 generated from the property investment fares better than the standard return of 3 available from the risk free treasury bonds the extra 4 represents the return for the risk taken by the investor by investing in the property market as against investing in the safest treasury bonds which come with zero risk property investment is risky and there can be several scenarios where the return as represented by the capitalization rate measure can vary widely for instance a few of the tenants may move out and the rental income from the property may diminish to 40 000 reducing the 20 000 towards various maintenance costs and property taxes and assuming that property value stays at 1 million the capitalization rate comes to 20 000 1 million 2 this value is less than the return available from risk free bonds in another scenario assume that the rental income stays at the original 90 000 but the maintenance cost and or the property tax increases significantly to say 50 000 the capitalization rate will then be 40 000 1 million 4 pay attention to rates in general cap rates increase when interest rates go up in another case if the current market value of the property itself diminishes to say 800 000 with the rental income and various costs remaining the same the capitalization rate will increase to 70 000 800 000 8 75 in essence varying levels of income that get generated from the property expenses related to the property and the current market valuation of the property can significantly change the capitalization rate the surplus return which is theoretically available to property investors over and above the treasury bond investments can be attributed to the associated risks that lead to the above mentioned scenarios the risk factors include | |
what should my capitalization rate be | the capitalization rate for an investment property should be between 4 and 10 the exact number will depend on the location of the property as well as the rate of return required to make the investment worthwhile 2 | |
is a higher or lower capitalization rate better | generally the capitalization rate can be viewed as a measure of risk so determining whether a higher or lower cap rate is better will depend on the investor and their risk profile a higher cap rate means that the investment holds more risk whereas a low cap risk means an investment holds less risk | |
what is the difference between the capitalization rate and return on investment | return on investment indicates what the potential return of an investment could be over a specific time horizon the capitalization rate will tell you what the return of an investment is currently or what it should actually be the bottom linethe capitalization rate is used to measure the profitability of commercial rental properties a high cap rate indicates a relatively high income relative to the size of the initial investment however there are also other factors to consider such as risk and local market dynamics investors should be careful to consider a wide range of metrics in addition to the capitalization rate | |
what is a capitalization cap table | a capitalization table is a spreadsheet or table that shows the equity capitalization of a company it s also known as a cap table and is most commonly used for startups and early stage businesses but all types of companies can use it as well the capitalization table is generally an intricate breakdown of a company s shareholders equity cap tables often include all of a company s equity ownership capital such as common equity shares preferred equity shares warrants and convertible equity understanding a cap tablea basic capitalization table lists each type of equity ownership capital the individual investors and the share prices a more complex table may also include details on potential new funding sources mergers and acquisitions public offerings or other hypothetical transactions capitalization tables are typically used privately by private companies to provide information on a company s investors and market value 1here s an example a capitalization table shows the total market value of a company and its components it s considered a key point of reference for business managers in every financial decision that has an impact on market capitalization and the company s market value it s important for the capitalization table to be accurate customized to the business s needs and regularly maintained for decision making based on the most current information a capitalization table is a simple organized document that displays the total ownership capitalization of a firm creating and maintaining a cap tablea cap table can be viewed in conjunction with the shareholders equity portion of the balance sheet which also details the equity capital structuring of a firm the capitalization table shows each investor s equity capital stake in the business which is calculated by multiplying the share price by the number of shares owned the names of the security owners will be listed on the y axis in most cases and the types of securities will appear on the x axis all holdings of each investor should be in a single row the listing of investors can be done in a few ways and may depend on the targeted audience some cap tables may list investors by founders first followed by executives and key employees with equity stakes then other investors such as angel investors venture capital firms and others who are involved in the business plan a capitalization table may choose to list investors in descending order by ownership showing the largest holders at the top instead special considerationscompanies constantly evolve so their capitalization tables must be continuously updated startups run several funding rounds to support capital needs they also issue stock options to attract talent all these actions change the capitalization table terminating options when an employee leaves the business can also alter the table as can letting options expire having an investor exercise vested options or having an investor redeem transfer or sell shares | |
why do startups need cap tables | startup companies generally have only a small number of equity owners they often include the founders friends and family of the founders and angel investors keeping track of who owns what stake in the new company is important as it grows and raises capital from other sources such as venture capitalists and ultimately to the public via an initial public offering ipo 2the cap table will be updated after each subsequent funding round showing how ownership becomes diluted and spread across new owners as it grows | |
what information does the cap table keep track of | the cap table will keep track of stock ownership as well as convertible securities warrants and options and stock compensation grants this allows for a fully diluted picture of equity ownership the cap table will show who owns how many shares or rights the current market value and the proportion of the ownership as an overall percentage | |
are cap tables public information | there are no u s regulations mandating that private companies disclose their cap tables 3 startups may want to limit the visibility of their cap tables and only make them available to serious inquiries from potential investors a list of insiders and institutional shareholders is made available when a company goes public however the bottom linea capitalization or cap table is a spreadsheet or table that shows a company s equity capitalization it s generally an intricate breakdown of a company s shareholders equity capitalization tables are typically used privately by private companies to provide information on a company s investors and market value | |
what is to capitalize | to capitalize is to record a cost or expense on the balance sheet for the purposes of delaying full recognition of the expense in general capitalizing expenses is beneficial as companies acquiring new assets with long term lifespans can amortize or depreciate the costs this process is known as capitalization capitalization may also refer to the concept of converting some idea into a business or investment in finance capitalization is a quantitative assessment of a firm s capital structure when used this way it sometimes also means to monetize investopedia jake shiunderstanding how to capitalizeone of the most important principles of accounting is the matching principle the matching principle states that expenses should be recorded for the period incurred regardless of when payment e g cash is made recognizing expenses in the period incurred allows businesses to identify amounts spent to generate revenue for assets that are immediately consumed this process is simple and sensible however large assets that provide a future economic benefit present a different opportunity for example a company purchases a delivery truck for daily operations the truck is expected to provide value over a period of 12 years instead of expensing the entire cost of the truck when purchased accounting rules allow companies to write off the cost of the asset over its useful life 12 years in other words the asset is written off as it is used most companies have an asset threshold in which assets valued over a certain amount are automatically treated as a capitalized asset benefits of capitalizationcapitalizing assets has many benefits because long term assets are costly expensing the cost over future periods reduces significant fluctuations in income especially for small firms many lenders require companies to maintain a specific debt to equity ratio if large long term assets were expensed immediately it could compromise the required ratio for existing loans or could prevent firms from receiving new loans also capitalizing expenses increases a company s asset balance without affecting its liability balance as a result many financial ratios will appear favorable despite this benefit it should not be the motivation for capitalizing on an expense depreciationthe process of writing off an asset over its useful life is referred to as depreciation which is used for fixed assets such as equipment amortization is used for intangible assets such as intellectual property depreciation deducts a certain value from the asset every year