RESOURCES

Use of financial calculators HP12C/17B/19B (Download as PDF file)

Glossary

A B C D E F G H I J L M N O P Q R S T U V W Z

A
Accounting
The process of accumulating, classifying, and reporting financial information.

Accounting Equation
The statement that the assets of a business equal its liabilities and equity.

Accounts payable
The money a company owes its vendors and suppliers; a liability account.

Accounts receivable
The money a firm's customers owe it; an asset account.

Accrual accounting
A method of accounting that recognizes revenues when they are earned (not when they are paid) and matches certain expenses to the time period when the company receives the benefit.

Accrued liabilities
Expenses for which the benefit has been received, but the payment has not yet been made; a liability account.

Accumulated depreciation
The cumulative amount of depreciation since the asset was put in service.

Activity Based Costing (ABC)
The concept of tracing costs based on the activity they relate.

Activity measure
The measure of how much of an activity is performed.

Additional contributed capital
See Paid-in capital

Allowance for doubtful
An estimate of the amount of receivables that will never be accounts collected, subtracted from the receivables on the balance sheet. Also called allowance for bad debts.

Altman's Z-Score
See Z-Score.

American Institute of Certified Public Accountants (AICPA)
U. S. organization which certifies public accountants and sets auditing standards for the profession.

Amortization
Reducing an asset's value over time to indicate that it is being used up or worn out. Term usually applies to intangible assets and capital leases.

Asset turnover
The sales of a business divided by the total assets; one component of the DuPont formula.

Assets
What the organization owns; its financial, physical, and intangible properties.

Audit
An examination of a company's accounting systems and financial statements to confirm their accuracy and verify that the accounting conforms to Generally Accepted Accounting Principles (GAAP).

Authorized shares
The number of shares of stock that a corporation is allowed to issue as approved by the shareholders.

B

Balance sheet
A statement of a firm's financial position at a particular time; its assets, liabilities, and equity. Also called statement of financial position.

Bonds
Instruments of long-term debt which are sold to investors and pay a specified rate of interest; the principal is repaid at an agreed upon time.

Book value
When applied to an asset: net property value, or an asset's historical cost less its accumulated depreciation. When applied to stock, it is the amount of the common shareholder's equity as stated on the balance sheet divided by the number of shares of common stock outstanding.

Breakeven
The point at which sales or revenues equal expenses.

Burden
See Factory overhead.

C

Capital Asset Pricing Model
A method of calculating the cost of equity which incorporates a company's beta or risk factor into the analysis. The formula is: Risk free rate of return + beta (market return -risk free rate of return).

Call feature
An option that allows a company to buy back bonds at a specified price before they fall due.

Capital expenditure
A purchase of a fixed asset or an investment which the company expects to last for over 1 year.

Capital in excess of par value
See Paid-in capital.

Capital lease
A lease in which the risks and responsibilities of ownership are transferred to the organization leasing the item. From an accounting standpoint, the lease is treated as the purchase of an asset with the creation of a matching liability.

Captive Lessor
A leasing company that has been set up by a manufacturer or equipment dealer to finance the sale or lease of its own products to end-users or lessees.

Cash basis accounting
A method of accounting in which transactions are recorded at the time cash is actually received or paid out.

Cash budget
A detailed estimate of future cash receipts and disbursements. Also called cash flow projection.

Cash flow
Most commonly defined as net income plus depreciation, amortization, and depletion. However, there are a number of different definitions. See also Free cash flow, Gross cash flow, and Operating cash flow.

Cash flow per share
The amount of cash generated for each share of stock. A variety of definitions of cash flow may be used in calculating this ratio.

Cash flow projection
See Cash budget.

Cash flow statement
A financial statement which states the sources and uses of cash for the organization during the year.

Certified Public Accountant
An accountant who has passed the certification examination (CPA) given by the American Institute of Certified Public Accountants and is licensed by the state in which he or she practices.

Chief Financial Officer (CFO)
The individual who manages the accounting and financial areas of a company and deals with outsiders concerned with the firm's finances.

Closed-end Lease
A lease that does not contain a purchase or renewal option, thereby requiring the lessee to return the equipment to the lessor at the end of the initial lease term. Also refers to a vehicle lease in which the lessor absorbs the entire risk of the residual.
Collateral Assets pledged as security on a loan.

