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does an attorney in fact need to be a lawyer | no an attorney in fact can be anyone you wish to designate as such often they are a family member or close friend that said there is nothing to prevent you from choosing a lawyer also known as an attorney at law as your attorney in fact | |
what s the difference between an attorney and attorney in fact | it s important to note that an attorney in fact is not the same as a lawyer or an attorney a lawyer is a professional who is licensed to practice law while an attorney in fact is simply a person who has been given the authority to act on behalf of another person | |
are power of attorney and attorney in fact the same thing | absolutely not an attorney in fact is someone whom you designate to act on your behalf in business financial or personal matters a power of attorney is a legal document that names and transfers power to your attorney in fact when making decisions on your behalf the attorney in fact is usually required to show the power of attorney as proof of their authority 1312 | |
what are the liabilities of being an attorney in fact | as an attorney in fact you are legally responsible for carrying out the duties and responsibilities assigned to you by the principal this means that you have a legal obligation to act in the best interests of the principal and to follow the instructions and guidelines set forth in the power of attorney if you fail to fulfill your duties as an attorney in fact you may be held liable for any damages or losses that result from your actions or inactions for example if you make a financial decision on behalf of the principal that results in a loss of money you may be held financially responsible for that loss 14additionally you may be held liable for any actions you take on behalf of the principal that are outside the scope of the power of attorney for example if the power of attorney specifically states that you are not authorized to sell the principal s property but you go ahead and sell it anyway you could be held liable for any losses that the principal incurs as a result of the sale to avoid potential liability it s important to carefully review the power of attorney and make sure you fully understand your responsibilities as an attorney in fact you should also seek legal guidance if you have any questions or concerns about your duties as an attorney in fact the bottom linean attorney in fact is someone who is granted authority to make decisions on behalf of another person known as the principal such authority is granted via a written document providing power of attorney to the attorney in fact power of attorney can be either general or limited to certain specified transactions and topics typically it only lapses if the principal dies becomes incapacitated or consciously revokes it through a written witnessed and notarized notice however if it is a durable power of attorney the attorney in fact will continue to serve if the principal becomes incapacitated making a decision to appoint an attorney in fact should not be done lightly and the person so designated should be a person or persons you can appoint more than one whom you trust family members and close friends are popular choices if you appoint more than one be sure to specify if decisions can be made by majority vote or must be unanimous | |
what is attribution analysis | attribution analysis is a sophisticated method for evaluating the performance of a portfolio or fund manager also known as return attribution or performance attribution it attempts to quantitatively analyze aspects of an active fund manager s investment selections and decisions and to identify sources of excess returns especially as compared to an index or other benchmark for portfolio managers and investment firms attribution analysis can be an effective tool to assess strategies for investors attribution analysis works as a way to assess the performance of fund or money managers | |
how attribution analysis works | attribution analysis focuses on three factors the manager s investment picks and asset allocation their investment style and the market timing of their decisions and trades the method begins by identifying the asset class in which a fund manager chooses to invest an asset class generally describes the type of investments that a manager chooses within that it can also get more specific describing a geographical marketplace in which they originate and or an industry sector european fixed income debt or u s technology equities could both be examples then there is the allocation of the different assets that is what percentage of the portfolio is weighted to specific segments sectors or industries specifying the type of assets will help identify a general benchmark for the comparison of performance often this benchmark will take the form of a market index a basket of comparable assets market indexes can be very broad such as the s p 500 index or the nasdaq composite index which cover a range of stocks or they can be fairly specific focusing on say real estate investment trusts or corporate high yield bonds the next step in attribution analysis is to determine the manager s investment style like the class identification discussed above a style will provide a benchmark against which to gauge the manager s performance the first method of style analysis concentrates on the nature of the manager s holdings if they are equities for example are they the stocks of large cap or small cap companies value or growth oriented american economist bill sharpe introduced the second type of style analysis in 1988 returns based style analysis rbsa charts a fund s returns and seeks an index with comparable performance history sharpe refined this method with a technique that he called quadratic optimization which allowed him to assign a blend of indices that correlated most closely to a manager s returns once an attribution analyst identifies that blend they can formulate a customized benchmark of returns against which they can evaluate the manager s performance such an analysis should shine a light on the excess returns or alpha that the manager enjoys over those benchmarks the next step in attribution analysis attempts to explain that alpha is it due to the manager s stock picks selection of sectors or market timing to determine the alpha generated by their stock picks an analyst must identify and subtract the portion of the alpha attributable to sector and timing again this can be done by developing customize benchmarks based on the manager s selected blend of sectors and the timing of their trades if the alpha of the fund is 13 it is possible to assign a certain slice of that 13 to sector selection and timing of entry and exit from those sectors the remainder will be stock selection alpha market timing and attribution analysisthough some managers employ a buy and hold strategy most are constantly trading making buy and sell decisions throughout a given period segmenting returns by activity can be useful telling you if a manager s decisions to add or subtract positions from the portfolio helped or hurt the final return vis vis a more passive buy and hold approach 1enter market timing the third big factor that goes into attribution analysis a fair amount of debate exists on its importance though certainly this is the most difficult part of attribute analysis to put into quantitative terms to the extent that market timing can be measured scholars point out the importance of gauging a manager s returns against benchmarks reflective of upturns and downturns ideally the fund will go up in bullish times and will decline less than the market in bearish periods even so some scholars note that a significant portion of a manager s performance with respect to timing is random or luck as a result in general most analysts attribute less significance to market timing than asset selection and investment style | |
what is attrition in business | the term attrition refers to a gradual but deliberate reduction in staff numbers that occurs as employees leave a company and are not replaced it is commonly used to describe the downsizing of a firm s employee pool by human resources hr professionals in this case downsizing is voluntary where employees either resign or retire and aren t replaced by the company understanding attritionemployee attrition refers to the deliberate downsizing of a company s workforce downsizing happens when employees resign or retire 1 this type of reduction in staff is called a hiring freeze it is one way a company can decrease labor costs without the disruption of layoffs 2there are a number of reasons why employee attrition takes place 2 they include companies may want to consider increasing training opening dialogue with employees and increasing benefits and other perks to help decrease attrition types of attritionvoluntary attrition occurs when employees leave a company of their own volition employees leaving voluntarily may indicate that there are problems at the company or it may mean that people have personal reasons for departing that are unrelated to the business for example some employees voluntarily leave when they get a new job elsewhere they may be moving to a new area which makes the commute impossible they might have decided to try a different career and therefore need a different type of job voluntary attrition can also occur when employees retire this is also referred to as natural attrition unless a company experiences an unusually high rate of early retirements employees retiring shouldn t be a cause for concern for management involuntary attrition occurs when the business dismisses employees this can happen because of an employee s poor or disruptive performance dismissal might be tied to an employee s misconduct companies may have to eliminate an employee s position or they might have to lay off employees due to worrisome economic conditions internal attrition refers to movement out of one department or division and into another the employee isn t leaving the company they re simply making a move within it for instance internal attrition can occur when an employee gets promoted to a different management level or they move laterally to a different section because a job there was more suitable internal attrition can signal that a company offers good opportunities for career growth on the other hand if one department has a high internal attrition rate it may be experiencing problems the company should investigate and address them if need be demographic related attrition results when people identified with certain demographic groups depart a company unexpectedly and quickly these could be women ethnic minorities veterans older employees or those with disabilities such an exodus could mean that employees have encountered some form of harassment or discrimination that should be of concern to all companies because such behavior can undermine a positive workplace environment and successful business operations action should be taken quickly to understand what caused such departures rectifying demographic related attrition is a must because inclusion should be a top goal of every company plus a company can put a halt to the loss of employees of great value and promise diversity training can help while not related to employee attrition it s important that a business also be aware of customer attrition customer attrition happens when a company s customer base begins to shrink 1 the rate of customer attrition is sometimes referred to as the churn rate customer attrition can mean that a company is in trouble and could suffer a loss of revenue customer attrition can take place for a variety of reasons 1in june 2022 4 2 million u s employees voluntarily left their jobs 3benefits of attritionattrition has its positive aspects by its simplest definition it s a natural diminishing of the workforce this can be welcome when the economy is in bad shape or a recession looms and if not for attrition a company would face the prospect of having to lay off employees when it doesn t want to lose them here are other times when attrition might help the attrition ratethe attrition rate is the rate at which people leave a company during a particular period of time it s useful for a business to track attrition rates over time so it can see whether departures are increasing or decreasing a change in the attrition rate can alert management to potential problems within the company that may be causing employee departures the formula for the attrition rate is attrition rate number of departures average number of employees1 x 100say that 25 employees left abc company last year in addition the company had an average of 250 employees for the year 200 300 2 with those figures you can now calculate the attrition rate attrition rate 25 250 x 100attrition rate 0 1 x 100attrition rate 10 1 to calculate the average number of employees add the number that existed at the beginning of the time period to the number that existed at the end of the time period then divide by two by measuring attrition rates a company may pinpoint problems that are causing voluntary attrition that s important because the costs associated with losing valuable employees whom you d like to retain can be staggering for example the cost to hire and train a new employee when one employee voluntarily departs can be one half to two times that employee s annual salary 4company profits can be affected negatively when knowledgeable experienced employees leave and productivity suffers loss of customers can go hand in hand with loss of valued employees that can mean another hit to profits tied to former employees who understood company products and services and how to sell them 4attrition vs layoffssometimes employees choose to leave an existing job to take a new one or because they re retiring an attrition policy takes advantage of such voluntary departures to reduce overall staff laying off employees doesn t involve a voluntary action on the part of the employee however layoffs do result in attrition when a company doesn t immediately hire as many new employees as it laid off 5layoffs occur when a company is faced with a financial crisis and must cut its workforce to stay afloat sometimes due to changes in company structure or a merger certain departments are trimmed or eliminated rather than relying on natural attrition associated with voluntary employee departures this usually requires layoffs attrition vs turnoverturnover takes place in a company s workforce when people leave their job and are replaced by new employees in such instances there is no attrition employee turnover is generally counted within a one year period 6 this loss of talent occurs in a company for many reasons as with voluntary attrition employees may retire relocate find a better job or change their career companies can study turnover to make needed changes 6 for instance many employees leaving within a short period of time probably signals issues within a company that must be dealt with just as with voluntary attrition management can use turnover information to initiate changes that will make the company a more amenable place for new and existing employees | |
how does employee attrition differ from customer attrition | employee attrition refers to a decrease in the number of employees working for a company that occurs when employees leave and aren t replaced customer attrition on the other hand refers to a shrinking customer base | |
is employee attrition good or bad | the loss of employees can be a problem for corporations because it can mean the reduction of valued talent in the workforce however it can also be a good thing attrition can force a firm to identify the issues that may be causing it it also allows companies to cut down labor costs as employees leave by choice and they re not replaced eventually it can lead to the hiring of new employees with fresh ideas and energy | |
how can i stop customer attrition | you can prevent customer attrition by making sure that your company offers the products and services that your customers want provides them with excellent customer service stays current with market trends and addresses any problems that arise as a result of customer complaints the bottom lineattrition refers to the gradual but deliberate reduction in staff that occurs as employees leave a company and aren t replaced employees may leave voluntarily or involuntarily or they may simply move from one department to another in that case attrition occurs when the former department doesn t replace the employee employees may also leave for reasons of discrimination calculating and tracking attrition rates can be useful to companies high attrition rates indicate more people are leaving they can signal that some problem is causing these departures and must be dealt with to improve the working environment of course a certain level of attrition can be helpful because it can avoid the need for layoffs in difficult economic times | |
what is an auction market | in an auction market buyers enter competitive bids and sellers submit competitive offers at the same time the price at which a stock trades represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept matching bids and offers are then paired together and the orders are executed the new york stock exchange nyse is an example of an auction market auction market processthe process involved in an auction market differs from the process in an over the counter otc market on the nyse for example there are no direct negotiations between individual buyers and sellers while negotiations occur in otc trades most traditional auctions involve multiple potential buyers or bidders but only a single seller whereas auction markets for securities have multiple buyers and multiple sellers all looking to make deals simultaneously double auction marketsan auction market also known as a double auction market allows buyers and sellers to submit prices they deem acceptable to a list when a match between a buyer s price and a seller s asking price is found the trade proceeds at that price trades without matches will not be executed examples of the auction market processimagine that four buyers want to buy a share of company xyz and make the following bids 10 00 10 02 10 03 and 10 06 respectively conversely four sellers wish to sell shares of company xyz and these sellers submitted offers to sell their shares at the following prices 10 06 10 09 10 12 and 10 13 respectively in this scenario the individuals that made bids offers for company xyz at 10 06 will have their orders executed all remaining orders will not immediately be executed and the current price of company xyz will be 10 06 treasury auctionsthe u s treasury holds auctions to finance certain government financial activities the treasury auction is open to the public and various larger investment entities these bids are submitted electronically and are divided into competing and noncompeting bids depending on the person or entity who places the recorded bid noncompeting bids are addressed first because noncompetitive bidders are guaranteed to receive a predetermined amount of securities as a minimum and up to a maximum of 5 million these are most commonly entered by individual investors or those representing small entities in competitive bidding once the auction period closes all of the incoming bids are reviewed to determine the winning price securities are sold to the competing bidders based on the amount listed within the bid once all of the securities have been sold the remaining competing bidders will not receive any securities | |