until the full value of the asset is written off the balance sheet 1depreciation is an expense recorded on the income statement it is not to be confused with accumulated depreciation which is a balance sheet contra account the income statement depreciation expense is the amount of depreciation expensed for the period indicated on the income statement the accumulated depreciation balance sheet contra account is the cumulative total of depreciation expense recorded on the income statements from the asset s acquisition until the time indicated on the balance sheet for leased equipment capitalization is the conversion of an operating lease to a capital lease by classifying the leased asset as a purchased asset which is recorded on the balance sheet as part of the company s assets the value of the asset that will be assigned is either its fair market value or the present value of the lease payments whichever is less also the amount of principal owed is recorded as a liability on the balance sheet there are strict regulatory guidelines and best practices for capitalizing assets and expenses market capitalizationanother aspect of capitalization refers to the company s capital structure capitalization can refer to the book value of capital which is the sum of a company s long term debt stock and retained earnings which represents a cumulative savings of profit or net income the alternative to the book value is market value the market value of capital depends on the price of the company s stock it is calculated by multiplying the price of the company s stock by the number of equity shares outstanding in the market if the total number of shares outstanding is 1 billion and the stock is currently priced at 10 the market capitalization is 10 billion companies with a high market capitalization are referred to as large caps companies with medium market capitalization are referred to as mid caps while companies with small capitalization are referred to as small caps 2it is possible to be overcapitalized or undercapitalized overcapitalization occurs when earnings are not enough to cover the cost of capital such as interest payments to bondholders or dividend payments to shareholders dividends are cash payments made to shareholders by companies undercapitalization occurs when there s no need for outside capital because profits are high and earnings were underestimated capitalized cost vs expense | |
when trying to discern what a capitalized cost is it s first important to make the distinction between what is defined as a cost and an expense in the world of accounting a cost on any transaction is the amount of money used in exchange for an asset | a company buying a forklift would mark such a purchase as a cost an expense is a monetary value leaving the company this would include something like paying the electricity bill or rent on a building the use of the word capital to refer to a person s wealth comes from the medieval latin capitale for stock property limitations of capitalizingto capitalize assets is an important piece of modern financial accounting and is necessary to run a business however financial statements can be manipulated for example when a cost is expensed instead of capitalized if this occurs current income will be understated while it will be inflated in future periods over which additional depreciation should have been charged | |
what is capitalization in accounting | in accounting typically a purchase is recorded in the time accounting period in which it was bought however some expenses such as office equipment may be usable for several accounting periods beyond the one in which the purchase was made these fixed assets are recorded on the general ledger as the historical cost of the asset as a result these costs are considered to be capitalized not expensed a portion of the cost is then recorded during each quarter of the item s usable life in a process called depreciation | |
what is capitalization in finance | in finance capitalization is the company s capital structure it is the book value cost of capital or the total of a company s long term debt stock and retained earnings a company that is said to be undercapitalized does not have the capital to finance all obligations overcapitalization occurs when outside capital is determined to be unnecessary as profits were high enough and earnings were underestimated | |
what kinds of costs can be capitalized | any costs that benefit future periods should be capitalized and expensed so as to reflect the lifespan of the item or items being purchased costs that can be capitalized include development costs construction costs or the purchase of capital assets such as vehicles or equipment the bottom linecapitalizing in business is to record an expense on the balance sheet in a way that delays the full recognition of the expense often over a number of quarters or years the process is used for the purchase of fixed assets that have a long usable life such as equipment or vehicles in finance capitalization is also an assessment of a company s capital structure | |
what is a capitalized cost | a capitalized cost is an expense added to the cost basis of a fixed asset on a company s balance sheet capitalized costs are incurred when building or purchasing fixed assets capitalized costs are not expensed in the period they were incurred but recognized over a period of time via depreciation or amortization 1investopedia michela buttignolunderstanding capitalized costs | |
when capitalizing costs a company is following the matching principle of accounting the matching principle seeks to record expenses in the same period as the related revenues in other words the goal is to match the cost of an asset to the periods in which it is used and is therefore generating revenue as opposed to when the initial expense was incurred 1 | long term assets will be generating revenue throughout their useful life thus their costs may be depreciated or amortized over a long period according to the internal revenue service there are many different kinds of business assets that you must fully capitalize the costs of these include for example land buildings furniture machinery trucks and freight and installation charges two other examples are patents and franchise rights 2for example expenses incurred during the construction of a warehouse are not expensed immediately the costs associated with building the warehouse including labor costs and financing costs can be added to the carrying value of the fixed asset on the balance sheet these capitalized costs will be expensed through depreciation in future periods when revenues generated from the factory output are also recognized another example is software development out of the three phases of software development preliminary project stage application development stage and post implementation operation stage only the costs from the application development stage should be capitalized 3examples of the costs a company would capitalize include salaries of employees working on the project their bonuses debt insurance costs and data conversion costs from the old software these costs could be capitalized only as long as the project would need additional testing before application example of capitalized costtake the example of a coffee roasting facility some of the likely costs of building and operating it would include customizing the facility for the specifics of the business purchasing roasting and packing equipment and installing equipment in addition to the machinery and hardware the company would need to buy green coffee to roast and it also needs to pay its employees to roast and sell that coffee further costs would include marketing and advertising their product sales distribution and so on items that would show up as an expense in the company s general ledger include utilities pest control employee wages and any item under a certain capitalization threshold these are considered expenses because the value of running water no bugs and operational staff can be directly linked to one accounting period certain items like a 200 laminator or a 50 chair would be considered an expense because of their relatively low cost even though they may be used over multiple periods each company has its dollar value threshold for what it considers an expense rather than a capitalizable cost the roasting facility s packaging machine roaster and floor scales would be considered capitalized costs on the company s books the monetary value isn t leaving the company with the purchase of these items when the roasting company spends 40 000 on a coffee roaster the value is retained in the equipment as a company asset the price of shipping and installing equipment is included as a capitalized cost on the company s books the costs of a shipping container transportation from the farm to the warehouse and taxes could also be considered part of the capitalized cost these expenses were necessary to get the building set up for its intended use capitalized costs are originally recorded on the balance sheet as an asset at their historical cost these capitalized costs move from the balance sheet to the income statement expensed through depreciation or amortization for example the 40 000 coffee roaster from above may have a useful life of seven years and a 5 000 salvage value at the end of that period depreciation expense related to the coffee roaster each year would be 5 000 40 000 historical cost 5 000 salvage value 7 years advantages and disadvantages of capitalized cost | |
when high dollar value items are capitalized expenses are effectively smoothed out over multiple periods this allows a company to not present large jumps in expense in any one period from an expensive purchase of property plant or equipment the company will initially show higher profits than it would have if the cost were expensed in full however this also means that it will have to pay more in taxes initially | capitalizing costs inappropriately can lead investors to believe that a company s profit margins are higher than they are warning signs that a company may be capitalizing costs inappropriately include | |