Collection period ratio
See Days Sales Outstanding.

Commercial paper
Unsecured promissory notes issued by large companies to meet their short-term needs for cash.

Common stock
Stock that is true risk capital; dividends may or may not be paid. Common shareholders are the true owners of a corporation and are last in line for compensation if the firm is liquidated.

Compensating balance
The amount of money a company must keep on deposit with a bank if it is to be able to borrow from that bank.

Conservatism
The accounting principle that requires that losses be recognized when they appear likely, but gains be recorded only when they are actually earned.

Consistency
The accounting principle that requires an organization to be consistent in its use of accounting methods and assumptions.

Contribution margin
Sales minus variable costs; what each unit contributes towards covering fixed costs and providing for profit.

Controller
The chief accounting officer of a company.

Convertible bonds, notes,
Debt or preferred stock that can be converted to debentures, or preferred stock common stock.

Corporation
A business incorporated under provincial or state laws as a separate accounting entity.

Cost drivers
Items which cause costs to increase or decrease.

Cost of capital
The cost of a company's long-term debt and its shareholders' equity and is usually calculated as a weighted average.

Cost of goods sold
See Cost of sales.

Cost of sales
The cost of making or buying the products that the company sells.
CPA See Certified Public Accountant.

Credit
An entry on the right-hand side of an account. Credit entries increase liability, equity, and revenue accounts; they decrease asset and expense accounts.

Current assets
Assets that are either cash or will be converted to cash or used up within a year.

Current liabilities
Debts that will fall due within a year.

Current ratio
Current assets divided by current liabilities; a measure of a company's liquidity.

D

Days Inventory On Hand (DIOH)
Inventory turnover divided into the number of days in a year and is the number of days' worth of inventory.

Days Sales Outstanding (DSO)
The average number of days a business takes to collect its accounts receivable, calculated as:

Recievables x 365
Net Sales

Also called the collection period ratio.

Debentures
Unsecured bonds for which no assets are pledged as collateral.

Debit
An entry on the left-hand side of an account. Debit entiries increase asset and expense accounts; they decrease liability, equity, and revenue accounts.

Debt service ratio
A ratio measuring the firms ability to generate cash flow to meet its debt commitments:

pretax income + interest expense + depration
interest expense + principal on debt due in the next

Debt to equity ratio
The total debt of t he company divided by the shareholders' equity; a measure of how highly the company is leveraged.

Deferred revenue
Revenue received before it is earned; examples include magazine subscriptions paid in advance and advance deposits on construction work; recorded as a liability until the money is earned.

Depletion
The reducing of a mineral reserve's value over time.

Depreciation
The reduction of a fixed asset's value over time to reflect that it is being diminished; in other words, the systematic allocation of the asset's cost over the time period it is expected to provide benefits.

DIOH
See Days Inventory On Hand.

Discount Rate
An interest rate used to bring a series of future cash flows to their present value in order to state them in current, or today's dollars. Use of a discount rate removes the time value of money from future cash flows.

Discounted cash flow
A method of analyzing investments in which future cash flows are discounted, or converted, to their present value.

Discounted lease
A lease in which the lease payments are assigned to a funding source in exchange for up-front cash to the lessor.

Dividends
Money or stock paid to shareholders as a return on their investment in a corporation.

Double entry accounting
A system of accounting in which each transaction is entered twice. The sum of the debits must equal the sum of the credits. Double entry accounting shows the give and the take of a transaction.

DSO
See Days Sales Outstanding.

DuPont formula
Return on sales multiplied by asset turnover.

E

Earnings Per Share (EPS)
Simple EPS is the firm's profits for the year minus the preferred shareholders' dividends, divided by the average number of shares of common stock outstanding. With primary EPS, the number of common stock equivalents (warrants, convertibles) likely to convert is added to the average number of common shares. Fully diluted earnings per share assumes that all warrants and convertibles will be exercised or converted.

Earnings statement
See Income Statement.

Equity
The amount of the owners' or shareholders' portion of the business; also called net worth.

Expenses
The costs of running a business.

F

Factoring
The sale of a company's receivables to another firm or individual.