what is an audit | an audit is a formal review of a person or company s financial records by professional accountants audits can be conducted internally by employees of the organization or externally by an outside certified public accountant cpa firm lenders and underwriters may require an audit in order to evaluate a company s financial health tax authorities also conduct audits to ensure that a taxpayer has correctly reported their income investopedia daniel fishelunderstanding auditsan audit is the review or inspection of a company or individual s accounts by an independent body auditors may be hired internally by the company or work for an external third party firm almost all companies conduct a yearly audit of their financial statements this includes the review of statements such as the income statement balance sheet and cash flow statement lenders often require the results of an external audit annually as part of their debt covenants audits are a legal requirement for some companies due to compelling incentives to intentionally misstate financial information in an attempt to commit fraud publicly traded companies must also receive an evaluation of the effectiveness of their internal controls as a result of the sarbanes oxley act sox of 2002 1in the united states external audits follow the generally accepted auditing standards gaas they re set out by the auditing standards board asb of the american institute of certified public accountants aicpa 2additional rules for the audits of publicly traded companies are made by the public company accounting oversight board pcaob that was established as a result of sox in 2002 3 a separate set of international standards is known as the international standards on auditing they were set up by the international auditing and assurance standards board 4importance of auditsaudits are a necessary and important part of the financial world because a company s financial health and well being can t be upheld without proper accounting routine audits ensure that companies are following reporting standards and that they re being truthful and honest about their financial position audits are particularly important for shareholders and lenders as well as consumers and suppliers the process of auditing also helps companies in other ways including types of auditsaudits can involve financial accounts of companies or individuals they can be conducted by external or internal auditors and they may also be completed by tax agencies like the internal revenue service irs audits performed by outside parties can help remove bias in reviewing the state of a company s financials these audits seek to identify whether there are any material misstatements in the financial statements an unqualified or clean auditor s opinion provides financial statement users with confidence that the financials are presented fairly in all material respects external audits allow stakeholders to make better more informed decisions related to the company being audited external auditors follow a set of standards that are different from those of the company or organization hiring them to do the work the resulting auditor s opinion expressed on items being audited a company s financials internal controls or a system can be candid and honest when audits are performed by third parties they won t affect daily work relationships within the company internal auditors are employed by the company or organization for whom they re performing an audit the resulting audit report is given directly to management and the board of directors they re not employed internally but consultant auditors use the standards of the company they re auditing rather than a separate set of standards internal auditors are typically used when an organization doesn t have the in house resources to audit certain parts of its operations the results of an internal audit are used to make managerial changes and improvements to internal controls the purpose is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection ongoing audits also provide benefits to management by identifying flaws in internal control or financial reporting before its review by external auditors the biggest difference between an internal and external audit is the independence of the external auditor the irs routinely performs audits to verify the accuracy of taxpayers returns and specific transactions it usually carries a negative connotation when the irs audits a person or company and is seen as evidence of some type of wrongdoing by the taxpayer but being selected for an audit isn t necessarily a sign of any wrongdoing irs audit selection is usually made by random statistical formulas that analyze a taxpayer s return and compare it to similar returns a taxpayer may also be selected for an audit if they have any dealings with another person or company who was found to have tax errors on their audit there are three possible irs audit outcomes available the taxpayer may owe additional taxes or penalties if the change is accepted there s a process to follow that may include mediation or an appeal if the taxpayer disagrees 5 | |
what s the purpose of an audit | audits are generally meant to ensure that businesses and individuals are being honest and accurate about their financial positions but the purpose of an audit depends entirely on the type of review in question corporations are routinely audited to ensure that they re compliant and are following accounting standards audits also ensure that businesses are representing their financial well being accurately tax agencies conduct routine audits at random or may do so if someone s tax return is flagged things that may trigger an audit include specific tax credits and deductions or certain types of income | |
are audits a bad thing | the term audit conjures up negative feelings for a lot of people because they re usually associated with tax agencies that want to review tax returns people often believe they ll be responsible for a hefty tax bill after an audit but being audited isn t necessarily a bad thing most agencies just want to ensure that you re following the law and taking tax credits and deductions that you re entitled to claim audits in the corporate world help companies remain compliant by reviewing financial statements to ensure that they accurately represent their financial positions | |
how do i prepare for an irs audit | it may seem daunting but an irs audit shouldn t worry you the agency routinely conducts audits for corporations and individuals some are selected randomly others are flagged because of certain types of income credits and deductions the best way to prepare for an audit is to keep your tax records in a location that s easily accessible for up to three years including any receipts and tax documents 6the bottom linethe idea of an audit can make people very nervous but audits aren t entirely bad despite the negative connotation individuals who are audited by tax agencies are commonly chosen at random corporate audits are routinely conducted to make sure financial statements are in line with accounting standards you ll know that the companies in which you have an interest are being honest about their financial position if you re an investor | |
what is an audit committee | an audit committee is one of the major operating committees of a company s board of directors that is in charge of overseeing financial reporting and disclosure all u s publicly traded companies must maintain a qualified audit committee in order to be listed on a stock exchange committee members must be made up of independent outside directors including a minimum of one person who qualifies as a financial expert 1 | |
how an audit committee works | the audit committee works closely with auditors to ensure that company s books are correct and that no conflicts of interest exist between auditors or any outside consulting firms employed by the company ideally the chair of the audit committee will be a certified public accountant cpa often however a cpa is not available for the audit committee let alone a member of the board of directors the new york stock exchange nyse requires that the audit committee include a financial expert but this qualification is typically met by a retired banker even though that person s ability to catch fraud may be less than expert the audit committee should meet at least four times a year in order to review the most recent audit either in person or via teleconferencing an additional meeting should be held if other issues need to be addressed 2 audit committees maintain communication with the company s chief financial officer cfo and controller the committee has the authority to initiate special investigations in cases where it is determined that accounting practices are problematic or suspect or when serious issues arise with employees an internal auditor would assist the committee in such efforts the audit committee s role includes the oversight of financial reporting the monitoring of accounting policies the oversight of any external auditors regulatory compliance and the discussion of risk management policies with management the duties and composition of a company s audit committee can be found in sec form def 14a or proxy statement 1 committee members may change from time to time depending on the movement of personnel on or off the board or change of committee assignments aside from annual compensation for directors those who serve on an audit committee the same applies for all committees are paid additionally for each meeting attended audit committee hazardsthe audit committee must take its responsibilities very seriously financial reporting compliance and risk management are subject to a number of hazards especially when the company is a large organization with thousands of personnel and reporting systems stretching across the globe exogenous threats such as cyber hacking are under the purview of an audit committee making its job even more challenging cybersecurity should be an increasing focus for audit committees in corporate boardrooms everywhere | |
what is audit risk | audit risk is the risk that financial statements are materially incorrect even though the audit opinion states that the financial reports are free of any material misstatements understanding audit riskthe purpose of an audit is to reduce the audit risk to an appropriately low level through adequate testing and sufficient evidence because creditors investors and other stakeholders rely on the financial statements audit risk may carry legal liability for a certified public accountancy cpa firm performing audit work over the course of an audit an auditor makes inquiries and performs tests on the general ledger and supporting documentation if any errors are caught during the testing the auditor requests that management propose correcting journal entries at the conclusion of an audit after any corrections are posted an auditor provides a written opinion as to whether the financial statements are free of material misstatement auditing firms carry malpractice insurance to manage audit risk and the potential legal liability types of audit riskthe two components of audit risk are the risk of material misstatement and detection risk assume for example that a large sporting goods store needs an audit performed and that a cpa firm is assessing the risk of auditing the store s inventory material misstatement risk is the risk that the financial reports are materially incorrect before the audit is performed in this case the word material refers to a dollar amount that is large enough to change the opinion of a financial statement reader and the percentage or dollar amount is subjective if the sporting goods store s inventory balance of 1 million is incorrect by 100 000 a stakeholder reading the financial statements may consider that a material amount the risk of material misstatement is even higher if there is believed to be insufficient internal controls which is also a fraud risk detection risk is the risk that the auditor s procedures do not detect a material misstatement for example an auditor needs to perform a physical count of inventory and compare the results to the accounting records this work is performed to prove the existence of inventory if the auditor s test sample for the inventory count is insufficient to extrapolate out to the entire inventory the detection risk is higher | |
what is an auditor | an auditor is a person authorized to review and verify the accuracy of financial records and ensure that companies comply with tax laws they protect businesses from fraud point out discrepancies in accounting methods and on occasion work on a consultancy basis helping organizations to spot ways to boost operational efficiency auditors work in various capacities within different industries investopedia dennis madambaunderstanding an auditorauditors assess financial operations and ensure that organizations are run efficiently they are tasked with tracking cash flow from beginning to end and verifying that an organization s funds are properly accounted for in the case of public companies the main duty of an auditor is to determine whether financial statements follow generally accepted accounting principles gaap to meet this requirement auditors inspect accounting data financial records and operational aspects of a business and take detailed notes on each step of the process known as an audit trail once complete the auditor s findings are presented in a report that appears as a preface in financial statements separate private reports may also be issued to company management and regulatory authorities as well the securities and exchange commission sec demands that the books of all public companies are regularly examined by external independent auditors in compliance with official auditing procedures 1 official procedures are established by the international auditing and assurance standards board iaasb a committee of the international federation of accountants ifac 2unqualified opinion vs qualified opinionauditor reports are usually accompanied by an unqualified opinion these statements confirm that the company s financial statements conform to gaap without providing judgment or an interpretation 3 | |
when an auditor is unable to give an unqualified opinion they will issue a qualified opinion a statement suggesting that the information provided is limited in scope and or the company being audited has not maintained gaap accounting principles 4 | auditors assure potential investors that a company s finances are in order and accurate as well as provide a clear picture of a company s worth to help investors make informed decisions types of auditorsauditor qualificationsexternal auditors working for public accounting firms require a certified public accountant cpa license a professional certification awarded by the american institute of certified public accountants in addition to this certification these auditors also need to obtain state cpa certification requirements vary although most states do demand a cpa designation and two years of professional work experience in public accounting 56qualifications for internal auditors are less rigorous internal auditors are encouraged to get cpa accreditation although it is not always mandatory instead a bachelor s degree in subjects such as finance and other business disciplines together with appropriate experience and skills is often acceptable 7special considerationsauditors are not responsible for transactions that occur after the date of their reports moreover they are not necessarily required to detect all instances of fraud or financial misrepresentation that responsibility primarily lies with an organization s management team audits are mainly designed to determine whether a company s financial statements are reasonably stated in other words this means that audits do not always cover enough ground to identify cases of fraud in short a clean audit offers no guarantee that an organization s accounting is completely above board 8 | |
what is an auditor s opinion | an auditor s opinion is a certification that accompanies financial statements it is based on an audit of the procedures and records used to produce the statements and delivers an opinion as to whether material misstatements exist in the financial statements an auditor s opinion may also be called an accountant s opinion understanding auditor s opinionsan auditor s opinion is presented in an auditor s report the audit report begins with an introductory section outlining the responsibility of management and the responsibility of the audit firm the second section identifies the financial statements on which the auditor s opinion is given a third section outlines the auditor s opinion on the financial statements although it is not found in all audit reports a fourth section may be presented as a further explanation regarding a qualified opinion or an adverse opinion for audits of companies in the united states the opinion may be an unqualified opinion in accordance with generally accepted accounting principles gaap a qualified opinion or an adverse opinion the audit is performed by an accountant who is independent of the company being audited unqualified opinion auditan unqualified opinion is also known as a clean opinion the auditor reports an unqualified opinion if the financial statements are presumed to be free from material misstatements after an unqualified audit in addition an unqualified opinion is given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance and the auditor has performed fieldwork to test its effectiveness qualified audita qualified opinion is given when a company s financial records have not followed gaap in all financial transactions although the wording of a qualified opinion is very similar to an unqualified opinion the auditor provides an additional paragraph including deviations from gaap in the financial statements and points out why the auditor report is not unqualified a qualified opinion may be given due to either a limitation in the scope of the audit or an accounting method that did not follow gaap however the deviation from gaap is not pervasive and does not misstate the financial position of the company as a whole adverse opinionthe most unfavorable opinion a business may receive is an adverse opinion an adverse opinion indicates financial records are not in accordance with gaap and contain grossly material and pervasive misstatements an adverse opinion may be an indicator of fraud investors lenders and other financial institutions do not typically accept financial statements with adverse opinions as part of their debt covenants disclaimer of opinionin the event that the auditor is unable to complete the audit report due to the absence of financial records or insufficient cooperation from management the auditor issues a disclaimer of opinion this is referred to as a scope limitation and is an indication that no opinion over the financial statements was able to be determined 1 a disclaimer of opinion is not an opinion itself | |
what is an auditor s report | an auditor s report is a written letter from the auditor containing their opinion on whether a company s financial statements comply with generally accepted accounting principles gaap and are free from material misstatement the independent and external audit report is typically published with the company s annual report the auditor s report is important because banks and creditors require an audit of a company s financial statements before lending to them 1 | |