what are the disadvantages of capitalized costs | some disadvantage capitalized cost includes misleading investors of a company s profit margins drops in free cash flow and potentially higher tax bills | |
what costs can be capitalized | capitalized costs can include intangible asset expenses can be capitalized like patents software creation and trademarks in addition capitalized costs include transportation labor sales taxes and materials 4 | |
what is capitalized interest | capitalized interest is the cost of borrowing to acquire or construct a long term asset unlike an interest expense incurred for any other purpose capitalized interest is not expensed immediately on the income statement of a company s financial statements instead firms capitalize it meaning the interest paid increases the cost basis of the related long term asset on the balance sheet capitalized interest shows up in installments on a company s income statement through periodic depreciation expense recorded on the associated long term asset over its useful life 1investopedia zoe hansenunderstanding capitalized interestcapitalized interest is part of the historical cost of acquiring assets that will benefit a company over many years because many companies finance the construction of long term assets with debt generally accepted accounting principles gaap allow firms to avoid expensing interest on such debt and include it on their balance sheets as part of the historical cost of long term assets 1typical examples of long term assets for which capitalizing interest is allowed include various production facilities real estate and ships capitalizing interest is not permitted for inventories that are manufactured repetitively in large quantities u s tax laws also allow the capitalization of interest which provides a tax deduction in future years through a periodic depreciation expense 2in accordance with the matching principle capitalizing interest ties the costs of a long term asset to the earnings generated by the same asset over its useful life 2capitalized interest vs expensed interestfrom the perspective of accrual accounting capitalizing interest helps tie the costs of using a long term asset to earnings generated by the asset in the same periods of use capitalized interest can only be booked if its impact on a company s financial statements is material otherwise interest capitalization is not required and it should be expensed immediately | |
when booked capitalized interest has no immediate effect on a company s income statement and instead it appears on the income statement in subsequent periods through depreciation expense the entry to record capitalized interest is a debit to the capitalized asset account and credit to cash assuming the interest is paid otherwise the credit is to the open liability until interest is paid | in the long term both capitalized interest and expensed interest will have the same impact on a company s financial statements it is important for a company to realize that short term cash obligation may also be the same if interest is due immediately there will be the same cash outlay regardless of how interest is recorded the only difference between capitalized interest and expensed interest is the timing in which the expense shows up on the income statement 3capitalized interest vs accrued interestaccrued interest is the amount of interest that has accumulated on a loan since the last payment was made for example if a borrower has a monthly payment on a loan and they miss a payment interest will continue to accrue on the loan until the borrower makes their next payment the interest that is due but has not yet been paid during that time is referred to as accrued interest in some cases accrued interest and capitalized interest can be the same for example if an unpaid amount of interest is added to the balance of the principal the amount of accrued interest is considered the same as the amount of capitalized interest however the specific treatment of accrued interest does not always prevail itself to being capitalized for example a missed payment of interest could simply be a period expense that is immediately recognized on the income statement in this case the accrued interest that is due is not capitalized interest but instead set to be expensed immediately 4interest is to be capitalized for assets being constructed asset intended for sale or lease as discrete projects or investments accounted for by the equity method while specific investee activities occur 2capitalized interest and student loanscapitalized interest is also present in many student loans capitalized interest on student loans is the interest that accrues on a loan and is added to the principal balance of the loan this can happen when the borrower is not making payments on the loan and interest continues to accrue as is the case most often while the student is attending scholl in the case of student loans the borrower may be in any sort of deferment period however interest can still accrue on the loan during that time in some cases this interest is then added to the principal balance of the loan and the borrower is then responsible for paying interest on the higher principal balance i e interest on interest it s important to note that not all student loans accrue interest during a deferment period and some loans may have interest subsidies that cover the interest during that time however student borrowers must understand the implications of capitalized interest and respect the importance of how capitalized interest can affect their loan balance and repayment plan 4example of capitalized interestconsider a company that builds a small production facility worth 5 million with a useful life of 20 years it borrows the amount to finance this project at an interest rate of 10 the project will take a year to complete to put the building to its intended use and the company is allowed to capitalize its annual interest expense on this project which amounts to 500 000 the company capitalizes interest by recording a debit entry of 500 000 to a fixed asset account and an offsetting credit entry to cash at the end of construction the company s production facility has a book value of 5 5 million consisting of 5 million in construction costs and 500 000 in capitalized interest in the next year when the production facility is used the company books a straight line depreciation expense of 275 000 5 5 million of the facility s book value divided by 20 years of useful life of which 25 000 500 000 of capitalized interest divided by 20 years is attributable to the capitalized interest | |
how does capitalized interest work | capitalized interest is simply an interest assessment charged against an outstanding principal balance however instead of expensing the charge right away the interest is capitalized as part of the cost of creating a long term asset companies recognize capitalized interest by including it in the cost basis of the asset being generated and depreciating the asset over time 2 | |
when should interest be capitalized | the timing of interest being capitalized will greatly vary depending on the interest itself for student loans interest is capitalized as part of the loan agreement and type of loan this may also depend on the type of education undergraduate vs graduate being pursued on the other hand interest is often capitalized during construction when an asset s development is underway 4 | |
why would you want to capitalize interest | companies may be interested in capitalizing interest if they want to defer the interest expense deduction to future periods this is usually favorable as the company will likely have rent income from the asset being developed in the same period the interest expense could be taken alternatively if all interest was expensed upfront the company might not make the most use of the deduction as it may not have income to offset the expense against 5 | |
how do you calculate capitalized interest | capitalized interest is calculated the same way as any other type of interest the prevailing rate of interest is multiplied by the prevailing principal balance of debt for a given period and considerations are made for the number of days outstanding this balance is then added to the original principal balance amount so it may be wise to sometimes track the original principal balance and the balance of interest that has accumulated 2the bottom linecapitalized interest is the unpaid amount of interest that is added to the principal balance of a loan capital interest occurs when the borrower is not making payments on the loan and interest continues to accrue when the interest is added to the principal balance the borrower is then responsible for paying interest on the higher balance in future periods as the basis for the calculation of interest is higher 2 for student loans borrowers may experience capitalized interest during deferment periods when they don t need to paying interest during school 4 | |