Factory overhead
The indirect materials, indirect labor, depreciation, and other plant-related costs incurred in a manufacturing operation in order to make the product. Also called burden.

FASB 13
Financial Accounting Standards Board Statement No. 13, "Accounting for Leases." FASB 13, along with its various amendments and interpretations, specifies the proper classification, accounting and reporting of leases by lessors and lessees.

FIFO (First In, First Out)
A method of inventory valuation that assumes the inventory items are sold in the same order in which they were made or bought, oldest items first.

Financial accounting
The branch of accounting concerned with preparation of the statements in accordance with generally accepted accounting principles.

Financial Accounting
The group responsible for establishing generally accepted Standards Board (FASB) accounting principles in the U.S.

Financial Lease
See Capital lease.

Fiscal year
The annual period selected by a company for reporting on its operations. May be the same as the calendar year.

Fixed assets
An organization's land, properties, plants, equipment, and vehicles.

Fixed costs
Expenses that remain constant over the short term, regardless of sales volume.

Free cash flow
Net income + depreciation, depletion, and amortization + changes in non-cash working capital accounts - capital expenditures.

Full payout lease
A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.

Fully diluted earnings per share
See Earnings Per Share.

Fund balance
The excess of revenues over expenses which a not-for-profit organization has retained. Also called reserve or surplus.

G

Generally Accepted Accounting Principles (GAAP)
A set of practices that guides accountants in preparing financial statements. Audited statements generally conform with GAAP as the auditors must disclose any deviations from the principles.

Generally Accepted Auditing Standards (GAAS)
Rules that Chartered Accountants and Certified Public Accountants follow when auditing their clients.

Going concern
The assumption that a company will continue indefinitely.

Goodwill
The premium a company has paid over fair market value of the assets acquired when buying another company; an asset account. Also called excess of purchase price over market value of assets acquired.

Gordon dividend growth model
A method of calculating the cost of equity; the dividends per share divided by the price per share plus the growth in dividends or market price.

Gross cash flow
Net income plus depreciation, depletion, and amortization.

Gross margin
Gross profit as a percent of sales.

Gross profit
Net sales minus cost of goods sold.

H

Historical cost
The price actually paid for an asset.

Hurdle rate
The company's minimum required rate of return on capital projects.

I

Income statement
A statement of the revenues and expenses of an organization and the resulting profit or loss. "Also called earnings statement, operations statement, P & L, profit and loss statement.

Indenture
An agreement stating the terms and conditions of a bond offering, along with any restrictions placed on the company.

Independent lessor
A type of leasing company that is independent of any one manufacturer, and, as such, purchases equipment from various unrelated manufacturers. The equipment then is leased to the end-user or lessee. This type of lessor also is referred to as a third-party lessor.

Intangible assets
Nonphysical assets such as goodwill, patents, copyrights, and trademarks

Interest coverage ratio
A ratio measuring the firm's ability to generate earnings to cover its interest expense; calculated as follows:

pretax income + interest expense
interest expense

Internal Rate of Return (IRR)
A capital project's rate of return compared to the rate of the company's required rate.
Inventory The products a company has made or purchased to sell; a current asset account.

Inventory turnover
The cost of goods sold divided by the inventory; a measure of how well the inventory is moving. May also be calculated using net sales instead of cost of goods.

Invested capital
Often defined as equity plus interest bearing debt; may also be defined as equity plus long-term liabilities.

Investment bankers
Firms that specialize in handling the sale of securities for other companies, usually by buying the securities and reselling them.

IRR
See Internal Rate of Return.

Issued shares
The number of shares of stock actually issued; includes shares of treasury stock that have not been cancelled.

J

Journal
A record of a business's financial transactions, kept in chronological order.
Just-In-Time (JIT) The concept of reducing inventory levels through not holding large amounts of inventory in stock and bringing items in just before they are needed.

L

Lease broker/packager
An entity that provides one or more services in the lease transaction, but that does not retain the lease transaction for its own portfolio. Such services include finding the lessee, working with the equipment manufacturer, securing debt financing for the lessor to use in purchasing the equipment and locating the ultimate lessor or equity participant in the lease transaction. The lease broker also is referred to as a packager.

Ledger
A record of financial transactions, kept by account.