how an auditor s report works | an auditor s report is a written letter attached to a company s financial statements that expresses its opinion on a company s compliance with standard accounting practices the auditor s report is required to be filed with a public company s financial statements when reporting earnings to the securities and exchange commission sec 1however an auditor s report is not an evaluation of whether a company is a good investment also the audit report is not an analysis of the company s earnings performance for the period instead the report is merely a measure of the reliability of the financial statements the components of an auditor s reportthe auditor s letter follows a standard format as established by generally accepted auditing standards gaas a report usually consists of three paragraphs 1an additional paragraph may inform the investor of the results of a separate audit on another function of the entity the investor will key in on the third paragraph where the opinion is stated the type of report issued will be dependent on the findings by the auditor below are the most common types of reports issued for companies a clean report means that the company s financial records are free from material misstatement and conform to the guidelines set by gaap a majority of audits end in unqualified or clean opinions 1a qualified opinion may be issued in one of two situations first if the financial statements contain material misstatements that are not pervasive or second if the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion but the possible effects of any material misstatements are not pervasive for example a mistake might have been made in calculating operating expenses or profit auditors typically state the specific reasons and areas where the issues are present so that the company can fix them 1an adverse opinion means that the auditor has obtained sufficient audit evidence and concludes that misstatements in the financial statements are both material and pervasive an adverse opinion is the worst possible outcome for a company and can have a lasting impact and legal ramifications if not corrected 2regulators and investors will reject a company s financial statements following an adverse opinion from an auditor also if illegal activity exists corporate officers might face criminal charges 3a disclaimer of opinion means that for some reason the auditor is unable to obtain sufficient audit evidence on which to base the opinion and the possible effects on the financial statements of undetected misstatements if any could be both material and pervasive examples can include when an auditor can t be impartial or wasn t allowed access to certain financial information 1example of an auditor s reportexcerpts from the audit report by deloitte touche llp for starbucks corporation dated nov 15 2019 follow we have audited the accompanying consolidated balance sheets of starbucks corporation and subsidiaries the company as of september 29 2019 and september 30 2018 the related consolidated statements of earnings comprehensive income equity and cash flows for each of the three years in the period ended september 29 2019 and the related notes collectively referred to as the financial statements in our opinion the financial statements present fairly in all material respects the financial position of the company as of september 29 2019 and september 30 2018 and the results of its operations and its cash flows for each of the three years in the period ended september 29 2019 in conformity with accounting principles generally accepted in the united states of america 4 we conducted our audits in accordance with the standards of the public company accounting oversight board pcaob those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud our audits included performing procedures to assess the risks of material misstatement of the financial statements whether due to error or fraud and performing procedures that respond to those risks such procedures included examining on a test basis evidence regarding the amounts and disclosures in the financial statements our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements we believe that our audits provide a reasonable basis for our opinion 4 | |
what is an augmented product | an augmented product has been enhanced by its seller with added features or services to distinguish it from the same product offered by its competitors augmenting a product involves including intangible benefits or add ons that go beyond the product itself examples of the features used to create augmented products might include free delivery or in home installation of a service cosmetics companies tend to offer free makeovers and travel size samples to augment their products | |
how an augmented product works | to marketing professionals every product comes in at least three versions the core the actual and the augmented the core product is not a physical object it is the product s benefit to the consumer for example a lipstick will make its buyer attractive a pair of sneakers will make her healthier a new phone will help you communicate more efficiently the actual product is the item for sale including the unique branding design and packaging that is attached to it the actual product and its features must deliver on the core product expectations that consumers want from the product a car for example should function seamlessly with all of its features to deliver the core product and create customer value the augmented product adds on features and services that distinguish it from similar products offered by the competition the add ons don t change the actual product and may have a minimal impact on the cost of producing the product however an augmented product may have a perceived value that gives the consumer a reason to buy it the added value may also allow the seller to command a premium price augmentation doesn t change the product being sold however augmentation adds value to the experience for the consumer and can lead to brand loyalty examples of augmented productsit s no secret that companies that can effectively create augmented products create a positive buying experience and have the best chance of developing a loyal base of repeat customers apple inc aapl launched its video and tv streaming service in 2019 to boost awareness of the new product and increase sagging iphone sales the company created an add on or augmentation for anyone purchasing a device as stated below from the company s website a discount coupon for a future purchase is a product augmentation as is an offer of a refund if the customer is dissatisfied a free recipe book offered with the purchase of a kitchen appliance such as a crockpot creates an augmented product more expensive purchases often come with enhanced augmentation in store financing for furniture purchases a free trial or free delivery all augment the product being offered a cable company competing for new business might offer a more convenient home installation schedule to attract customers good customer service and store ambiance are augmentations that brick and mortar retailers add to their entire range of products a generous return policy and in store demonstrations are others a retail store that sells cooking supplies might offer free cooking classes with each purchase apple for example offers teaching and guidance for how to use their products through their retail locations an engaging website to help customers learn about a product or service as well as an online support team are product augmentations in considering almost any purchase consumers have a wealth of options an augmented product has been made to stand out from other products or the same product offered by other sellers | |
what is austerity | the term austerity refers to a set of economic policies that a government implements in order to control public sector debt governments put austerity measures in place when their public debt is so large that the risk of default or the inability to service the required payments on its obligations becomes a real possibility the goal of austerity is to improve a government s financial health default risk can spiral out of control quickly and as an individual company or country slips further into debt lenders will charge a higher rate of return for future loans making it more difficult for the borrower to raise capital | |
how austerity works | governments experience financial instability when their debt outweighs the amount of revenue they receive resulting in large budget deficits debt levels generally increase when government spending increases as mentioned above this means that there is a greater chance that federal governments can default on their debts creditors in turn demand higher interest to avoid the risk of default on these debts in order to satisfy their creditors and control their debt levels they may have to take certain measures austerity only takes place when this gap between government receipts and government expenditures shrinks this situation occurs when governments spend too much or when they take on too much debt as such a government may need to consider austerity measures when it owes more money to its creditors than it receives in revenues implementing these measures helps put confidence back into the economy while helping restore some semblance of balance to government budgets austerity measures indicate that governments are willing to take steps to bring some degree of financial health back to their budgets as a result creditors may be willing to lower interest rates on debt when austerity measures are in place but there may be certain conditions on these moves for instance interest rates on greek debt fell following its first bailout 1 however the gains were limited to the government having decreased interest rate expenses although the private sector was unable to benefit the major beneficiaries of lower rates are large corporations consumers benefited only marginally from lower rates but the lack of sustainable economic growth kept borrowing at depressed levels despite the lower rates special considerationsa reduction in government spending doesn t simply equate to austerity in fact governments may need to implement these measures during certain cycles of the economy for example the global economic downturn that began in 2008 left many governments with reduced tax revenues and exposed what some believed were unsustainable spending levels several european countries including the united kingdom greece and spain turned to austerity as a way to alleviate budget concerns austerity became almost imperative during the global recession in europe where eurozone members didn t have the ability to address mounting debts by printing their own currency thus as their default risk increased creditors put pressure on certain european countries to aggressively tackle spending types of austeritybroadly speaking there are three primary types of austerity measures there is some disagreement among economists about the effect of tax policy on the government budget former ronald reagan adviser arthur laffer famously argued that strategically cutting taxes would spur economic activity paradoxically leading to more revenue 2still most economists and policy analysts agree that raising taxes will raise revenues this was the tactic that many european countries took for example greece increased value added tax vat rates to 23 in 2010 3 the government raised income tax rates on upper income scales along with adding new property taxes 4the opposite austerity measure is reducing government spending most consider this to be a more efficient means of reducing the deficit new taxes mean new revenue for politicians who are inclined to spend it on constituents spending takes many forms including grants subsidies wealth redistribution entitlement programs paying for government services providing for the national defense benefits to government employees and foreign aid any reduction in spending is a de facto austerity measure at its simplest an austerity program that is usually enacted by legislation may include one or more of the following measures criticism of austeritythe effectiveness of austerity remains a matter of sharp debate while supporters argue that massive deficits can suffocate the broader economy thereby limiting tax revenue opponents believe that government programs are the only way to make up for reduced personal consumption during a recession cutting government spending many believe leads to large scale unemployment robust public sector spending they suggest reduces unemployment and therefore increases the number of income tax payers although austerity measures may help restore financial health to a nation s economy reduced government spending may lead to higher unemployment economists such as john maynard keynes a british thinker who fathered the school of keynesian economics believe that it is the role of governments to increase spending during a recession to replace falling private demand the logic is that if demand is not propped up and stabilized by the government unemployment will continue to rise and the economic recession will be prolonged but austerity runs contradictory to certain schools of economic thought that have been prominent since the great depression in an economic downturn falling private income reduces the amount of tax revenue that a government generates likewise government coffers fill up with tax revenue during an economic boom the irony is that public expenditures such as unemployment benefits are needed more during a recession than a boom examples of austeritya model of austerity in response to a recession occurred in the united states between 1920 and 1921 the unemployment rate in the u s economy jumped from 4 to almost 12 5 real gross national product gnp declined almost 20 over that time greater than any single year during the great depression or great recession except for 1931 1932 when it declined just over 25 67in a speech in 1920 presidential candidate warren harding declared that his administration will attempt intelligent and courageous deflation and strike at government borrowing and will attack high cost of government with every energy and facility 8 after he became president harding implemented federal spending decreases and tax cuts to fight the recession following austerity measures already implemented under president woodrow wilson however economists and historians argue over whether the austerity measures were necessary as the economy had already begun to improve by the time harding took office some economists also question whether harding s measures can be considered austerity measures as they actually ended up increasing federal tax revenues 9in exchange for bailouts after the great recession the eu and european central bank ecb embarked on an austerity program that sought to bring greece s finances under control the program cut public spending and increased taxes often at the expense of greece s public workers and was very unpopular since then greece s deficit has dramatically decreased 10 the austerity program that the country enacted in 2010 however provided only mixed benefits to its economy 11mainly austerity measures failed to improve the financial situation in greece because the country struggled in the past with a lack of aggregate demand aggregate demand declines with austerity structurally greece is a country of small businesses rather than large corporations so it benefits less from the principles of austerity such as lower interest rates these small companies do not benefit from a weakened currency as they are unable to become exporters while most of the world followed the financial crisis in 2008 with years of lackluster growth and rising asset prices greece remained mired in its own depression greece s gross domestic product gdp in 2010 was 299 36 billion in 2014 its gdp was 235 57 billion according to the united nations 12 this is staggering destruction in the country s economic fortunes akin to the great depression in the united states in the 1930s greece s problems began following the great recession as the country was spending too much money relative to tax collection as the country s finances spiraled out of control and interest rates on sovereign debt exploded higher the country was forced to seek bailouts or default on its debt | |
what is a budget deficit | a budget deficit happens when spending is higher than revenue for a country this means that its spending is higher than the money is takes in usually from taxes when this happens governments must borrow money usually by issuing bonds this increases the country s national debt | |
what happens when a country defaults | sovereign default happens when a country cannot pay its debts unlike when an individual defaults a country cannot be forced to pay its debts but default can cause other economic problems it may trigger a recession or cause the country s currency to lose value a country that defaults may also struggle to borrow money in the future because it is seen as a bad economic risk | |
do austerity measures work | economists disagree on whether austerity measures work as they are intended to supporters of austerity measures argue that large deficits are damaging to the broader economy which can limit tax revenue austerity under this argument is effective because it lowers government spending and decreases deficits opponents argue that during a recession austerity is harmful because more people are in need of assistance government spending according to this argument lowers unemployment which increases tax revenue and reduces deficits the bottom lineausterity measures are strict frugal economic policies used by governments to manage public debt there are three main types higher taxes revenue generation to fund government spending revenue generation plus lower government spending and lower taxes plus lower government spending austerity has been used in many countries such as the united states and greece but it is a controversial policy depending on the overall economic situation and its causes austerity may improve an economy or cause further damage | |
what is the australian securities exchange asx | the australian securities exchange is headquartered in sydney australia the exchange in its current form was created through the merger of the australian stock exchange and sydney futures exchange in 2006 1 the asx acts as a market operator clearing house and payments facilitator it also provides educational materials to retail investors 2understanding the australian securities exchange asx asx is consistently ranked among the top exchanges globally other major exchanges include the tokyo stock exchange or tse the new york stock exchange nyse the nasdaq and the london stock exchange lse each exchange has specific listing requirements that include regular financial reports and minimum capital requirements for example in 2021 the nyse has a key listing requirement that stipulated aggregate shareholders equity for last three fiscal years of greater than or equal to 10 million a global market capitalization of 200 million and a minimum share price of 4 in addition for initial public offerings and secondary issuers must have 400 shareholders 3australian securities exchange asx and electronic tradingas with the majority of international exchanges asx s relies on a hefty data center to help connect it to leading financial hubs and facilitate electronic trading electronic trading gained strong traction with nyse s 2005 acquisition of rival market the archipelago exchange a fully electronic exchange that listed new and fast growing companies nyse arca was the new name following the acquisition cybersecurity is an increasing concern as exchanges become more interconnected via the internet asx and educationthe australian securities exchange has a strong emphasis on educating visitors to its website the investing public and current and potential listers for example for first time investors asx offers free resources for understanding the public markets exploring different asset classes and developing a personal investment strategy visitors can download a series of tutorials and guidebooks in addition asx offers a game version of trading where players do not have to risk real money instead they can learn the basics in a risk free environment | |