what is capitulation | capitulation in finance describes the dramatic surge of selling pressure in a declining market or security that marks a mass surrender by investors the resulting dramatic drop in market prices can mark the end of a decline since those who didn t sell during a panic are unlikely to do so soon after capitulation typically follows significant downturns in price which can take place even as many investors remain bullish as the downturn accelerates it reaches a point where the selling by the investors unwilling to suffer further losses snowballs leading to a dramatic plunge in price the heavy trading volume accompanying the decline shakes out weak hands the investors lacking conviction and replaces them with more risk tolerant holders who may not have suffered prior losses and were willing to buy at the end of a protracted decline capped with a dramatic drop traders look for unusually high trading volume accompanying sharp declines in price to signal capitulation they try to anticipate the surest sign of a capitulation the rebound in price that follows once the panic selling has run its course investopedia michela buttignolunderstanding capitulationcapitulation means surrender in financial markets capitulation marks the point in time when a large enough proportion of investors simultaneously give up hopes of recouping recent losses typically as the decline in prices gathers speed suppose a stock you own dropped by 30 but you were sure it would bounce back imagine it then fell another 20 but it was clear the fundamentals were solid maybe you bought a little more on the dip now imagine the same stock is down 15 intraday and the grind of daily disappointment has given way to certain knowledge that you bought a loser that could go even lower selling the stock as a result would be an act of capitulation investors can only identify capitulations with certainty after they have occurred and the price has rebounded note that the stock was already down 15 in a day suggesting others felt the same while misery may like company a capitulation requires a panicked crowd capitulation does not mean the sellers were wrong or the buyers right while a short term rebound follows capitulation by definition it doesn t mean prices can t go even lower later if future reverses turn the new strong hands into sellers bear markets can feature repeat high volume plunges in price and premature calls of capitulation the truth is that the condition can be diagnosed conclusively only in hindsight if the price rebounds using technical analysis to identify capitulationscapitulations often signal major turning points in the price action of underlying securities and financial instruments technical analysts use candlestick charts to identify capitulation patterns one such pattern is the hammer candle which marks a trading session in which the price drops well below its opening level but reverses to regain much of the loss by the close when accompanied by heavy volume it suggests the decline reached a climax conversely a shooting star candle describing a session in which price rallies sharply but then reverses to close near opening level often forms at the end of a buying spree indicating a top is in place example of capitulationwhile capitulations can be hard to tell apart from run of the mill high volume declines as they happen they re easy to spot with the benefit of hindsight just look for a significant rebound in the price an interesting example of capitulation occurred with the price of tesla tsla after reaching its all time high of 414 on oct 31 2021 over the next fifteen months the stock alternated between sharp drops and brief rebounds by the opening of 2023 tsla had reached a low of 101 a loss of more than three quarters 1however the stock rebounded just as quickly reaching 208 over the next six weeks with daily volume at one point exceeding 1 billion in retrospect the final price drop represented a period of capitulation as speculators accepted their losses and new investors assumed their positions | |
how do traders identify capitulation | traders and analysts may observe a variety of sentiment and technical indicators such as the relative strength index fibonacci ratios candlestick patterns and the moving average convergence divergence to determine when the buy or sell pressure for a certain asset is close to exhaustion however none of these methods is faultless and the only 100 accurate way to identify capitulation is in hindsight | |
how long does capitulation last | there s no set criteria for the length of a capitulation period and some markets may take longer to recover than others for example the great recession of 2008 lasted 18 months but it took several years for the economy to recover completely | |
is capitulation good or bad | capitulation is neither good nor bad but it can be profitable depending on an investor s position investors with a long position stand to profit during a bullish capitulation as short sellers close out their positions during a bearish capitulation speculators may have the chance to snatch up shares at a discount as other traders abandon their positions the bottom linecapitulation is a period of prolonged price drops that causes investors to sell their positions and accept realize losses rather than see their assets dwindle further this may occur as the final stage of a bubble when inflated asset prices collapse however after capitulation the asset may begin to appreciate again | |
what are carbon credits | carbon credits are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases ghgs one credit permits the emission of one ton of carbon dioxide or the equivalent of other greenhouse gases carbon credits are also known as carbon offsets the carbon credit is half of a cap and trade program companies that pollute are issued credits that allow them to continue to pollute up to a certain limit that s periodically reduced the company can sell any unneeded credits to other companies that need them so private companies are doubly incentivized to reduce greenhouse emissions first they must spend money on extra credits if their emissions exceed the cap and second they can make money by reducing their emissions and selling their excess allowances proponents of the carbon credit system say that it leads to measurable verifiable emission reductions from certified climate action projects and that it is critical way that governments and private enterprises can work to address the climate crisis there are a range of carbon compliance markets in operation across the world | |
how do carbon credits work | the ultimate goal of carbon credits is to reduce the emission of ghgs into the atmosphere a carbon credit represents the right to emit greenhouse gases equal to one ton of carbon dioxide that s the equivalent of a 2 400 mile drive in terms of carbon dioxide emissions according to the environmental defense fund 1companies or nations are allotted a certain number of credits and they can trade them to help balance total worldwide emissions since carbon dioxide is the principal greenhouse gas people speak simply of trading in carbon the united nations notes 2the intention is to reduce the number of credits over time thus incentivizing companies to find innovative ways to reduce greenhouse gas emissions u s carbon creditscap and trade programs remain controversial in the united states but 13 states have adopted such market based approaches to the reduction of greenhouse gases according to the center for climate and energy solutions ten of them are northeast states that banded together to jointly attack the problem through a program known as the regional greenhouse gas initiative rggi 3the state of california initiated a cap and trade program in 2013 the rules apply to the state s large electric power plants industrial plants and fuel distributors the state claims that its program is the fourth largest in the world after those of the european union south korea and the chinese province of guangdong 4the cap and trade system is sometimes described as a market system it creates an exchange value for emissions its proponents argue that a cap and trade program offers an incentive for companies to invest in cleaner technologies to avoid buying permits that will increase in cost each year the united states has been regulating airborne emissions since the passage of the u s clean air act of 1990 the act is credited as the world s first cap and trade program although it called its caps allowances 5the program is credited by the environmental defense fund for substantially reducing emissions of sulfur dioxide from coal fired power plants the cause of the notorious acid rain of the 1980s the inflation reduction act is a landmark bill that was signed into law on aug 16 2022 it aims to reduce the deficit fight inflation and reduce carbon emissions the legislation is very focused on cleaning up the environment and it includes a provision to reward high emitting companies that store their greenhouse gases underground or use them to build other products the rewards include significantly expanded tax credits that have increased to 85 from 50 for each metric ton of captured carbon stored underground and to 60 from 35 for each ton of captured carbon that s used in other manufacturing processes or for oil recovery 6it s hoped that these more generous credits will convince investors to make a bigger effort at capturing carbon the tax incentive known as 45q was previously accused of only paying enough to make easy carbon capture projects worth pursuing worldwide carbon credit initiativesthe united nations intergovernmental panel on climate change ipcc developed a carbon credit proposal to reduce worldwide carbon emissions in a 1997 agreement known as the kyoto protocol the agreement set binding emission reduction targets for the countries that signed it another agreement known as the marrakesh accords spells out the rules for how the system would work 7the kyoto protocol divided countries into industrialized and developing economies industrialized countries collectively called annex 1 operated in their own emissions trading market a country could sell its surplus credits to countries that didn t achieve their kyoto level goals through an emissions reduction purchase agreement erpa if it emitted less than its target amount of hydrocarbons the separate clean development mechanism for developing countries issued certified emission reduction cer carbon credits a developing nation could receive these credits for supporting sustainable development initiatives the trading of cers took place in a separate market the first commitment period of the kyoto protocol ended in 2012 8 the u s had already dropped out in 2001 9the kyoto protocol was revised in 2012 in an agreement known as the doha amendment that was ratified as of october 2020 with 147 member nations having deposited their instrument of acceptance 10more than 190 nations signed the paris agreement of 2015 which also sets emission standards and allows for emissions trading 11 the u s dropped out in 2017 under president donald trump but subsequently rejoined the agreement in january 2021 under president biden 1213the paris agreement is also known as the paris climate accord it s an agreement among the leaders of more than 180 countries to reduce greenhouse gas emissions and limit the global temperature increase to less than two degrees celsius or 3 6 degrees fahrenheit above preindustrial levels by the year 2100 negotiators at the november 2021 summit inked a deal that saw nearly 200 