Lessee
The user of the equipment being leased.

Lessor
The owner of equipment leased to a lessee or user. (Legal title under the Uniform Commercial Code may be with the lessee in finance leased and nontax leases.)

Leverage
The relationship between a company's debt and its equity; a firm is said to be highly leveraged when it has a large amount of debt in proportion to equity.

Liabilities
A company's debts and other financial obligations.

LIFO (Last In, First Out)
A method of inventory valuation that assumes that the items made or purchased last are the ones sold first.

Line of credit
The maximum amount a company can borrow from a bank without making an additional formal loan application.

Liquidity
The speed at which an asset can be converted into cash or the ability of a company to generate enough cash to pay its bills and expenses on time.

Long-term liabilities
Debts that are not due within the next year.

M

MACR Class life
The specific tax cost recovery (depreciation) period for a class of assets as defined by Modified Accelerated Cost Recovery System (MACRS). Asset class lives (ADR midpoint lives) are used to determine an asset's MACRS classlife and, hence, its recovery period.

Management accounting
The branch of accounting which provides internal financial information to assist management in running the business more profitably.

Market value
The current value of a fixed asset or security in the marketplace.

Marketable securities
Treasury bills and other short-term securities that can readily be sold.

Master Lease
A lease agreement containing boiler plate provisions that allows a lessee to obtain additional leased equipment under the same basic lease terms and conditions as originally agreed to, without having to renegotiate and execute a new lease contract with the lessor. The actual lease rate for a specific piece of equipment generally will be set upon equipment delivery to the lessee.

Materiality
The principle that financial reporting discloses only significant, or material, information.

Minority interest
That portion of a subsidiary's equity which the parent company does not own.

Mortgage bond
A bond for which the issuing company has pledged specific fixed assets as collateral.

N

Net income
A company's after-tax profit or earnings; its bottom line. Also called net profit and net earnings.

Net Present Value (NPV)
A way of calculating a project's ROI by converting future cash inflows and outflows to their present value; calculation requires a required rate of return and the use of present value tables.

Net worth
See Equity.

Noncurrent liabilities
See Long-term liabilities

Nontax lease
A type of lease in which the lessee is, or will become, the owner of the leased equipment; and, therefore, is entitled to all the risks and benefits (including tax benefits) of equipment ownership.

Non-value-added costs
Costs which do not provide a benefit to the customer and are not essential to the organization.

O

Off Balance Sheet Financing
Any form of financing, such as an operating lease, that, for financial reporting purposes, is not required to be reported on a firm's balance sheet.

Operating cash flow
The net income of the business plus depreciation, amortization, and depletion, and changes in non-cash working capital accounts.

Operating lease
A lease which is treated as an expense, not as an acquisition of property, on its financial statements.

Operating profit
Sales minus cost of goods and all the basic operating expenses of the business.

Operations statement
See Income statement

Outstanding shares
Those shares that have been issued by a corporation and are owned by the shareholders.

Owners' equity
See Equity.

P

P & L
See Income statement.

Paid-in capital
The equity account containing the amount over par value which the company received for the stock when it sold it. Also called additional contributed capital or capital in excess of par value.

Par value
An arbitrary and usually low value assigned to stock at the time of incorporation.

Partnership
An unincorporated business with two or more owners.

Payback
The number of years it takes to recover an investment in a capital project.

P/E ratio
See Price earnings ratio.

Preferred stock
Stock that has priority over the common stock for the payment of dividends and, if necessary, liquidation. Doe not normally have voting rights.

Prepaid expenses
Expenses such as insurance that the company has paid for in advance and not yet received the benefit; an asset account.

Present value
The discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present value represents a series of future cash flows expressed in today's dollars.

Price earnings ratio
The market price of a share of stock divided by the earnings per share.

Primary activities
Activities which create an output used by a customer or another department.

Primary earnings per share
See Earnings Per Share.

Pro forma statement
A projected or budgeted financial statement.

Profit and loss statement
SSee Income Statement.

Profit margin
See Return on Sales.

Purchase Option
An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease term for either a fixed amount or at the future fair market value of the leased equipment.

Q

Qualified opinion
An auditor's opinion which states that the business being audited did not comply with all generally accepted accounting principles or that the business may be unable to continue as a going concern.