what is autarky | autarky refers to a nation that operates in a state of self reliance nations that follow a policy of autarky are characterized by self sufficiency and limited trade with global partners the definition of autarky comes from the greek autos meaning self and arkein meaning to ward off and to be strong enough to suffice a fully autarkic nation would be a closed economy and lacking any sources of external support trade or aid in practice however no modern nation has achieved this level of autarky even when subjected to punishing sanctions this is because the global supply chain has made true economic isolation difficult so any policy of autarky is a matter of degrees rather than a complete isolation understanding autarkyautarky can be thought of as an extreme form of economic nationalism and protectionism the motivation behind a policy of autarky is usually a combination of securing the supply of important goods and a desire to reduce the dependence on other nations in general depending on the type of political structure in a nation the goal of reducing dependence on outside nations may be related to reducing the influence of competing political and economic systems at various points in history however autarky has been proposed by groups all across the political spectrum when framed in terms of keeping domestic spending at home or stopping the transfer of wealth to bad political actors autarky touches populist themes and appears to make practical sense in practice however autarky has economic downsides that are not immediately apparent in the populist arguments autarky was first questioned by economist adam smith and then david ricardo 1 smith suggested that countries should engage in free trade and specialize in goods they have an absolute advantage in producing in order to generate more wealth this is one of the core arguments smith made in favor of free trade in the wealth of nations ricardo amended this argument slightly saying that countries should also produce goods in which they have a comparative advantage by leveraging comparative advantages countries are able to work together to create more wealth in the global system of trade put another way opting out of global trade in favor of doing it all domestically has a high opportunity cost for nations just as it does for individuals for example a family preoccupied with sewing their own clothes building their own furniture and growing their own food will necessarily have less time to work outside the home for wages this will likely result in less income for the household and less workers for nearby employers and ultimately a smaller economy due to the high degree of self sufficiency being practiced this is true on a global scale as well real world examples of autarkyhistorically autarkic policies have been deployed to different extents western european countries deployed them under mercantilist policies from the 16th to the 18th century this spurred economists like smith ricardo and frederic bastiat to refine free market and free trade philosophies as counter arguments nazi germany also implemented a form or autarky to ensure the strategic supply needed for its war efforts today north korea stands as the main example of a policy of autarky north korea s economic isolation is a mixture of intentional self reliance to reduce international political influence and imposed self reliance due to being cut out of international trade through sanctions one of the most extreme examples of contemporary autarky is north korea which relies on the concept of juche often translated as self reliance autarky and the autarkic pricea related term autarky price or autarkic price refers to the cost of a good in an autarkic state the cost of producing in a closed economy must be covered by the price charged for the good if the cost is higher relative to other nations then the autarky price is a dead loss for that national economy the autarkic price is sometimes used as an economic variable when roughly calculating where a nation s comparative advantages are in practice however comparative advantages are discovered through market mechanisms rather than an economic model | |
what is authorized stock | authorized stock or authorized shares refers to the maximum number of shares that a corporation is legally permitted to issue as specified in its articles of incorporation in the u s or in the company s charter in other parts of the world it is also usually listed in the capital accounts section of the balance sheet authorized shares should not be confused with outstanding shares which are the number of shares the corporation has actually issued that are held by the public authorized stock is also known as authorized shares or authorized capital stock understanding authorized stock | |
why a company might not issue all of its authorized shares | the number of authorized shares is typically higher than those actually issued which allows the company to offer and sell more shares in the future if it needs to raise additional funds for example if a company has 1 million authorized shares it might only sell 500 000 of the shares during its initial public offering ipo the company might reserve 50 000 of authorized stock as stock options to attract and retain employees it might sell 150 000 more in a secondary offering to raise more money in the future the unissued stock that will be retained in the company s treasury account will be 1 million 500 000 50 000 150 000 300 000 another reason a company might not want to issue all of its authorized shares is to maintain a controlling interest in the company and prevent the possibility of a hostile takeover example of authorized stockamazon s corporate charter for example states that the company s total authorized stock shall include 5 billion shares of common stock and 500 million shares of preferred stock the charter permits amazon to increase its authorized stock if there isn t enough unissued common stock to allow for the conversion of preferred stock 1 corporate charters often require shareholder approval to increase the number of shares of authorized stock an investor might want to know how many authorized shares a company has in order to analyze the potential for stock dilution dilution reduces a stockholder s share of ownership and voting power in a company and reduces a stock s earnings per share eps following the issue of new stock the larger the difference between the number of authorized shares and the number of outstanding shares the greater the potential for dilution | |
what is autocorrelation | autocorrelation is a mathematical representation of the degree of similarity between a given time series and a lagged version of itself over successive time intervals it s conceptually similar to the correlation between two different time series but autocorrelation uses the same time series twice once in its original form and once lagged one or more time periods for example if it s rainy today the data suggests that it s more likely to rain tomorrow than if it s clear today when it comes to investing a stock might have a strong positive autocorrelation of returns suggesting that if it s up today it s more likely to be up tomorrow too naturally autocorrelation can be a useful tool for traders to utilize particularly for technical analysts investopedia jiaqi zhouunderstanding autocorrelationautocorrelation can also be referred to as lagged correlation or serial correlation as it measures the relationship between a variable s current value and its past values as a very simple example take a look at the five percentage values in the chart below we are comparing them to the column on the right which contains the same set of values just moved up one row | |
when calculating autocorrelation the result can range from 1 to 1 | an autocorrelation of 1 represents a perfect positive correlation an increase seen in one time series leads to a proportionate increase in the other time series on the other hand an autocorrelation of 1 represents a perfect negative correlation an increase seen in one time series results in a proportionate decrease in the other time series autocorrelation measures linear relationships even if the autocorrelation is minuscule there can still be a nonlinear relationship between a time series and a lagged version of itself the most common method of test autocorrelation is the durbin watson test without getting too technical the durbin watson is a statistic that detects autocorrelation from a regression analysis the durbin watson always produces a test number range from 0 to 4 values closer to 0 indicate a greater degree of positive correlation values closer to 4 indicate a greater degree of negative autocorrelation while values closer to the middle suggest less autocorrelation correlation measures the relationship between two variables whereas autocorrelation measures the relationship of a variable with lagged values of itself so why is autocorrelation important in financial markets simple autocorrelation can be applied to thoroughly analyze historical price movements which investors can then use to predict future price movements specifically autocorrelation can be used to determine if a momentum trading strategy makes sense autocorrelation in technical analysisautocorrelation can be useful for technical analysis that s because technical analysis is most concerned with the trends of and relationships between security prices using charting techniques this is in contrast with fundamental analysis which focuses instead on a company s financial health or management technical analysts can use autocorrelation to figure out how much of an impact past prices for a security have on its future price autocorrelation can help determine if there is a momentum factor at play with a given stock if a stock with a high positive autocorrelation posts two straight days of big gains for example it might be reasonable to expect the stock to rise over the next two days as well example of autocorrelationlet s assume rain is looking to determine if a stock s returns in their portfolio exhibit autocorrelation that is the stock s returns relate to its returns in previous trading sessions if the returns exhibit autocorrelation rain could characterize it as a momentum stock because past returns seem to influence future returns rain runs a regression with the prior trading session s return as the independent variable and the current return as the dependent variable they find that returns one day prior have a positive autocorrelation of 0 8 since 0 8 is close to 1 past returns seem to be a very good positive predictor of future returns for this particular stock therefore rain can adjust their portfolio to take advantage of the autocorrelation or momentum by continuing to hold their position or accumulating more shares | |
what is the difference between autocorrelation and multicollinearity | autocorrelation is the degree of correlation of a variable s values over time multicollinearity occurs when independent variables are correlated and one can be predicted from the other an example of autocorrelation includes measuring the weather for a city on june 1 and the weather for the same city on june 5 multicollinearity measures the correlation of two independent variables such as a person s height and weight | |
why is autocorrelation problematic | most statistical tests assume the independence of observations in other words the occurrence of one tells nothing about the occurrence of the other autocorrelation is problematic for most statistical tests because it refers to the lack of independence between values | |
what is autocorrelation used for | autocorrelation can be used in many disciplines but is often seen in technical analysis technical analysts evaluate securities to identify trends and make predictions about their future performance based on those trends the bottom lineautocorrelation is the correlation of a time series and its lagged version over time although similar to correlation autocorrelation uses the same time series twice financial analysts and traders use autocorrelation to examine historical price movements and predict future ones technical analysts use autocorrelation to determine what or how much of an impact historical prices of a security have on its future price although a very useful tool it is often used with other statistical measures in financial analysis | |
what is the automated clearing house ach | the automated clearing house ach is an electronic funds transfer system run by nacha it serves as a versatile feature for conducting digital transactions by processing large volumes of credit and debit transactions for this reason many banks brokerages and private retail businesses have made this feature available to their customers this has allowed its customers the ability to receive direct deposits and pay bills in a timely manner the automated clearing house traces its roots back to the late 1960s but was officially established in the mid 1970s the payment system provides many types of ach transactions such as payroll deposits it requires a debit or credit from the originator and a credit or debit on the recipient s end 1investopedia michela buttignol | |
how the automated clearing house ach works | the ach network is an electronic system that serves financial institutions to facilitate financial transactions in the u s it represents more than 10 000 financial institutions ach transactions totaled more than 80 1 trillion in 2023 by enabling over 31 billion electronic financial transactions 2the network essentially acts as a financial hub and helps people and organizations move money from one bank account to another ach transactions consist of deposits and payments including here s how the system works an originator starts a direct deposit or direct payment transaction using the ach network via debit and credit the originator s bank also known as the originating depository financial institution takes the ach transaction and batches it together with other ach transactions to be sent out at regular times throughout the day an ach operator either the federal reserve or a clearinghouse receives the batch of ach transactions from the originating institution with the originator s transaction the ach operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient also known as the receiving depository financial institution the recipient s bank account receives the transaction thus reconciling both accounts and ending the process changes to nacha s operating rules in march 2021 expanded access to same day ach transactions which allows for same day settlement of most if not all ach transactions 3special considerationsthe ach payment system is offered by nacha formerly known as the national automated clearing house association it s a self regulating institution the ach network s history dates back to 1968 but wasn t officially established until 1974 4this network manages develops and administers the rules surrounding electronic payments the organization s operating rules are designed to facilitate growth in the size and scope of electronic payments within the network types of ach transactions include payroll and other direct deposits tax refunds consumer bills tax payments and many more payment services in the u s and internationally advantages and disadvantages of the achbecause the ach network batches financial transactions together and processes them at specific intervals throughout the day it makes online transactions extremely fast and easy nacha rules state that the average ach debit transaction settles within one business day and the average ach credit transaction settles within one to two business days the use of the ach network to facilitate electronic transfers of money has also increased the efficiency and timeliness of government and business transactions more recently ach transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts by direct deposit transfer or e check ach for individual banking services typically took two or three business days for monies to clear starting in 2016 nacha rolled out in three phases for same day ach settlement phase 3 launched in march 2018 requires receiving depository financial institutions rdfis to make same day ach credit and debit transactions available to the receiver for withdrawal no later than 5 p m they must be in the rdfi s local time on the settlement date of the transaction and are subject to the right of return under nacha rules 5originally the ach network only worked between u s accounts this meant you couldn t conduct any transactions meant for international transfers using this payment system however nacha eventually introduced international ach transactions iat which allow banks to transact internationally 6certain financial institutions may restrict the amount of money you can transfer if you want to do a large transfer you may have to do this in multiple steps for instance if you re transferring money to your child who s away in college you may be limited to transfers of 1 000 if they need more for books and rent you will be required to send more than one transfer some banks charge fees for ach transactions and this can be a per transaction fee if you re used to doing multiple transactions this can add up and put a big dent in your bottom line makes online transactions quick and easyincreases efficiency and timelinessprovides same day banking transactionsinternationally availablebanks may limit transaction amountsfees | |
how does the automated clearing house work | an automated clearing house or ach transaction begins with a request from the originator their bank batches the transaction with others to be sent out during the day the batch is received and sorted by a clearinghouse which sends individual transactions out to receiving banks each receiving bank deposits the money into the recipient s account | |
what is an automated clearing house transaction | an automated clearing house or ach transaction is an electronic transaction that requires a debit from an originating bank and a credit to a receiving bank transactions go through a clearinghouse that batches and sends them to the recipient s bank transactions usually are executed on the same day as long as they are done before 5 p m | |
are there any disadvantages to automated clearing house transactions | ach transactions may come with fees depending on your bank this means the more you do the more you ll spend on fees certain banks limit the amount of money you can transfer through the system so if you want to transfer large amounts of money to other people you may have to do so through multiple transactions the bottom linesending money to someone else used to be a big hassle but the advent of electronic technology is making things much easier the automated clearing house ach facilitates transfers between banks this eliminates the need to withdraw money from one account and deposit it into another the network is updated to allow businesses and individuals to execute transactions on the same day but keep in mind that there are some restrictions you may be limited in how much you can transfer and you may incur fees check with your bank about how it handles ach transactions | |