countries implement article 6 of the 2015 paris agreement it allows nations to work toward their climate targets by buying offset credits that represent emission reductions by other countries the hope is that the agreement encourages governments to invest in initiatives and technology that protect forests and build renewable energy technology infrastructure to combat climate change 14brazil s chief negotiator at the summit leonardo cleaver de athayde stated that the forest rich south american country planned to be a major trader of carbon credits it should spur investment and the development of carbon projects that could deliver significant emissions reductions he told reuters 15several other provisions in the accord that were aimed at reducing overall global emissions include zero tax on bilateral trades of offsets between countries and canceling 2 of total credits additionally 5 of revenues generated from offsets are placed in an adaptation fund for developing countries to help fight climate change negotiators also agreed to carry over offsets that had been registered since 2013 allowing 320 million credits to enter the new market 16who can sell carbon credits a diverse range of enterprises and individuals can sell carbon credits depending on their ability to participate in a carbon registry or sequestration program landowners may be able to sell carbon credits if they enroll their land be it forest grassland or rangeland into a project which will then measure and pay for carbon stored landowners may then earn additional revenue from the sale of credits linked to their land stewardship typically the project operator will also collect a broker fee | |
why companies buy carbon credits | companies buy carbon credits to offset their emissions given the urgency of the climate crisis there s growing public and institutional pressure for companies to make net zero commitments these are pledges that companies take to cut the amount of carbon they emit over the course of their operations for some reductions in emissions are possible through changes in business practices but for most firms a wholesale elimination of emissions is not feasible carbon credits fund emission reduction activities such as tree planting or nature conservation in lieu of completely eliminating one s own emissions | |
why should levels of carbon and greenhouse gases be reduced in the atmosphere | scientists at the united nations intergovernmental panel on climate change ipcc have shown that increased levels of greenhouse gases ghg in the atmosphere are warming the planet this creates extreme weather changes around the world carbon dioxide is the main ghg created by burning fossil fuels including coal oil and gas reducing the amount of carbon dioxide we emit may avoid further damage to our climate 17 | |
where can carbon credits be bought | several private companies offer carbon offsets to companies or individuals seeking to reduce their net carbon footprint these offsets represent investments or contributions to forestry or other projects with a negative carbon footprint buyers can also purchase tradable credits on a carbon exchange such as new york based xpansive cbl or singapore s aircarbon exchange 18 | |
how large is the carbon credit market | estimates of the size of the carbon credit market vary wildly due to the different regulations in each market and other geographical distinctions the voluntary carbon market that consists largely of companies that buy carbon offsets for corporate social responsibility csr reasons had an estimated value of 1 billion in 2021 according to some figures the market for compliance credits related to regulatory carbon caps is substantially larger with estimates ranging as high as 272 billion in 2020 1920can you make money from carbon credits this is a complicated question that depends heavily on numerous factors it is indeed possible to earn revenue from selling carbon credits based on emissions offsets that can be demonstrated from certain practices such as forest conservation or land management however carbon credit markets can be volatile and the value of a carbon credit can vary over time and by place in addition selling carbon credits comes with expenses including those related to verification and the opportunity cost of engaging in offsetting activities | |
how much is a carbon credit worth | the value of a carbon credit can vary significantly based on time and geography it can also swing due to changes in regulations policy and demand for offsets according to bloomberg nef a commodities research service carbon prices in california are expected to average 42 per metric ton in 2024 and 76 per ton in europe 21the bottom linecarbon credits were devised as a mechanism to reduce greenhouse gas emissions by creating a market in which companies can trade in emissions permits companies receive a set number of carbon credits under the system that decline over time they can sell any excess to another company carbon credits create a monetary incentive for companies to reduce their carbon emissions those that cannot easily reduce emissions can still operate but at a higher financial cost proponents of the carbon credit system say that it leads to measurable verifiable emission reductions credits have also led to the need for carbon accounting to guide companies governments and individuals in measuring their impacts | |
what is carding | carding is a form of fraud where stolen credit or debit card information is used to charge prepaid cards purchase gift cards or assist other schemes stolen cards can be used to purchase store branded gift cards which can then be sold or used to purchase other goods that can be sold for cash stolen card information can also be sold to others credit and debit card thieves who are involved in this type of fraud are called carders 1 | |
how carding works | carding typically starts with a hacker gaining access to a store s or website s credit card processing system with the hacker obtaining a list of credit or debit cards that were recently used to make purchases hackers might exploit weaknesses in the security software and technology intended to protect credit card accounts they might also procure credit card information by using scanners to copy the coding from the magnetic strips credit card information might also be compromised by accessing the account holder s other personal information such as bank accounts the hacker has already gained entry to targeting the information at its source the hacker then sells the list of credit or debit card numbers to a third party a carder who uses the stolen information to purchase a gift card 2carding forums are websites that teach fraudsters about this illicit trade fraudsters use these sites to buy and sell their illegally gained credit and debit card information 3 they also use them for money laundering 4pins and chips have made it more difficult to use stolen cards in point of sale transactions but card not present sales remain the mainstay of card thieves and are much discussed on carding forums most credit card companies offer cardholders protection from fraudulent charges if a credit or debit card is reported stolen but by the time the cards are canceled the carder has often already made a purchase the gift cards are used to buy high value goods such as cell phones televisions and computers as these goods do not require registration and can be resold later if the carder purchases a gift card from an electronics retailer such as amazon they may use a third party to receive the goods and then ship them to other locations this limits the carder s risk of drawing attention to themselves the carder may also sell the goods on websites offering a degree of anonymity because credit cards are often canceled quickly after being lost a major part of carding involves testing the stolen card information to see if it still works this may involve submitting card not present purchase requests on the internet terminologycarding comes with its own language a couple of terms are discussed below fullz is slang for full information it refers to the information package containing a person s real name address and form of identification the information is used for identity theft and financial fraud the person whose fullz is sold is not a party to the transactions 56a credit card dump occurs when a criminal makes an unauthorized digital copy of a credit card it is performed by physically copying information from the card or hacking the issuer s payments network 7 although the technique is not new its scale has expanded tremendously in recent years with some attacks including millions of victims | |
how companies prevent carding fraud | companies are implementing various techniques to stay ahead of carders some of the more interesting recent changes include requiring more information from the user that is not as easily available to the carder an avs system compares the billing address supplied at checkout in an online purchase to the address on record with the credit card company the results are immediately returned to the seller with a full match address match zip code match and no match at all a properly functioning avs system can stop no match transactions if the card is reported lost or stolen for the address only or zip only matches the seller has discretion to accept or not avs is currently used in the united states canada and the united kingdom 89an ip geolocation system compares the ip location of the user s computer to the bill address entered on the checkout page if they don t match fraud may be indicated 9 there are legitimate reasons such as travel for a failure to match up but these incidents often warrant further investigation a card verification value cvv code is a three or four digit number on a credit card that adds an extra layer of security for making purchases when the buyer is not physically present since it is on the card itself it verifies that the person making a phone or online purchase actually has a physical copy of the card 9if your card number is stolen a thief without the cvv will have difficulty using it the cvv can be stored in the card s magnetic strip or in the card s chip the seller submits the cvv with all other data as