What is an Embedded Derivative? An embedded derivative is a part of a financial instrument that modifies its cash flows by tying it to an underlying asset. Usually, derivatives are separate financial instruments that are independent. However, embedded derivatives are a part of a financial contract. This contract, which holds …

Accounting numbers are prevalent in financial reporting, business valuation, and investment management. They’re so frequently used that the practitioners rarely asked pragmatic questions such as: are they useful, do they account for some meaningful risks, can they be used to price assets. A recent article attempts to bring some …

Risk represents the probability that the actual results differ from the expected results. Entities, including individuals, companies, organizations, and other bodies, face risk in their transactions. It also includes the possibility that losses occur for these entities. When transacting in financial markets, facing risks is inevitable. However, there are various …

What are Generally Accepted Accounting Principles? Generally Accepted Accounting Principles (GAAP) represent a set of accounting standards, rules, and principles issued by the Financial Accounting Standard Board (FASB). GAAP is one of the two prevalent accounting standards used throughout the world, the other being IFRS. While IFRS has a worldwide …

Businesses and companies follow various accounting standards to prepare and present their financial statements. These standards regulate how companies account for transactions. Some countries may have their specific standards. However, most of these companies use variations of international standards already developed by standardized bodies. When it comes to international accounting …

What is Free Cash Flow to the Firm? Free Cash Flow to the Firm (FCFF) represents any cash remaining after deducting a company’s depreciation, taxes, working capital, and other investment costs from its revenues. This amount shows any cash flow available for companies to distribute to their financiers, whether debtholders, …

What is a Chief Financial Officer? A Chief Financial Officer (CFO) is a senior executive in companies, responsible for overlooking financial matters. In any company, a CFO is the highest rank figure in finance. Usually, CFOs are professionals with an understanding of financial matters and who can resolve any related …

What is Corporate Governance? Corporate governance represents a system of rules, practices, and processes which dictate how companies should operate. Technically, corporate governance can be defined as “the system by which companies are directed and controlled in the interests of shareholders and other stakeholders”. The control and direction may come …

Assets are resources that companies own or control and result in future economic inflows. These are expenses that companies and businesses must bear for long-term success. Unlike other expenses, companies cannot charge an asset’s total cost to a single accounting period. It is because the matching principle in accounting requires …

What is the Accounting Rate of Return? The Accounting Rate of Return (ARR) represents the average net income that a company expects to generate from an asset from its capital cost. In other words, it is the return that a company expects on an investment in relation to the initial …