what is the automated customer account transfer service acats | the automated customer account transfer service acats is a system that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank the national securities clearing corporation nscc developed the acats system replacing the previous manual asset transfer system with this fully automated and standardized one 1 this greatly reduced the cost and time of moving assets between brokerage accounts as well as cut down on human error in the united kingdom and ireland the central securities depository process is handled by the certificateless registry for electronic share transfer crest | |
how the automated customer account transfer service acats works | the acats system is initiated when the new receiving firm has the client sign the appropriate transfer documents once the document is received in good order the receiving firm submits a request using the client s account number and sends it to the delivering firm if the information matches between both the delivering firm and the receiving firm the acats process can begin the process takes usually takes three to six business days to complete 2the acats simplifies the process of moving assets from one brokerage firm to another the delivering firm transfers the exact holdings to the receiving firm for example if the client had 100 shares of stock xyz at the delivering firm then the receiving firm receives the same amount with the same purchase price this makes it more convenient for clients as they do not need to liquidate their positions and then repurchase them with the new firm another benefit is that clients do not need to let their previous brokerage firm or advisor know beforehand if they are unhappy with their current broker they can simply go to a new one and start the transfer process 3securities eligible for acatsclients can transfer all publicly traded stocks exchange traded funds etfs cash bonds and most mutual funds through the acats system acats can also transfer certificates of deposit cds from banking institutions through the acats system as long as it is a member of the nscc acats also works on all types of accounts such as taxable accounts individual retirement accounts iras trusts and brokerage 401 k s 1transfers involving qualified retirement accounts like iras may take longer as both the sending and receiving firm must validate the tax status of the account to avoid errors that could cause a taxable event securities ineligible for acatsthere are several types of securities that cannot go through the acats system annuities cannot transfer through the system as those funds are held with an insurance company to transfer the agent of record on an annuity the client must fill out the correct form to make the change and initiate the process via what is known as a 1035 exchange 4other ineligible securities depend on the regulations of the receiving brokerage firm or bank many institutions have proprietary investments such as non transferrable mutual funds and alternative investments that may need to be liquidated and which may not be available for repurchase through the new broker also some firms may not transfer unlisted shares or financial products that trade over the counter otc | |
how does an acats transfer work | an acats transfer is initiated by a brokerage customer at the receiving institution by submitting a transfer information ti record the ti contains all of the information needed to identify the customer s existing brokerage account and where it will be delivered the delivering firm must respond to the output within one business day by either adding the assets that are subject to the transfer or by rejecting the transfer before delivery is made a review period is opened during which the sending and receiving firm can confirm the assets to be transferred 1 | |
what is the difference between an acats and non acats transfer | the main difference between an acats transfer and a manual non acats transfer is primarily one of automating the process such that it cuts the delivery time down to 3 6 business days for acats vs up to one month or more for a non acats transfer the other difference is that the automated system is far less prone to mistakes typos and other forms of human error | |
what is an acat out fee | some brokers charge existing customers a fee to acat assets out of their account to a new brokerage this fee can be as high as 100 or more per transfer brokerage firms charge this fee to make it more costly to close the account and move assets elsewhere not all brokerages charge these fees so check with yours before initiating a transfer | |
what is an automated teller machine atm | an automated teller machine atm is an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller anyone with a credit card or debit card can access cash at most atms either in the u s or other countries atms are convenient allowing consumers to perform quick self service transactions such as deposits cash withdrawals bill payments and transfers between accounts fees are commonly charged for cash withdrawals by the bank where the account is located by the operator of the atm or by both some or all of these fees can be avoided by using an atm operated directly by the bank network that holds the account using an atm abroad can cost more than using one in the u s due to exchange rates or transaction fees 1history of atmsthe first atm appeared at a branch of barclays bank in london in 1967 though there are reports of a cash dispenser in use in japan in the mid 1960s 23 the interbank communications networks that allowed a consumer to use one bank s card at another bank s atm followed in the 1970s within a few years atms had spread around the globe securing a presence in every major country they now can be found even in tiny island nations such as kiribati and the federated states of micronesia 4atms are also known automated bank machines abms cashpoints or cash machines number of atms in use around the world 5types of atmsthere are two main types of atms basic units only allow you to withdraw cash and receive updated account balances the more complex machines accept deposits facilitate line of credit payments and transfers and access account information to access the advanced features of the complex units you often must be an accountholder at the bank that operates the machine 6you can now buy and sell bitcoin and other crypto tokens via bitcoin atms bitcoin atmsare internet connected terminals that will dispense cash in return for crypto they may also accept cash or credit card to purchase crypto there are now more than 28 000 bitcoin atms located around the world 7atm design elementsthe design of each atm may be different but they all contain the same basic parts full service machines often have slots for depositing paper checks or cash 8 | |
how to use an atm | to use an atm you typically insert your bank cards and follow the prompts to withdraw cash which is dispensed through a slot atms require you to use a plastic card either a bank debit card or a credit card to complete a transaction your identity is authenticated by a pin before any transaction can be made many cards come with a chip which transmits data from the card to the machine these work in the same way as a bar code that is scanned by a code reader banks place atms inside and outside of their branches other atms are located in high traffic areas such as shopping centers grocery stores convenience stores airports bus and railway stations gas stations casinos restaurants and other locations most atms in banks are multifunctional while off site atms are generally only for cash withdrawals atm feesaccount holders can typically use their bank s atms at no charge but an atm owned by another bank usually charges a fee according to moneyrates com the average total fees to withdraw cash from an out of network atm was 4 55 in 2022 some banks will reimburse their customers for the fee especially if there is no corresponding atm available in the area 9atm fees can add up for users who make withdrawals regularly for example if you make weekly withdrawals at an atm that charges 4 and is not from your bank you would pay more than 200 a year in atm fees using atms outside the u s atms make it easier for you to access your checking or savings accounts from almost anywhere in the world when you travel travel experts recommend using foreign atms as a source of cash abroad as they generally receive a more favorable exchange rate than they would at most currency exchange offices however the accountholder s bank may charge a transaction fee or a percentage of the amount exchanged many atms don t list the exchange rate on the receipt making it difficult to track spending | |
how much can you withdraw from an automated teller machine atm | the amount that you can withdraw from an automated teller machine atm per day per week or per month will vary based on your bank and account status at that bank for instance some banks limit daily cash withdrawals to 300 but most citibank accounts allow up to 1 500 depending on your account 10 you may be able to get around these limits by calling your bank to request permission or upgrading your banking status by depositing more funds | |
how do you make a deposit at an atm | if you are a bank s customer you may be able to deposit cash or checks via one of their atms to do this you may simply need to insert the checks or cash directly into the machine other machines may require you to fill out a deposit slip and put the money into an envelope before inserting it into the machine be sure to endorse the back of any checks and note for deposit only to be safer | |
which bank installed the first atm in the u s | the first atm in the u s was installed by chemical bank in rockville center long island new york in 1969 two years after barclays installed the first atm in the u k by the end of 1971 more than 1 000 atms were installed worldwide 11the bottom lineatm or automated teller machine is a machine that lets you get cash from your bank account without visiting a teller some atms are simple cash dispensers while others allow a variety of transactions such as check deposits balance transfers and bill payments before you make a withdrawal make sure you understand what fees you will have to pay | |
what is an automatic bill payment | an automatic bill payment is a money transfer scheduled on a predetermined date to pay a recurring bill automatic bill payments are routine payments made from a banking brokerage or mutual fund account to vendors automatic payments are usually set up with the company receiving the payment though it s also possible to schedule automatic payments through a checking account s online bill pay service automatic bill payments occur over an electronic payment system such as the automated clearing house ach | |
how an automatic bill payment works | automatic bill payments can be scheduled for all types of payment transactions this can include installment loans auto loans mortgage loans credit card bills electric bills cable bills and more these payments can be automated quite easily from a checking account setting up automatic bill payment involves making arrangements with the bank holding the checking account to make the exact payment each month the set of instructions is typically created online by the account holder more frequently this power is given to the vendor the utility company for example to charge the checking account for whatever amount is owed that particular month in both cases the individual paying the bill must initiate the automatic bill payment and provide the necessary information required to make automated recurring payments payments are easy to automate from a checking account organizing automatic bill payments helps you avoid late payments paying automatically and always on time helps you improve or maintain a good credit score once payments are set up you don t have to keep doing the task each month if you don t keep a cushion in your checking account an automatic payment could bounce you may incur a returned payment fee or late fee you could miss catching mistakes or fraud because the payment is automatic automatic payments can be difficult to cancel example of an automatic bill paymentautomatic payments save consumers the hassle of having to remember to make a payment month after month they can also help consumers avoid late payments for example suppose you have a 300 car payment due on the 10th of every month for the next 60 months instead of logging into your online account with the auto loan company to schedule the same payment each month you could set up automatic payments one time and agree to have 300 automatically transferred from your checking account to the auto loan company on the fifth day of each month this way you know your payment will never be late and you ll avoid the trouble of doing the same task each month you ll also improve or maintain a good credit score disadvantages of automatic bill paymentsautomatic payments have a couple of potential downsides if you forget about your scheduled automatic payments and do not maintain a cushion in your checking account an automatic payment could bounce not only will your bill remain unpaid but you might also incur a returned payment fee from the company you were trying to pay as well as a late fee for missing the due date and automatic payments aren t infallible you still need to check regularly to make sure your scheduled payments have gone through as expected another problem can occur when you authorize automatic payments that vary in amount for example suppose you set up automatic payments of your credit card bill from your checking account if you don t look at your credit card bill when it arrives you might have an ugly surprise when it s automatically paid in a much higher amount than you expected because of a mistake or fraud or because you simply didn t realize how much you had spent automatic payments can also be difficult to cancel additionally consumers might forget about certain automatic payments and continue to pay for services that they no longer want | |
what is an automatic premium loan | an automatic premium loan apl is an insurance policy provision that allows the insurer to deduct the amount of an outstanding premium from the value of the policy when the premium is due automatic premium loan provisions are most commonly associated with cash value life insurance policies such as whole life and allow a policy to continue to be in force rather than lapsing due to nonpayment of the premium understanding automatic premium loansin order to take an automatic premium loan you have to have a cash value life insurance policy in which every premium you pay adds to the cash value of the policy depending on the policy language life insurance policyholders may be able to take out a loan against the cash value of their policy this accrued cash value is a value over and above the face value of the policy and can be borrowed against by the policyholder at their discretion an automatic premium loan is essentially a loan taken out against the policy and does carry an interest rate if the policyholder continues to use this method of paying the premium it is possible that the cash value of the insurance policy will reach zero at this point the policy will lapse because there is nothing left against which to take out a loan if the policy is canceled with an outstanding loan the amount of the loan plus any interest is deducted from the cash value of the policy before it is closed note that the policy contract s language may indicate that no loans may be taken out unless the premium has been paid in full special considerationssince the accrued value is technically the property of the policyholder borrowing against the cash value does not require a credit application loan collateral or other good faith requirements typically found in loans the loan is taken out against the cash value of the policy and the loan balance is deducted from the policy s cash value if not repaid the policyholder will owe interest on the loan just as with a standard loan automatic premium loan provisions help both the insurer and the policyholder the insurer can continue to automatically collect periodic premiums rather than sending reminders to the policyholder and the policyholder is able to maintain coverage even when they forget or are unable to send in a check to cover the policy premium the policyholder may still choose to pay the premium by the regularly scheduled due date but if the premium is not paid within a certain number of days after the grace period such as 60 days the outstanding premium amount is deducted from the policy s cash value this prevents the policy from lapsing if the automatic premium loan provision is used the insurer will inform the policyholder of the transaction an automatic premium loan taken out against an insurance policy is still a loan and as such does carry an interest rate | |
what kinds of life insurance policies are eligible to include an automatic premium loan provision | automatic premium loans can only be made from permanent policies that have a cash value component these include whole life policies and some universal life ul policies because universal life policies deduct expenses from the cash value they do not always allow alp | |
what is the automatic premium loan provision designed to do | automatic premium loans are designed to keep life insurance coverage in force even after the policy owner has not paid the required premiums on time perhaps the policy owner is unable to pay due to financial or other difficulties or simply forgot either way the apl provision allows the death benefit to remain even in such circumstances | |
does an automatic premium loan decrease the death benefit of a policy | potentially any outstanding loans along with interest due will be deducted from the death benefit amount if the insured passes away before these are paid back | |
what is an automatic stabilizer | automatic stabilizers are a type of fiscal policy designed to offset fluctuations in a nation s economic activity through their normal operation without additional timely authorization by the government or policymakers the best known automatic stabilizers are progressively graduated corporate and personal income taxes and transfer systems such as unemployment insurance and welfare automatic stabilizers are called this because they act to stabilize economic cycles and are automatically triggered without additional government action understanding automatic stabilizersautomatic stabilizers are primarily designed to counter negative economic shocks or recessions though they can also be intended to cool off an expanding economy or to combat inflation by their normal operation these policies take more money out of the economy as taxes during periods of rapid growth and higher incomes they put more money back into the economy in the form of government spending or tax refunds when economic activity slows or incomes fall this has the intended purpose of cushioning the economy from changes in the business cycle automatic stabilizers can include the use of a progressive taxation structure under which the share of income that is taken in taxes is higher when incomes are high the amount then falls when incomes fall due to a recession job losses or failing investments for example as an individual taxpayer earns higher wages their additional income may be subjected to higher tax rates based on the current tiered structure if wages fall the individual will remain in the lower tax tiers as dictated by their earned income similarly unemployment insurance transfer payments decline when the economy is in an expansionary phase since there are fewer unemployed people filing claims unemployment payments rise when the economy is mired in recession and unemployment is high when a person becomes unemployed in a manner that makes them eligible for unemployment insurance they need only file to claim the benefit the amount of benefit offered is governed by various state and national regulations and standards requiring no intervention by larger government entities beyond application processing automatic stabilizers and fiscal policy | |