part of the transaction authorization request the issuer can approve refer or decline transactions that fail cvv validation depending on the issuer s procedures multifactor authentication mfa is a security technology that requires more than one method of authentication from independent credentials to verify a user s login or other transaction it can use two or more independent information bits such as a password authenticator token or biometric data using mfa creates a layered process that makes it more difficult for an unauthorized person to access their target because the attacker probably won t hack all of the layers mfa originally used only two factors but more factors are no longer uncommon 10captcha completely automated public turing test to tell computers and humans apart is a security measure of the challenge response authentication type it protects users from password decryption by asking the user to complete a test that proves the test taker is human and not a computer attempting to break into the account captcha typically uses a random series of images in a block and requires the user to identify them these are anomaly spotting systems e g click on the squares with motorcycles the challenges are designed to be easy for humans but less so for computers 11velocity checks look at the number of transactions attempted by the same card or site visitor within a given number of seconds or minutes of one another typically users do not make multiple payments in quick succession especially payments so rapid as to be beyond the capacity of a human being 12 velocity can be monitored by dollar amount user ip address billing address bank identification number bin and device carding faqs | |
what is a credit card skimmer | a credit card skimmer is a fraudulent instrument or device placed inside a legitimate reader such as an automated teller machine atm or a gas pump to copy the data off cards used in that atm or pump 13 | |
how do criminals steal credit card information | fraudsters steal credit card information in various ways they use skimmers which steal credit and debit card information from atms and gas pumps in which they have been installed they also gain information through phishing scams site compromises and by purchasing the information on carder forums | |
what is a carding attack | a carding attack is an attempt to place multiple fraudulent orders on a website in rapid succession it can usually be recognized by a sharp sudden spike in orders which usually have the same shipping address often the customer information given will be clearly fraudulent 14 | |
how can you protect yourself from carding | as a seller you can protect yourself from carding by using one or more of the newly developed fraud prevention methods like captcha and cvv cardholders should also be careful with their cards and be on the lookout for signs of tampering when using atms and gas stations the bottom linecarding is a crime that often involves the purchase of gift cards which can then be spent on relatively difficult to trace goods the goods are then re sold online or elsewhere the credit or debit card information may also be resold to others for use in various illicit schemes such as identity theft and money laundering in the long run carding can only be prevented if cardholders and those who accept cards aggressively take advantage of every available method to prevent carding sellers should use as many prevention aids as they can practically afford while cardholders should keep an eye out for physical signs of tampering any time they use a card in an atm or gas pump | |
what is carriage and insurance paid to cip | carriage and insurance paid to cip is a global trade term under which a seller pays freight and insurance costs to deliver goods from its factory to a buyer appointed party at an agreed upon location the risk of damage or loss to the goods being transported transfers from the seller to the buyer as soon as the goods are delivered to the buyer s carrier or appointee cip is comparable to but different from cost insurance and freight cif an agreement that is used in maritime trade and commodity trading under cip the seller is obligated to insure goods in transit for 110 of the contract value if the buyer desires additional insurance they must arrange for it on their own 1cip and cif are two incoterms a set of globally accepted commercial trade terms published by the international chamber of commerce icc 2 | |
what is carriage and insurance paid to cip | carriage and insurance paid to cip is a global trade term under which a seller pays freight and insurance costs to deliver goods from its factory to a buyer appointed party at an agreed upon location the risk of damage or loss to the goods being transported transfers from the seller to the buyer as soon as the goods are delivered to the buyer s carrier or appointee cip is comparable to but different from cost insurance and freight cif an agreement that is used in maritime trade and commodity trading under cip the seller is obligated to insure goods in transit for 110 of the contract value if the buyer desires additional insurance they must arrange for it on their own 1cip and cif are two incoterms a set of globally accepted commercial trade terms published by the international chamber of commerce icc 2 | |
what is a carve out | a carve out is the partial divestiture of a business unit in which a parent company sells a minority interest of a subsidiary to outside investors a company undertaking a carve out is not selling a business unit outright but instead is selling an equity stake in that business or relinquishing control of the business from its own while retaining an equity stake a carve out allows a company to capitalize on a business segment that may not be part of its core operations investopedia julie bang | |
how a carve out works | in a carve out the parent company sells some of its shares in its subsidiary to the public through an initial public offering ipo since shares are sold to the public a carve out also establishes a new set of shareholders in the subsidiary a carve out often precedes the full spin off of the subsidiary to the parent company s shareholders in order for such a future spin off to be tax free it has to satisfy the 80 control requirement which means that not more than 20 of the subsidiary s stock can be offered in an ipo 1 2 a carve out effectively separates a subsidiary or business unit from its parent as a standalone company the new organization has its own board of directors and financial statements however the parent company usually retains a controlling interest in the new company and offers strategic support and resources to help the business succeed unlike a spin off the parent company generally receives a cash inflow through a carve out a corporation may resort to a carve out strategy rather than a total divestiture for several reasons and regulators take this into account when approving or denying such a restructuring sometimes a business unit is deeply integrated making it hard for the company to sell the unit off completely while keeping it solvent those considering an investment in the carve out must consider what might happen if the original company completely cuts ties with the carve out and what prompted the carve out in the first place carve out vs spin offin an equity carve out a business sells shares in a business unit the ultimate goal of the company may be to fully divest its interests but this may not be for several years the equity carve out allows the company to receive cash for the shares it sells now this type of carve out may be used if the company does not believe that a single buyer for the entire business is available or if the company wants to maintain some control over the business unit another divestment option is the spin off in this strategy the company divests a business unit by making that unit its own standalone company rather than selling shares in the business unit publicly current investors are given shares in the new company the business unit spun off is now an independent company with its own shareholders and the shareholders now hold shares in two companies the parent company does not usually receive any cash benefit and may still own an equity stake in the new company to be tax free for the final ownership structure the parent company must relinquish 80 of control or more 1 2 | |
what is cash accounting | cash accounting is an accounting method where payment receipts are recorded during the period in which they are received and expenses are recorded in the period in which they are actually paid in other words revenues and expenses are recorded when cash is received and paid respectively cash accounting is also called cash basis accounting and may be contrasted with accrual accounting which recognizes income at the time the revenue is earned and records expenses when liabilities are incurred regardless of when cash is actually received or paid understanding cash accountingcash accounting is one of two forms of accounting the other is accrual accounting where revenue and expenses are recorded when they are incurred small businesses often use cash accounting because it is simpler and more straightforward and it provides a clear picture of how much money the business actually has on hand corporations however are required to use accrual accounting under generally accepted accounting principles gaap | |