Quick ratio
See Acid-test ratio.

R

Renewal option
An option in the lease agreement that allows the lessee to extend the lease term for an additional period beyond the expiration of the initial lease term, in exchange for lease renewal payments.

Required rate of return
The minimum rate of return on its investment that a company requires before it will undertake a project; also known as the hurdle rate.

Reserve
See Fund balance.

Retained earnings
That portion of a firm's profits which is not paid out in dividends, but kept within the firm to finance its growth.

Return On Assets (ROA)
Pretax profit (or sometimes net income) divided by the total assets

Return on Equity (ROE)
Net income divided by equity.

Return on Invested Capital (ROIC)
The return earned on the money invested in the company by shareholders and lenders; calculated as follows:

Return on Investment (ROI)
A generic term which may refer to the return the firm has owned on a specific investment, on equity, on assets, etc.

Return on Sales (ROS)
Net income divided by net sales, sometimes called the profit margin.

Revenues
The money a company receives from or is owed by its customers for the goods or services it provides. Also called sales.

Reverse split
A decrease in the number of shares held by stockholders without a change in the dollar amount of the firm's equity; for example, a one for three split means that each investor's number of shares is reduced by two-thirds, but his or her proportional ownership remains the same.

ROA
See Return on Assets.

ROE
See Return on Equity.

S

Sale-leaseback
A transaction that involves the sale of equipment to a leasing company and a subsequent lease of the same equipment back to the original owner, who continues to use the equipment.

Secondary activities
Activities which support primary activities.

Secured transaction
A lease transaction which has more characteristics of a sale or financing arrangement than a usage arrangement, thus making the lessee the legal owner.

Semi-variable costs
Costs that increase in relationship to sales, but not in linear relationship.

Short-term investments
See Marketable securities.

Sinking fund
Money set aside regularly by a company to provide for the repurchase of bonds.

Statement of cash flow
Financial statement showing the cash flow of the organization divided into three areas: operations, financing, and investments.

Statement of changes in financial position
The old format for the statement of cash flow.

Statement of financial position
See Balance sheet.

Stock split
An increase in shareholders' shares without a change in the dollar amount of the firm's equity; for example, a two for one split means that each investor's number of shares is doubled, but his or her proportional ownership remains the same.

T

Tax accounting
The branch of accounting which determines the amount of taxes a company must pay.

Tax Lease
A generic term for a lease in which the lessor takes on the risks of ownership (as determined by various IRS pronouncements) and, as the owner, is entitled to the benefits of ownership, including tax benefits.

Temporary investments
See Marketable securities

Third-party Lessor
An independent leasing company, or lessor, that writes leases involving three parties: 1) the unrelated manufacturer, 2) the independent lessor and 3) the lessee.

Times interest earned ratio
See Interest coverage ratio.

Trade credit
Short-term credit extended by a company's suppliers.

Translation adjustments
Currency gains or losses which occur when investments of foreign subsidiaries are converted to the parent company's currency.

Treasury stock
Stock which the company has bought back from its shareholders.
Trial balance A listing of all the accounts in the ledger with their debit or credit balance.

True Lease
A lease transaction in which, for legal purposes, the lessor is deemed to be the legal owner of the equipment

U

UCC-1
A UCC document filed by a lessor informing the public that the filing party has a financial interest in the equipment on lease.

Uniform Commercial Code
A set of standard rules, adopted by all states, that governs commercial transactions.

Unqualified opinion
The auditor's opinion that the financial statements present the company's financial position fairly in accordance with Generally Accepted Accounting Principles (GAAP).

V

Value-added costs
Costs which provide value to the customer or are essential to the organization.

Variable costs
Expenses that increase or decrease in proportion to sales.

Variance
The difference between a budgeted amount and an actual amount.

W

Weighted average inventory
A method of inventory valuation which uses the average cost of the inventory for the year.

Working capital
Current assets minus current liabilities.

Z

Z-Score
A system of financial analysis developed by Edward J. Altman to identify companies with a high likelihood of bankruptcy.

Zero Base Budgeting (ZBB)
A budgeting system that requires managers to justify all budgeted expenses and rank them in incremental levels.