when an economy is in a recession automatic stabilizers may by design result in higher budget deficits this aspect of fiscal policy is a tool of keynesian economics that uses government spending and taxes to support aggregate demand in the economy during economic downturns | by taking less money out of private businesses and households in taxes and giving them more in the form of payments and tax refunds fiscal policy is supposed to encourage them to increase or at least not decrease their consumption and investment spending in this case the goal of fiscal policy is to help prevent an economic setback from deepening real world examples of automatic stabilizersautomatic stabilizers can also be used in conjunction with other forms of fiscal policy that may require specific legislative authorization examples of this include one time tax cuts or refunds government investment spending or direct government subsidy payments to businesses or households some examples of these in the united states were the 2008 one time tax rebates under the economic stimulus act and the 831 billion in federal direct subsidies tax breaks and infrastructure spending under the 2009 american reinvestment and recovery act 1 2 3 in 2020 the coronavirus aid relief and economic security cares act became the largest stimulus package in u s history it provided over 2 trillion in government relief in the form of expanded unemployment benefits direct payments to families and adults loans and grants to small businesses loans to corporate america and billions of dollars to state and local governments 4 special considerationssince they almost immediately respond to changes in income and unemployment automatic stabilizers are intended to be the first line of defense to turn mild negative economic trends around however governments often turn to other types of larger fiscal policy programs to address more severe or lasting recessions or to target specific regions industries or politically favored groups in society for extra economic relief | |
what is autonomous consumption | autonomous consumption is defined as the expenditures that consumers must make even when they have no disposable income certain goods need to be purchased regardless of how much income or money a consumer has in their possession at any given time when a consumer is low on resources paying for these necessities can force them to borrow or access money that they had previously been saving understanding autonomous consumptioneven if a person has no money they still need certain things such as food shelter utilities and health care these expenses cannot be eliminated regardless of limited personal income and are deemed autonomous or independent as a result autonomous consumption can be contrasted with discretionary consumption a term given to goods and services that are considered nonessential by consumers but desirable if their available income is sufficient to purchase them if a consumer s income were to disappear for a time they would have to either dip into savings or increase debt to finance essential expenses the level of autonomous consumption can shift in response to events that limit or eliminate sources of income or when available savings and financing options are low this can include the downsizing of a home changing eating habits or limiting the use of certain utilities dissaving the opposite of saving refers to spending money beyond one s available income this can be achieved by tapping into a savings account taking cash advances on a credit card or borrowing against future income via a payday or regular loan also referred to as negative saving dissaving can be examined on an individual level or on a larger economic scale if the autonomous spending within a community or population exceeds the cumulative income of the included individuals the economy has negative savings and it is likely taking on debt to finance its expenses a person does not need to experience financial hardship for dissaving to take place for example a person may have significant savings to pay for a major life event such as a wedding to use the accrued funds for a discretionary expense governments allocate their available funds to mandatory autonomous expenditures or discretionary expenses mandatory or autonomous expenditure includes funds mandated for specific programs and purposes that are considered necessary for the nation to function properly such as social security medicare and medicaid 1in contrast discretionary funds can be directed to programs that provide value to society but are not considered critical discretionary funds typically support programs related to certain defense activities education and transportation programs autonomous consumption vs induced consumptionthe difference between autonomous consumption and induced consumption is that the latter should fluctuate depending on income induced consumption is the portion of spending that varies depending on disposable income levels as the value of disposable income rises it is expected to induce a similar rise in consumption people in this situation are likely to spend more money on living lavishly making more purchases and incurring greater expenses | |
what is an autonomous expenditure | an autonomous expenditure describes the components of an economy s aggregate expenditure that are not impacted by that same economy s real level of income this type of spending is considered automatic and necessary whether occurring at the government level or the individual level the classical economic theory states that any rise in autonomous expenditures will create at least an equivalent rise in aggregate output such as gdp if not a greater increase understanding autonomous expenditurean autonomous expenditure obligation must be met regardless of income it is considered independent in nature as the need does not vary with incomes often these expenses are associated with the ability to maintain a state of autonomy autonomy in regard to nations includes the ability to be self governing for individuals it refers to the ability to function within a certain level of societally acceptable independence to be considered an autonomous expenditure the spending must generally be deemed necessary to maintain a base level of function or in an individual sense survival often these expenses do not vary regardless of personal disposable income or national income autonomous expenditure is tied to autonomous consumption including all of the financial obligations required to maintain a basic standard of living all expenses beyond these are considered part of induced consumption which is affected by changes in disposable income in cases in which personal income is insufficient autonomous expenses still must be paid these needs can be met through the use of personal savings consumer borrowing mechanisms such as loans and credit cards or various social services autonomous expenditures and income levelswhile the obligations that qualify as autonomous expenditures do not vary the amount of income directed toward them can for example in an individual sense the need for food qualifies as an autonomous expenditure though the need can be fulfilled in a variety of manners ranging from the use of food stamps to eating every meal at a five star restaurant even though income level may affect how the need is met the need itself does not change governments and autonomous expendituresthe vast majority of government spending qualifies as autonomous expenditures this is due to the fact that the spending often relates strongly to the efficient running of a nation making some of the expenditures required in order to maintain minimum standards factors affecting autonomous expenditurestechnically autonomous expenditures are not affected by external factors in reality however several factors can affect autonomous expenditures for example interest rates have a significant effect on consumption in an economy high interest rates can tamp down on consumption while low interest rates can spur it in turn this affects spending within an economy trade policies between countries can also affect autonomous expenditures made by their citizens if a producer of cheap goods imposes duties on exports then it would have the effect of making finished products for outside geographies more expensive governments can also impose controls on an individual s autonomous expenditures through taxes if a basic household good is taxed and no substitutes are available then the autonomous expenditure pertaining to it may decrease examples of autonomous expendituresome of the spending classes that are considered independent of income levels which can be counted as either individual income or taxation income are government expenditures investments exports and basic living expenses such as food and shelter | |
what is an autoregressive model | a statistical model is autoregressive if it predicts future values based on past values for example an autoregressive model might seek to predict a stock s future prices based on its past performance understanding autoregressive modelsautoregressive models operate under the premise that past values have an effect on current values which makes the statistical technique popular for analyzing nature economics and other processes that vary over time multiple regression models forecast a variable using a linear combination of predictors whereas autoregressive models use a combination of past values of the variable an ar 1 autoregressive process is one in which the current value is based on the immediately preceding value while an ar 2 process is one in which the current value is based on the previous two values an ar 0 process is used for white noise and has no dependence between the terms in addition to these variations there are also many different ways to calculate the coefficients used in these calculations such as the least squares method these concepts and techniques are used by technical analysts to forecast security prices however since autoregressive models base their predictions only on past information they implicitly assume that the fundamental forces that influenced the past prices will not change over time this can lead to surprising and inaccurate predictions if the underlying forces in question are in fact changing such as if an industry is undergoing rapid and unprecedented technological transformation nevertheless traders continue to refine the use of autoregressive models for forecasting purposes a great example is the autoregressive integrated moving average arima a sophisticated autoregressive model that can take into account trends cycles seasonality errors and other non static types of data when making forecasts although autoregressive models are associated with technical analysis they can also be combined with other approaches to investing for example investors can use fundamental analysis to identify a compelling opportunity and then use technical analysis to identify entry and exit points example of an autoregressive modelautoregressive models are based on the assumption that past values have an effect on current values for example an investor using an autoregressive model to forecast stock prices would need to assume that new buyers and sellers of that stock are influenced by recent market transactions when deciding how much to offer or accept for the security although this assumption will hold under most circumstances this is not always the case for example in the years prior to the 2008 financial crisis most investors were not aware of the risks posed by the large portfolios of mortgage backed securities held by many financial firms during those times an investor using an autoregressive model to predict the performance of u s financial stocks would have had good reason to predict an ongoing trend of stable or rising stock prices in that sector however once it became public knowledge that many financial institutions were at risk of imminent collapse investors suddenly became less concerned with these stocks recent prices and far more concerned with their underlying risk exposure therefore the market rapidly revalued financial stocks to a much lower level a move which would have utterly confounded an autoregressive model it is important to note that in an autoregressive model a one time shock will affect the values of the calculated variables infinitely into the future therefore the legacy of the financial crisis lives on in today s autoregressive models investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is an autoregressive integrated moving average arima | an autoregressive integrated moving average or arima is a statistical analysis model that uses time series data to either better understand the data set or to predict future trends a statistical model is autoregressive if it predicts future values based on past values for example an arima model might seek to predict a stock s future prices based on its past performance or forecast a company s earnings based on past periods understanding autoregressive integrated moving average arima an autoregressive integrated moving average model is a form of regression analysis that gauges the strength of one dependent variable relative to other changing variables the model s goal is to predict future securities or financial market moves by examining the differences between values in the series instead of through actual values an arima model can be understood by outlining each of its components as follows 1arima parameterseach component in arima functions as a parameter with a standard notation for arima models a standard notation would be arima with p d and q where integer values substitute for the parameters to indicate the type of arima model used the parameters can be defined as 1for example a linear regression model includes the number and type of terms a value of zero 0 which can be used as a parameter would mean that particular component should not be used in the model this way the arima model can be constructed to perform the function of an arma model or even simple ar i or ma models 23because arima models are complicated and work best on very large data sets computer algorithms and machine learning techniques are used to compute them arima and stationary datain an autoregressive integrated moving average model the data are differenced in order to make it stationary a model that shows stationarity is one that shows there is constancy to the data over time most economic and market data show trends so the purpose of differencing is to remove any trends or seasonal structures 1seasonality or when data show regular and predictable patterns that repeat over a calendar year could negatively affect the regression model if a trend appears and stationarity is not evident many of the computations throughout the process cannot be made and produce the intended results a one time shock will affect subsequent values of an arima model infinitely into the future therefore the legacy of the financial crisis lives on in today s autoregressive models | |
how to build an arima model | to begin building an arima model for an investment you download as much of the price data as you can once you ve identified the trends for the data you identify the lowest order of differencing d by observing the autocorrelations if the lag 1 autocorrelation is zero or negative the series is already differenced you may need to difference the series more if the lag 1 is higher than zero next determine the order of regression p and order of moving average q by comparing autocorrelations and partial autocorrelations once you have the information you need you can choose the model you ll use 4pros and cons of arimaarima models have strong points and are good at forecasting based on past circumstances but there are more reasons to be cautious when using arima in stark contrast to investing disclaimers that state past performance is not an indicator of future performance arima models assume that past values have some residual effect on current or future values and use data from the past to forecast future events the following table lists other arima traits that demonstrate good and bad characteristics good for short term forecastingonly needs historical datamodels non stationary datanot built for long term forecastingpoor at predicting turning pointscomputationally expensiveparameters are subjective | |
what is arima used for | arima is a method for forecasting or predicting future outcomes based on a historical time series it is based on the statistical concept of serial correlation where past data points influence future data points | |
what are the differences between autoregressive and moving average models | arima combines autoregressive features with those of moving averages an ar 1 autoregressive process for instance is one in which the current value is based on the immediately preceding value while an ar 2 process is one in which the current value is based on the previous two values a moving average is a calculation used to analyze data points by creating a series of averages of different subsets of the full data set to smooth out the influence of outliers as a result of this combination of techniques arima models can take into account trends cycles seasonality and other non static types of data when making forecasts | |
how does arima forecasting work | arima forecasting is achieved by plugging in time series data for the variable of interest statistical software will identify the appropriate number of lags or amount of differencing to be applied to the data and check for stationarity it will then output the results which are often interpreted similarly to that of a multiple linear regression model the bottom linethe arima model is used as a forecasting tool to predict how something will act in the future based on past performance it is used in technical analysis to predict an asset s future performance arima modeling is generally inadequate for long term forecastings such as more than six months ahead because it uses past data and parameters that are influenced by human thinking for this reason it is best used with other technical analysis tools to get a clearer picture of an asset s performance | |
what is an available balance | the available balance in a checking account or on demand account is the total amount that the account holder is free to use immediately the available balance is the total amount that has been cleared for deposits or transfers to the account after all deductions and withdrawals have been processed a credit card account s available balance is normally referred to as available credit this is the amount that the account holder is authorized to borrow it is the account holder s credit line minus any outstanding charges an account s available balance will at times differ from its current balance the current balance includes any pending transactions that haven t been cleared if you want to avoid interest charges on a credit card pay the statement balance in full by the due date you do not have to pay the current balance to avoid interest charges that figure includes newer purchases that won t incur interest charges until the next monthly statement understanding available balance | |