when transactions are recorded on a cash basis they affect a company s books with a delay from when a transaction is consummated as a result cash accounting is often less accurate than accrual accounting in the short term | most small businesses are permitted to choose between either the cash and accrual method of accounting but the irs requires businesses with over 25 million in annual gross receipts to use the accrual method 1 in addition the tax reform act of 1986 prohibits the cash accounting method from being used for c corporations tax shelters certain types of trusts and partnerships that have c corporation partners 2 note that companies must use the same accounting method for tax reporting as they do for their own internal bookkeeping example of cash accountingunder the cash accounting method say company a receives 10 000 from the sale of 10 computers sold to company b on november 2 and records the sale as having occurred on november 2 the fact that company b in fact placed the order for the computers back on october 5 is deemed irrelevant because it did not pay for them until they were physically delivered on november 2 under accrual accounting by contrast company a would have recorded the 10 000 sale on october 5 even though no cash had yet changed hands similarly under cash accounting companies record expenses when they actually pay them not when they incur them if company c hires company d for pest control on january 15 but does not pay the invoice for the service completed until february 15 the expense would not be recognized until february 15 under cash accounting under accrual accounting however the expense would be recorded in the books on january 15 when it was initiated limitations of cash accountinga main drawback of cash accounting is that it may not provide an accurate picture of the liabilities that have been incurred i e accrued but not yet paid for so that the business might appear to be better off than it really is on the other hand cash accounting also means that a business that has just completed a large job for which it is awaiting payment may appear to be less successful than it really is because it has expended the materials and labor for the job but not yet collected payment therefore cash accounting can both overstate or understate the condition of the business if collections or payments happen to be particularly high or low in one period versus another there are also some potentially negative tax consequences for businesses that adopt the cash accounting method in general businesses can only deduct expenses that are recognized within the current tax year 3 if a company incurs expenses in december 2019 but does not make payments against the expenses until january 2020 it would not be able to claim a deduction for the fiscal year ended 2019 which could significantly affect the business bottom line likewise a company that receives payment from a client in 2020 for services rendered in 2019 will only be allowed to include the revenue in its financial statements for 2020 | |
what is a cash advance | a cash advance is a short term loan from a bank or an alternative lender the term also refers to a service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash against their available credit cash advances generally feature steep interest rates and fees but they are attractive to borrowers because they also feature fast approval and quick funding types of cash advancesthere are a variety of cash advance types and lenders but the common denominators among all of them are the stiff interest rates and fees the most popular type of cash advance is borrowing on a line of credit through a credit card the money can be withdrawn at an atm or depending on the credit card company from a check that is deposited or cashed at a bank credit card cash advances typically carry an interest rate that is higher than the rate for regular purchases what s more the interest begins to accrue immediately there is no grace period 1these cash advances usually include a fee as well either a flat rate or a percentage of the advanced amount additionally if you use an atm to access the cash you often are charged a small usage fee along with separate interest rates credit card cash advances carry a separate balance from credit purchases but the monthly payment can be applied to both balances however if you are only paying the minimum amount due the card issuer is allowed by federal law to apply it to the balance with the lower interest rate as that is invariably the rate for purchases the cash advance balance can sit and accrue interest at that high rate for months any payments over the minimum payment must be applied to the highest interest balance so if possible paying more than the minimum is advisable 2in most cases credit card cash advances do not qualify for no or low interest rate introductory offers on the plus side they are quick and easy to obtain merchant cash advances refer to loans received by companies or merchants from banks or alternative lenders 3 typically businesses with less than perfect credit use cash advances to finance their activities and in some cases these advances are paid for with future credit card receipts or with a portion of the funds the business receives from sales in its online account rather than using a business credit score alternative lenders often survey its creditworthiness by looking at multiple data points including how much money the merchant receives through online accounts like paypal in consumer lending the phrase cash advance can also refer to payday loans issued by special payday lenders loans can start anywhere from 1 000 to 50 000 but they come with fees typically around 15 per 100 borrowed and interest rates exceeding 100 4 rather than taking into account the borrower s credit score the lender determines the amount of the loan based on local state regulations and the size of the applicant s paycheck if the loan is approved the lender hands the borrower cash if the transaction takes place online the lender makes an electronic deposit to the borrower s checking or savings account the loans are extremely short term they must be paid back on the borrower s next payday unless they wish to extend the loan and in that case additional interest is charged unfortunately many do more than 80 of all payday loans are rolled over within 30 days of the previous loan according to a 2014 study by the consumer financial protection bureau cfpb 5payday loans are only legal in 26 states and of those 16 states require lenders to offer extended payment plans that help mitigate the excess rollover fees however many payday lenders don t advertise these payment plans instead hoping that borrowers will rack up excessive fees 6the process can be quicker if more complex than securing a credit card cash advance to obtain a payday loan you write a postdated check made out to the payday lender for the amount you plan to borrow including the fees the lender immediately issues the borrowed amount but waits to cash your check until payday arrives some electronically minded lenders now have borrowers sign an agreement for automatic repayment from their bank accounts lenders usually ask that you provide personal identification and proof of income when you apply some employers offer payday loans or advances on paychecks as a service to their employees terms vary but often no fees or interest are charged a cash advance can be helpful to someone who needs cash fast and has a solid plan for paying it back quickly but cash advances can be disastrous if the borrower is about to declare bankruptcy needs to pay off a credit card or other bills that have interest rates or just wants the money to buy more products | |
do cash advances impact your credit score | taking out a cash advance has no direct impact on your credit or credit score but it can affect it indirectly in various ways first if you take the advance from a credit card it will raise your outstanding balance which will raise your credit utilization ratio a measure that credit scoring models use to calculate your score if you owe 500 on a 1 500 limit card for example your credit utilization ratio is 30 however if you take out a 300 cash advance on that card the balance will jump to 800 resulting in a credit utilization of more than 53 high utilization rates are a big indicator of credit risk as noted earlier a cash advance usually has a high interest rate if this affects your ability to pay the monthly charges promptly that also could affect your credit score and if the cash advance puts you over the card s credit limit your credit score can be dinged even after the balance is paid down your credit report will show the highest balance reported and other potential lenders will see that you were over the limit at one point which could hurt your ability to get new credit cash advance pros and consa credit card cash advance could be a reasonable option for someone who has an emergency need for money and limited resources for getting it especially when that person has a clear and reasonable plan for paying back the money in a short period it is for example a better option than a payday loan or a car title loan due to the exorbitant triple digit interest rates those loans typically carry and the greater payoff flexibility that comes with credit card debt but cash advances would be a bad idea under these conditions | |
what is a cash advance | a cash advance is considered a short term loan and can be taken from a credit card if you have enough balance on your account or as a payday loan can a cash advance impact my credit score it can indirectly if you do not pay it back in a short period of time it can raise the balance on your credit card which impacts your credit utilization rate | |
is a cash advance a good solution for emergency funding | a cash advance comes with hefty interest rates and fees so you may want to consider other less expensive alternatives if possible in an extreme situation a cash advance is fast and accessible just make sure you have a plan to pay it back quickly the bottom linecash advances aren t alarming when used infrequently but they are at best short term solutions to cover emergencies if they are becoming a habit or if you find you regularly need a cash advance to make ends meet then drastic budgeting and spending changes are in order | |