when you log into your online banking portal you will normally see two balances at the top the available balance and the current balance | the available balance shows the amount available for immediate use in your account this balance is updated continuously throughout the day any electronic activity that takes place in the account whether it s a transaction through a teller an automated teller machine atm at a store or online affects this balance almost instantaneously any transaction involving a paper check may take several days to show up depending on how the recipient processes it the available balance does not include any pending transactions that have yet to clear depending on both the issuing bank and the receiving bank s policies check deposits may take anywhere from one to two business days to clear this process may take much longer if the check is drawn from a non bank or foreign institution the time between when a check is deposited and when it is available is often called the float time a customer s available balance becomes important when there is a delay in crediting funds to an account if an issuing bank has not cleared a check deposit for example the funds will not be available to the account holder even though they may show up in the account s current balance using the available balancecustomers can use the available balance in any way they choose as long as they don t exceed the limit they should also consider any pending transactions that haven t been added or deducted from the balance a customer may be able to withdraw funds write checks do a transfer or even make a purchase with their debit card up to the available balance for example your bank account balance can be 1 500 but your available balance may only be 1 000 that extra 500 may be due one or more things like a pending transfer to another account an online purchase a check you deposited that hasn t cleared yet because the bank put it on hold or a pre authorized payment for your car insurance you can use any amount up to 1 000 without incurring extra fees or charges from your bank you may go into overdraft and incur penalty fees if you go beyond that available balance and check holdsa bank may decide to place holds on checks under various circumstances which affects your available balance they include banks may not hold cash or electronic payments along with the first 5 000 of traditional checks that are not in question in 2018 new amendments to regulation cc availability of funds and collection of checks issued by the federal reserve took effect to address the new environment of electronic check collection and processing systems 1special considerationsthere are cases that can affect your account balance negatively or positively and how you can use it electronic banking makes our lives easier allowing us to schedule payments and allow for direct deposits at regular intervals remember to keep track of all your pre authorized payments especially if they pop up at different days of the month if your employer offers direct deposit take advantage of it not only does it save you a trip to the bank every payday but it means you can use your pay right away | |
what is current balance on a credit card | current balance on a credit card is the total amount that the account holder owes to the issuer of the credit card this is not the same as the statement balance the statement balance is the sum of all of the charges incurred and all of the payments made during the most recent monthly billing cycle as well as the total carried over from the previous billing cycle it determines how much you owe in that billing cycle whether you make a partial payment or pay in full so the current balance may be larger it s a running list that includes any new charges or payments made after the close of the last billing cycle | |
what is a demand account | a demand account is a checking account it s a place to stash your cash until you demand it whether you do that by withdrawing money from an atm or paying a bill online in the financial world money in a checking account is the equivalent of cash it can be withdrawn by the account holder at will by contrast if you put your cash in a six month certificate of deposit cd you can withdraw it in an emergency but you ll probably pay a penalty for breaking the agreement you ll get zero interest on a demand account you ll get interest on a cd can i use the available balance in my checking account your available balance is the amount that your bank currently authorizes you to use or withdraw in these days of electronic transactions it should be up to the minute be careful though if you used a paper check yesterday it may not have passed through the bank yet or if you know you ll need 200 tomorrow and your bank doesn t know that leave at least 200 in your available balance also keep an eye on any automated payments you have scheduled if your utility payment is going through tomorrow morning you want to make sure your balance is adequate the bottom linein a checking account the available balance is the amount of money that the account holder can withdraw immediately the current balance by contrast includes any pending transactions that have not yet been cleared the bank will honor any withdrawal or payment you make up to the available balance amount be careful though that you don t use money that you have earmarked elsewhere if you have an automated payment going through from the cable company tomorrow your account won t reflect that today | |
what is an available for sale security | an available for sale security afs is a debt or equity security purchased with the intent of selling before it reaches maturity or holding for a long period of time should it not have a maturity date accounting standards require companies to classify any investments in debt or equity securities when they are purchased as available for sale held to maturity or held for trading securities afs securities are reported at fair value changes in value between accounting periods are included in the accumulated other comprehensive income component of the equity section of the balance sheet investopedia mira norian | |
how an available for sale security works | afs is an accounting term used to describe and classify financial assets it refers to a debt or equity security not classified as a held for trading or held to maturity security the two other kinds of financial assets afs securities are nonstrategic and usually have a ready market price available the unrealized gains and losses derived from an afs security are not reflected in net income unlike those from trading investments instead they appear in the other comprehensive income oci classification until they are sold net income is reported on the income statement therefore unrealized gains and losses on afs securities are not shown on the income statement net income is accumulated over multiple accounting periods into retained earnings on the balance sheet oci which includes unrealized gains and losses from afs securities is rolled into accumulated other comprehensive income on the balance sheet at the end of the accounting period accumulated other comprehensive income is reported just below retained earnings in the equity section of the balance sheet changes in value of afs securities can impact the value of regulatory capital that large banks are required to hold according to accounting regulations 1available for sale vs held for trading vs held to maturity securitiesas mentioned above there are three classifications of securities available for sale held for trading and held to maturity securities held for trading securities are purchased and held primarily for sale in the short term the purpose is to make a profit from the quick trade rather than the long term investment on the other end of the spectrum are held to maturity securities these are debt instruments or equities that a firm plans on holding until their maturity dates an example would be a certificate of deposit cd with a set maturity date afs is the catch all category that falls in the middle it is inclusive of securities both debt and equity that the company plans to hold for a while though not until maturity but could also sell more quickly from an accounting perspective each of these categories is treated differently and affects whether gains or losses appear on the balance sheet or income statement the accounting for afs securities is similar to the accounting for trading securities due to the short term nature of the investments they are recorded at fair value however the unrealized gains or losses to the fair market value for trading securities are recorded in operating income and appear on the income statement as noted changes in the value of afs securities are recorded as unrealized gains or losses in the oci category some companies include oci information below the income statement while others provide a separate schedule detailing what is included in total comprehensive income recording an available for sale security transactionif a company purchases afs securities with cash for 100 000 it records a credit to cash and a debit to afs securities for 100 000 if the value of the securities declines to 50 000 by the next reporting period the investment must be written down to reflect the change in the fair market value of the security this decrease in value is recorded as a credit of 50 000 to the afs security and a debit to oci likewise if the investment goes up in value the next month it is recorded as an increase in oci the security does not need to be sold for the change in value to be recognized in oci it is for this reason these gains and losses are considered unrealized until the securities are sold | |
is available for sale a current asset | available for sale securities can be classified as current assets if they are held for less than one year which is the definition of a current asset if they are to be held for more than a year then they have to be classified as a long term asset | |
what is the difference between held to maturity and available for sale | both held to maturity and available for sale are methods of recording investment securities held by a company htm securities are held until they mature afs securities are sold before they mature the former is recorded at cost minus impairment the latter is recorded at fair value | |
what is an htm strategy | an htm strategy is a held to maturity strategy the goal of an htm strategy can be to protect against adverse interest rates create portfolio diversification or earn a small return on low risk securities the bottom line | |
when a company purchases an investment security whether that be equity or debt it must be classified in one of three ways per accounting standards held to maturity held for trading or available for sale | an available for sale security is one that is sold before it reaches maturity any unrealized gains or losses on the security must be recorded as accumulated comprehensive income until it is sold | |
what is the average age of inventory | the average age of inventory is the average number of days it takes for a firm to sell off inventory it is a metric that analysts use to determine the efficiency of sales the average age of inventory is also referred to as days sales in inventory dsi formula and calculation of average age of inventorythe formula to calculate the average age of inventory is average age of inventory c g 3 6 5 where c the average cost of inventory at its present level g the cost of goods sold cogs begin aligned text average age of inventory frac c g times 365 textbf where c text the average cost of inventory at its present level g text the cost of goods sold cogs end aligned average age of inventory gc 365where c the average cost of inventory at its present levelg the cost of goods sold cogs | |
what the average age of inventory can tell you | the average age of inventory tells the analyst how fast inventory is turning over at one company compared to another the faster a company can sell inventory for a profit the more profitable it is however a company could employ a strategy of maintaining higher levels of inventory for discounts or long term planning efforts while the metric can be used as a measure of efficiency it should be confirmed with other measures of efficiency such as gross profit margin before making any conclusions the average age of inventory is a critical figure in industries with rapid sales and product cycles such as the technology industry a high average age of inventory can indicate that a firm is not properly managing its inventory or that it has an inventory that is difficult to sell the average age of inventory helps purchasing agents make buying decisions and managers make pricing decisions such as discounting existing inventory to move products and increase cash flow as a firm s average age of inventory increases its exposure to obsolescence risk also grows obsolescence risk is the risk that the value of inventory loses its value over time or in a soft market if a firm is unable to move inventory it can take an inventory write off for some amount less than the stated value on a firm s balance sheet example of how to use the average age of inventoryan investor decides to compare two retail companies company a owns inventory valued at 100 000 and the cogs is 600 000 the average age of company a s inventory is calculated by dividing the average cost of inventory by the cogs and then multiplying the product by 365 days the calculation is 100 000 divided by 600 000 multiplied by 365 days the average age of inventory for company a is 60 8 days that means it takes the firm approximately two months to sell its inventory conversely company b also owns inventory valued at 100 000 but the cost of inventory sold is 1 million which reduces the average age of inventory to 36 5 days on the surface company b is more efficient than company a | |
what is average annual growth rate aagr | the average annual growth rate aagr reports the mean increase in the value of an individual investment portfolio asset or cash flow on an annualized basis it doesn t take compounding into account formula for average annual growth rate aagr aagr gra grb grnnwhere gra growth rate in period agrb growth rate in period bgrn growth rate in period nn number of payments begin aligned aagr frac gr a gr b dotso gr n n textbf where gr a text growth rate in period a gr b text growth rate in period b gr n text growth rate in period n n text number of payments end aligned aagr ngra grb grn where gra growth rate in period agrb growth rate in period bgrn growth rate in period nn number of payments understanding the average annual growth rate aagr the average annual growth rate helps determine long term trends it applies to almost any kind of financial measure including growth rates of profits revenue cash flow expenses etc to provide the investors with an idea about the direction wherein the company is headed the ratio tells you your average annual return the average annual growth rate is a calculation of the arithmetic mean of a series of growth rates aagr can be calculated for any investment but it will not include any measure of the investment s overall risk as measured by its price volatility furthermore the aagr does not account for periodic compounding aagr is a standard for measuring average returns of investments over several time periods on an annualized basis you ll find this figure on brokerage statements and in a mutual fund s prospectus it is essentially the simple average of a series of periodic return growth rates one thing to keep in mind is that the periods used should all be of equal length for instance years months or weeks and not to mix periods of different duration aagr examplesthe aagr measures the average rate of return or growth over a series of equally spaced time periods here are two examples assume an investment has the following values over the course of four years the formula to determine the percentage growth for each year is simple percentage growth or return ending valuebeginning value 1 text simple percentage growth or return frac text ending value text beginning value 1simple percentage growth or return beginning valueending value 1thus the growth rates for each of the years are as follows the aagr is calculated as the sum of each year s growth rate divided by the number of years aagr 20 12 5 18 5 25 4 19 aagr frac 20 12 5 18 5 25 4 19 aagr 420 12 5 18 5 25 19 in financial and accounting settings the beginning and ending prices are usually used some analysts may prefer to use average prices when calculating the aagr depending on what is being analyzed as another example consider the five year real gross domestic product gdp growth for the united states over the last five years the u s real gdp growth rates for 2018 through 2022 were 0 7 1 8 3 9 7 0 and 2 6 respectively thus the aagr of u s real gdp over the last five years has been 3 2 or 0 7 1 8 3 9 7 0 2 6 5 1aagr vs compound annual growth rateaagr is a linear measure that does not account for the effects of compounding the above financial investment example showed that growth over four years averaged 19 per year the average annual growth rate is useful for showing trends however it can be misleading to analysts because it does not accurately depict changing financials in some instances it can overestimate the growth of an investment for example consider an end of year value for year 5 of 100 000 for the aagr example above the percentage growth rate for year 5 is 50 the resulting aagr would be 5 2 however it is evident from the beginning value of year 1 and the ending value of year 5 the performance yields a 0 return depending on the situation it may be more useful to calculate the compound annual growth rate cagr the cagr smooths out an investment s returns or diminishes the effect of the volatility of periodic returns cagr ending balancebeginning balance1 years 1cagr frac text ending balance text beginning balance frac 1 text years 1cagr beginning balanceending balance years1 1using the above example for years 1 through 4 the cagr equals cagr 200 000 100 00014 1 18 92 cagr frac 200 000 100 000 frac 1 4 1 18 92 cagr 100 000 200 000 41 1 18 92 for the first four years the aagr and cagr are close to one another however if year 5 were to be factored into the cagr equation 50 the result would end up being 0 which sharply contrasts the result from the aagr of 5 2 limitations of the aagrbecause aagr is a simple average of periodic annual returns the measure does not include any measure of the overall risk involved in the investment as calculated by the volatility of its price for instance if a portfolio grows by a net of 15 one year and 25 in the next year the average annual growth rate would be calculated to be 20 to this end the fluctuations occurring in the investment s return rate between the beginning of the first year and the end of the year are not counted in the calculations thus leading to some errors in the measurement a second issue is that as a simple average it does not care about the timing of returns for instance in our example above a stark 50 decline in year 5 only has a modest impact on total average annual growth however timing is important and so cagr may be more useful in understanding how time chained rates of growth matter | |
what does the average annual growth rate aagr tell you | the average annual growth rate aagr identifies long term trends of such financial measures as cash flows or investment returns aagr tells you what the annual return has been on average but it does not take into account compounding | |
what are the limitations of average annual growth rate | aagr may overestimate the growth rate if there are both positive and negative returns it also does not include any measure of the risk involved such as price volatility nor does it factor in the timing of returns | |
how does average annual growth rate differ from compounded annual growth rate cagr | average annual growth rate aagr is the average increase it is a linear measure and does not take into account compounding meanwhile the compound annual growth rate cagr does and it smooths out an investment s returns diminishing the effect of return volatility | |
how do you calculate the average annual growth rate aagr | the average annual growth rate aagr is calculated by finding the arithmetic mean of a series of growth rates | |
what is the average annual return aar | the average annual return aar is a percentage used when reporting the historical return such as the three five and 10 year average returns of a mutual fund the average annual return is stated net of a fund s operating expense ratio additionally it does not include sales charges if applicable or portfolio transaction brokerage commissions in its simplest terms the average annual return aar measures the money made or lost by a mutual fund over a given period investors considering a mutual fund investment will often review the aar and compare it with other similar mutual funds as part of their mutual fund investment strategy understanding the average annual return aar | |
when you are selecting a mutual fund the average annual return is a helpful guide for measuring a fund s long term performance however investors should also look at a fund s yearly performance to fully appreciate the consistency of its annual total returns | for example a five year average annual return of 10 looks attractive however if the yearly returns those that produced the average annual return were 40 30 10 5 and 15 50 5 10 performance over the past three years warrants examination of the fund s management and investment strategy components of an average annual return aar there are three components that contribute to the average annual return aar of an equity mutual fund share price appreciation capital gains and dividends share price appreciation results from unrealized gains or losses in the underlying stocks held in a portfolio as the share price of a stock fluctuates over a year it proportionately contributes to or detracts from the aar of the fund that maintains a holding in the issue for example the american funds amcap fund s top holding is netflix nflx which represents 3 7 of the portfolio s net assets as of feb 29 2020 netflix is one of 199 equities in the amcap fund fund managers can add or subtract assets from the fund or change the proportions of each holding as needed to meet the fund s performance objectives the fund s combined assets have contributed to the portfolio s 10 year aar of 11 58 through feb 29 2020 capital gains distributions paid from a mutual fund result from the generation of income or sale of stocks from which a manager realizes a profit in a growth portfolio shareholders can opt to receive the distributions in cash or reinvest them in the fund capital gains are the realized portion of aar the distribution which reduces share price by the dollar amount paid out represents a taxable gain for shareholders a fund can have a negative aar and still make taxable distributions the wells fargo discovery fund paid a capital gain of 2 59 on dec 11 2015 despite the fund having an aar of negative 1 48 quarterly dividends paid from company earnings contribute to a mutual fund s aar and also reduce the value of a portfolio s net asset value nav like capital gains dividend income received from the portfolio can be reinvested or taken in cash large cap stock funds with positive earnings typically pay dividends to individual and institutional shareholders these quarterly distributions comprise the dividend yield component of a mutual fund s aar the t rowe price dividend growth fund has a trailing 12 month yield of 1 36 a contributing factor to the fund s three year aar of 15 65 through feb 29 2020 special considerationscalculating an average annual return is much simpler than the average annual rate of return which uses a geometric average instead of a regular mean the formula is 1 r1 x 1 r2 x 1 r3 x x 1 ri 1 n 1 where r is the annual rate of return and n is the number of years in the period the average annual return is sometimes considered less useful for giving a picture of the performance of a fund because returns compound rather than combine investors must pay attention when looking at mutual funds to compare the same types of returns for each fund | |
what is average inventory | average inventory is a calculation that estimates the value or number of a particular good or set of goods during two or more specified time periods average inventory is the mean value of inventory within a certain time period which may vary from the median value of the same data set and is computed by averaging the starting and ending inventory values over a specified period understanding average inventoryinventory is the value of all the goods ready for sale or all of the raw materials to create those goods that are stored by a company successful inventory management is a key focal point for companies as it allows them to better manage their overall business in terms of sales costs and relationships with their suppliers since two points do not always accurately represent changes in inventory over different time periods average inventory is frequently calculated by using the number of points needed to more accurately reflect activities across a certain amount of time for instance if a business was attempting to calculate the average inventory over the course of a fiscal year it may be more accurate to use the inventory count from the end of each month including the base month the values associated with each point are added together and divided by the number of points in this case 13 to determine the average inventory the average inventory figures can be used as a point of comparison when looking at overall sales volume allowing a business to track inventory losses that may have occurred due to theft or shrinkage or due to damaged goods caused by mishandling it also accounts for any perishable inventory that has expired the formula for average inventory can be expressed as follows average inventory current inventory previous inventory number of periodsaverage inventory is used often in ratio analysis for instance in calculating inventory turnover investopedia zoe hansenmoving average inventorya company may choose to use a moving average inventory when it s possible to maintain a perpetual inventory tracking system this allows the business to adjust the values of the inventory items based on information from the last purchase effectively this helps compare inventory averages across multiple time periods by converting all pricing to the current market standard this makes it similar to adjusting historical data based on the rate of inflation for more stable market items it allows simpler comparisons on items that experience high levels of volatility example of average inventorya shoe company is interested in better managing its inventory the current inventory in its warehouse is equal to 10 000 this is in line with the inventory for the three previous months which were valued at 9 000 8 500 and 12 000 | |
when calculating a three month inventory average the shoe company achieves the average by adding the current inventory of 10 000 to the previous three months of inventory recorded as 9 000 8 500 and 12 000 and dividing it by the number of data points as follows | average inventory 10 000 9 000 8 500 12 000 4this results in an average inventory of 9 875 over the time period being examined | |
what is an average collection period | average collection period refers to the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable ar companies use the average collection period to make sure they have enough cash on hand to meet their financial obligations the average collection period is an indicator of the effectiveness of a firm s ar management practices and is an important metric for companies that rely heavily on receivables for their cash flows | |
how average collection periods work | accounts receivable is a business term used to describe money that entities owe to a company when they purchase goods and or services companies normally make these sales to their customers on credit ar is listed on corporations balance sheets as current assets and measures their liquidity as such they indicate their ability to pay off their short term debts without the need to rely on additional cash flows the average collection period is an accounting metric used to represent the average number of days between a credit sale date and the date when the purchaser remits payment a company s average collection period is indicative of the effectiveness of its ar management practices businesses must be able to manage their average collection period to operate smoothly a lower average collection period is generally more favorable than a higher one a low average collection period indicates that the organization collects payments faster however this may mean that the company s credit terms are too strict customers who don t find their creditors terms very friendly may choose to seek suppliers or service providers with more lenient payment terms formula for average collection periodaverage collection period is calculated by dividing a company s average accounts receivable balance by its net credit sales for a specific period then multiplying the quotient by 365 days average collection period 365 days average accounts receivables net credit sales alternatively and more commonly the average collection period is denoted as the number of days of a period divided by the receivables turnover ratio the formula below is also used referred to as the days sales receivable ratio average collection period 365 days receivables turnover ratiothe average receivables turnover is simply the average accounts receivable balance divided by net credit sales the formula below is simply a more concise way of writing the formula for the formulas above average accounts receivable is calculated by taking the average of the beginning and ending balances of a given period more sophisticated accounting reporting tools may be able to automate a company s average accounts receivable over a given period by factoring in daily ending balances | |
when analyzing average collection period be mindful of the seasonality of the accounts receivable balances for example analyzing a peak month to a slow month by result in a very inconsistent average accounts receivable balance that may skew the calculated amount | average collection period also relies on net credit sales for a period this metric should exclude cash sales as those are not made on credit and therefore do not have a collection period in addition to being limited to only credit sales net credit sales exclude residual transactions that impact and often reduce sales amounts this includes any discounts awarded to customers product recalls or returns or items re issued under warranty | |
when calculating average collection period ensure the same timeframe is being used for both net credit sales and average receivables for example if analyzing a company s full year income statement the beginning and ending receivable balances pulled from the balance sheet must match the same period | importance of average collection periodaverage collection period boils down to a single number however it has many different uses and communicates a variety of important information | |
how to use average collection period | the average collection period does not hold much value as a stand alone figure instead you can get more out of its value by using it as a comparative tool the best way that a company can benefit is by consistently calculating its average collection period and using it over time to search for trends within its own business the average collection period may also be used to compare one company with its competitors either individually or grouped together similar companies should produce similar financial metrics so the average collection period can be used as a benchmark against another company s performance companies may also compare the average collection period with the credit terms extended to customers for example an average collection period of 25 days isn t as concerning if invoices are issued with a net 30 due date however an ongoing evaluation of the outstanding collection period directly affects the organization s cash flows the average collection period is often not an externally required figure to be reported it is also generally not included as a financial covenant the usefulness of average collection period is to inform management of its operations example of average collection periodas noted above the average collection period is calculated by dividing the average balance of ar by total net credit sales for the period then multiplying the quotient by the number of days in the period let s say a company has an average ar balance for the year of 10 000 the total net sales that the company recorded during this period was 100 000 we would use the following average collection period formula to calculate the period | |
what is the average cost basis method | the average cost basis method is a system of calculating the value of mutual fund positions held in a taxable account to determine the profit or loss for tax reporting cost basis represents the initial value of a security or mutual fund that an investor owns the average cost is then compared with the price at which the fund shares were sold to determine the gains or losses for tax reporting the average cost basis is one of many methods that the internal revenue service irs allows investors to use to arrive at the cost of their mutual fund holdings zoe hansen investopediaunderstanding the average cost basis methodthe average cost basis method is commonly used by investors for mutual fund tax reporting a cost basis method is reported with the brokerage firm where the assets are held the average cost is calculated by dividing the total amount in dollars invested in a mutual fund position by the number of shares owned for example an investor who has 10 000 in an investment and owns 500 shares would have an average cost basis of 20 10 000 500 types of cost basis methodsalthough many brokerage firms default to the average cost basis method for mutual funds there are other methods available the first in first out fifo method means that when shares are sold you must sell the first ones that you acquired first when calculating gains and losses for example let s say an investor owned 50 shares and purchased 20 in january while purchasing 30 shares in april if the investor sold 30 shares the 20 in january must be used and the remaining 10 shares sold would come from the second lot purchased in april since both the january and april purchases would have been executed at different prices the tax gain or loss would be impacted by the initial purchase prices in each period also if an investor has had an investment for more than one year it would be considered a long term investment the irs applies a lower capital gains tax to long term investments vs short term investments which are securities or funds acquired in less than one year as a result the fifo method would result in lower taxes paid if the investor had sold positions that were more than a year old the last in first out lifo method is when an investor can sell the most recent shares acquired first followed by the previously acquired shares the lifo method works best if an investor wants to hold onto the initial shares purchased which might be at a lower price relative to the current market price the high cost method allows investors to sell the shares that have the highest initial purchase price in other words the shares that were the most expensive to buy get sold first a high cost method is designed to provide investors with the lowest capital gains tax owed for example an investor might have a large gain from an investment but doesn t yet want to realize that gain but needs money having a higher cost means that the difference between the initial price and the market price when sold will result in the smallest gain investors might also use the high cost method if they want to take a capital loss from a tax standpoint to offset other gains or income conversely the low cost method allows investors to sell the lowest priced shares first in other words the cheapest shares you purchased get sold first the low cost method might be chosen if an investor wants to realize a capital gain on an investment once a cost basis method has been chosen for a specific mutual fund it must remain in effect brokerage firms will provide investors with appropriate annual tax documentation on mutual fund sales based on their cost basis method elections investors should consult a tax advisor or financial planner if they are uncertain about the cost basis method that will minimize their tax bill for substantial mutual fund holdings in taxable accounts the average cost basis method may not always be the optimal method from a taxation point of view please note that the cost basis only becomes important if the holdings are in a taxable account and the investor is considering a partial sale of the holdings the specific identification method also known as specific share identification allows the investor to choose which shares are sold in order to optimize the tax treatment for example let s say an investor purchases 20 shares in january and 20 shares in february if the investor later sells 10 shares they can choose to sell five shares from the january lot and five shares from the february lot example of cost basis comparisonscost basis comparisons can be an important consideration let s say that an investor made the following consecutive fund purchases in a taxable account the total amount invested equals 52 000 and the average cost basis is calculated by dividing 52 000 by 3 500 shares the average cost is 14 86 per share suppose the investor then sells 1 000 shares of the fund at 25 per share the investor would have a capital gain of 10 140 using the average cost basis method the gain or loss using average cost basis would be as follows results can vary depending on the cost basis method chosen for tax purposes from strictly a tax standpoint the investor would be better off selecting the fifo method or the high cost method to calculate the cost basis before selling the shares these methods would result in no tax on the loss however with the average cost basis method the investor must pay a capital gains tax on the 10 140 in earnings of course if the investor sold the 1 000 shares using the fifo method there s no guarantee that 25 will be the selling price when the remaining shares are sold the stock price could decrease wiping out most of the capital gains and an opportunity to realize a capital gain as a result investors must weigh whether to take the gain today and pay the capital gains taxes or try to reduce their taxes and risk losing any unrealized gains on their remaining investment | |
how is the average cost basis method used | investors commonly use the average cost basis method for mutual fund tax reporting a cost basis method is reported with the brokerage firm where the assets are held | |
what are mutual funds | mutual funds are pooled investments managed by professional money managers they trade on exchanges and provide investors with access to a wide mix of assets selected for the fund | |
what is cost basis | cost basis is the original value of an asset for tax purposes usually the purchase price adjusted for stock splits dividends and return of capital distributions this value is used to determine the capital gain which is equal to the difference between the asset s cost basis and the current market value |
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