what is cash and carry arbitrage | cash and carry arbitrage is a market neutral strategy combining the purchase of a long position in an asset such as a stock or commodity and the sale short of a position in a futures contract on that same underlying asset it seeks to exploit pricing inefficiencies for the asset in the cash or spot market and futures market in order to make riskless profits the futures contract must be theoretically expensive relative to the underlying asset or the arbitrage will not be profitable basics of cash and carry arbitragein a cash and carry arbitrage the arbitrageur would typically seek to carry the asset until the expiration date of the futures contract at which point it would be delivered against the futures contract therefore this strategy is only viable if the cash inflow from the short futures position exceeds the acquisition cost and carrying costs on the long asset position cash and carry arbitrage positions are not 100 without risk as there is still risk the carrying costs can increase such as a brokerage raising its margin rates however the risk of any market movement which is the major component in any regular long or short trade is mitigated by the fact that once the trade is set in motion the only event is the delivery of the asset against the futures contract there is no need to access either one in the open market at expiration physical assets such as barrels of oil or tons of grain require storage and insurance but stock indexes such as the s p 500 index likely require only financing costs such as margin therefore arbitrage may be more profitable all else held constant in these non physical markets however because the barriers to participate in arbitrage are much lower they allow more players to attempt such a trade the result is more efficient pricing between spot and futures markets and lower spreads between the two lower spreads mean lower opportunities to profit less active markets may still have arbitrage possibilities as long as there is adequate liquidity on both sides of the game spot and futures example of cash and carry arbitrageconsider the following example of cash and carry arbitrage assume an asset currently trades at 100 while the one month futures contract is priced at 104 in addition monthly carrying costs such as storage insurance and financing costs for this asset amount to 3 in this case the arbitrageur would buy the asset or open a long position in it at 100 and simultaneously sell the one month futures contract i e initiate a short position in it at 104 the trader would then hold or carry the asset until the expiration date of the futures contract and deliver the asset against the contract thereby ensuring an arbitrage or riskless profit of 1 | |
what are cash and cash equivalents cce | cash and cash equivalents are a line item on the balance sheet that reports the value of a company s assets that are cash or can be converted into cash immediately cash equivalents include bank accounts and some types of marketable securities such as debt securities with maturities of less than 90 days however cash equivalents often do not include equity or stock holdings because they can fluctuate in value investopedia julie bangunderstanding cash and cash equivalents cce cash and cash equivalents are a group of assets owned by a company for simplicity the total value of cash on hand includes items with a similar nature to cash if a company has cash or cash equivalents the aggregate of these assets is always shown on the top line of the balance sheet this is because cash and cash equivalents are current assets meaning they re the most liquid of short term assets companies with a healthy amount of cash and cash equivalents can reflect positively in their ability to meet their short term debt obligations types of cash and cash equivalentscash and cash equivalents help companies with their working capital needs since these liquid assets are used to pay off current liabilities which are short term debts and bills cash is money in the form of currency which includes all bills coins and currency notes it also includes money orders cashier s checks certified checks and demand deposit accounts a demand deposit is a type of account from which funds may be withdrawn at any time without having to notify the institution examples of demand deposit accounts include checking accounts and savings accounts all demand account balances as of the date of the financial statements are included in cash totals companies holding more than one currency can experience currency exchange risk currency from foreign countries must be translated to the reporting currency for financial reporting purposes the conversion should normally provide results comparable to those that would have occurred if the business had completed operations using only one currency translation losses from the devaluation of foreign currency are not reported with cash and cash equivalents these losses are reported in the financial reporting account called accumulated other comprehensive income 1cash equivalents are investments that can readily be converted into cash the investment must be short term usually with a maximum investment duration of 90 days if an investment matures in more than 90 days it should be classified in the section named investments cash equivalents should be highly liquid and easily sold on the market the buyers of these investments should be easily accessible the dollar amounts of cash equivalents must be known therefore all cash equivalents must have a known market price and should not be subject to meaningful price fluctuations the value of the cash equivalents must not be expected to change significantly before redemption or maturity examples of cash equivalents include a company can have too much cash or cash equivalents on hand though it may be inefficient to sit on these resources instead of deploying them for company growth or rewarding investors with dividends exclusion from cash and cash equivalentsthere are some exceptions to short term assets and current assets being classified as cash and cash equivalents exceptions can exist for short term debt instruments such as treasury bills if they re being used as collateral for an outstanding loan or line of credit restricted t bills must be reported separately in other words there can be no restrictions on converting any of the securities listed as cash and cash equivalents inventory that a company has in stock is not considered a cash equivalent because it might not be readily converted to cash also the value of inventory is not guaranteed meaning there s no certainty in the amount that ll be received for liquidating the inventory a grey area of cash equivalents relates to certificate of deposits for terms longer than 3 months that can not be broken oftentimes financial institutions will allow the cd holder to break their financial product in exchange for a forfeiture of interest i e the last six months of interest is foregone if a financial institution does not allow this option the cd should not be treated as a cash equivalent this is especially true for longer term products such as five year cds that must be held to maturity a company may report prepaid assets as part of its current asset section these prepaid assets may be refundable however because there is risk that a refund cannot be processed timely or there may be only a partial return of funds prepaid assets are not considered cash equivalents because of the uncertainty regarding client creditworthiness outstanding account receivable balances are not cash equivalents even if the invoice is due or shortly to be due even if a debt is ready for collection there is no guarantee the client will be able to pay in addition the company may not have preferential positioning in bankruptcy or liquidation proceedings therefore money owed from clients is not the same as cash equivalents cash vs cash equivalentsalthough the balance sheet account groups cash and cash equivalents together there are a few notable differences between the two types of accounts cash is obviously direct ownership of money while cash equivalents represent ownership of a financial instrument that often ties to a claim to cash cash and cash equivalents may have different insurance coverage savings and checking accounts cash and money market accounts cash equivalents are often insured up to 250 000 by the fdic 5 however money market mutual funds are not fdic insured but may be sipc insured debt instruments whether issued by a government or corporation is tied to the health of that entity with no guarantee the entity may survive the term of the cash equivalent however in bankruptcy proceedings bondholders are at least well positioned to be paid back cash and cash equivalents also generally earn different yields as there are different risks associated with each though risk for both is fairly low cash equivalents may receive favorable yields in addition some money market funds may be tax exempt or be held in tax favorable accounts meanwhile cash often receives lower rates of interest in deposit accounts because cryptocurrencies are not legal tender and not backed by governments or legal entities u s gaap does not treat cryptocurrency as cash foreign currency or cash equivalents 6purpose of cash and cash equivalentscompanies carry cash and cash equivalents for a variety of business reasons a company may want to have cash and cash equivalents on hand to real world example of cash and cash equivalentsin its third quarter 2024 condensed consolidated balance sheet apple inc aapl reported 32 7 billion of cash and cash equivalents as of march 30 2024 on sept 30 2023 apple inc had reported 30 0 billion of cash and cash equivalents 7in note 4 to its financial statements apple provides a substantial amount of information regarding what comprises this cash and cash equivalent balance apple classifies its broad assortment of financial instruments as cash level 1 instruments or level 2 instruments based on how the item is valued 8in the table above the fifth column represents the value apple assigned as cash and cash equivalents the company owns cash money market funds u s treasury securities u s agency securities certificates of deposit and time deposits commercial paper corporate debt securities and other asset classes as well 8 | |
what is the difference between cash and cash equivalents | cash is the direct ownership of a government issued currency this may take the form of physical cash bills and coins or digital cash i e bank account balances cash equivalents are short term investments that can be easily liquidated carry low risk of loss and have active marketplaces to ensure quick transacting these instruments can easily be converted to cash but are classified differently because they are not actual claims of ownership of cash |
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