finance

Glossary of Accounting Terms

1. Above the line: This term can be applied to many aspects of accounting. It means transactions, assets etc., that are associated with the everyday running of a business. See below the line.

2. Account: A section in a ledger devoted to a single aspect of a business (eg. a Bank account, Wages account, Office expenses account).

3. Accounting cycle: This covers everything from opening the books at the start of the year to closing them at the end. In other words, everything you need to do in one accounting year accounting wise.

4. Accounting equation: The formula used to prepare a balance sheet: assets=liability + equity.

5. Accounts Payable: An account in the nominal ledger which contains the overall balance of the Purchase Ledger.

6. Accounts Payable Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger.

7. Accounts Receivable: An account in the nominal ledger which contains the overall balance of the Sales Ledger.

8. Accounts Receivable Ledger: A subsidiary ledger which holds the accounts of a business's customers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the sales ledger.

9. Accretive: If a company acquires another and says the deal is 'accretive to earnings', it means that the resulting PE ratio (price/earnings) of the acquired company is less than the acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say, $180,000 (P/E ratio=9 [180,000 valuation/20,000 profit]) then the deal is accretive because company 'A' is effectively increasing its EPS (because it now has more shares and it paid less for them compared with its own share price). (see dilutive)

10. Accruals: If during the course of a business certain charges are incurred but no invoice is received then these charges are referred to as accruals (they 'accrue' or increase in value). A typical example is interest payable on a loan where you have not yet received a bank statement. These items (or an estimate of their value) should still be included in the profit & loss account. When the real invoice is received, an adjustment can be made to correct the estimate. Accruals can also apply to the income side.

11. Accrual method of accounting: Most businesses use the accrual method of accounting (because it is usually required by law). When you issue an invoice on credit (ie. regardless of whether it is paid or not), it is treated as a taxable supply on the date it was issued for income tax purposes (or corporation tax for limited companies). The same applies to bills received from suppliers. (This does not mean you pay income tax immediately, just that it must be included in that year's profit and loss account).

12. Accumulated Depreciation Account: This is an account held in the nominal ledger which holds the depreciation of a fixed asset until the end of the asset's useful life (either because it has been scrapped or sold). It is credited each year with that year's depreciation, hence the balance increases (ie. accumulates) over a period of time. Each fixed asset will have its own accumulated depreciation account.

13. Advanced Corporation Tax (ACT - UK only - no longer in use): This is corporation tax paid in advance when a limited company issues a dividend. ACT is then deducted from the total corporation tax due when it has been calculated at year end. ACT was abolished in April 1999. See Corporation Tax.

14. Amortization: The depreciation (or repayment) of an (usually) intangible asset (eg. loan, mortgage) over a fixed period of time. Example: if a loan of 12,000 is amortized over 1 year with no interest, the monthly payments would be 1000 a month.

15. Annualize: To convert anything into a yearly figure. Eg. if profits are reported as running at £10k a quarter, then they would be £40k if annualized. If a credit card interest rate was quoted as 1% a month, it would be annualized as 12%.

16. Appropriation Account: An account in the nominal ledger which shows how the net profits of a business (usually a partnership, limited company or corporation) have been used.

17. Arrears: Bills which should have been paid. For example, if you have forgotten to pay your last 3 months rent, then you are said to be 3 months in arrears on your rent.

18. Assets: Assets represent what a business owns or is due. Equipment, vehicles, buildings, creditors, money in the bank, cash are all examples of the assets of a business. Typical breakdown includes 'Fixed assets', 'Current assets' and 'non-current assets'. Fixed refers to equipment, buildings, plant, vehicles etc. Current refers to cash, money in the bank, debtors etc. Non-current refers to any assets which do not easily fit into the previous categories (such as Deferred expenditure).

19. At cost: The 'at cost' price usually refers to the price originally paid for something, as opposed to, say, the retail price.

20. Audit: The process of checking every entry in a set of books to make sure they agree with the original paperwork (eg. checking a journal's entries against the original purchase and sales invoices).

21. Audit Trail: A list of transactions in the order they occurred.

22. Bad Debts Account: An account in the nominal ledger to record the value of un-recoverable debts from customers. Real bad debts or those that are likely to happen can be deducted as expenses against tax liability (provided they refer specifically to a customer).

23. Bad Debts Reserve Account: An account used to record an estimate of bad debts for the year (usually as a percentage of sales). This cannot be deducted as an expense against tax liability.

24. Balance Sheet: A summary of all the accounts of a business. Usually prepared at the end of each financial year.

25. Balancing Charge: When a fixed asset is sold or disposed of, any loss or gain on the asset can be reclaimed against (or added to) any profits for income tax purposes. This is called a balancing charge.

26. Bankrupt: If an individual or unincorporated company has greater liabilities than it has assets, the person or business can petition for, or be declared by its creditors, bankrupt. In the case of a limited company or corporation in the same position, the term used is insolvent.

27. Below the line: This term is applied to items within a business which would not normally be associated with the everyday running of a business. See above the line.

28. Bill: A term typically used to describe a purchase invoice (eg. an invoice from a supplier).

29. Bought Ledger: See Purchase Ledger.

30. Burn Rate: The rate at which a company spends its money. Example: if a company had cash reserves of $120m and it was currently spending $10m a month, then you could say that at the current 'burn rate' the company will run out of cash in 1 year.

31. CAGR: (Compound Annual Growth Rate) The year on year growth rate required to show the change in value (of an investment) from its initial value to its final value. If a $1 investment was worth $1.52 over three years, the CAGR would be 15% [(1 x 1.15) x 1.15 x 1.15]

32. Called-up Share capital: The value of unpaid (but issued shares) which a company has requested payment for. See Paid-up Share capital.

33. Capital: An amount of money put into the business (often by way of a loan) as opposed to money earned by the business.

34. Capital account: A term usually applied to the owners equity in the business.

35. Capital Allowances (UK specific): The depreciation on a fixed asset is shown in the Profit and Loss account, but is added back again for income tax purposes. In order to be able to claim the depreciation against any profits the Inland Revenue allow a proportion of the value of fixed assets to be claimed before working out the tax bill. These proportions (usually calculated as a percentage of the value of the fixed assets) are called Capital Allowances.

36. Capital Assets: See Fixed Assets.

37. Capital Employed (CE): Gross CE=Total assets, Net CE=Fixed assets plus (current assets less current liabilities).

38. Capital Gains Tax: When a fixed asset is sold at a profit, the profit may be liable to a tax called Capital Gains Tax. Calculating the tax can be a complicated affair (capital gains allowances, adjustments for inflation and different computations depending on the age of the asset are all considerations you will need to take on board).

39. Cash Accounting: This term describes an accounting method whereby only invoices and bills which have been paid are accounted for. However, for most types of business in the UK, as far as the Inland Revenue are concerned as soon as you issue an invoice (paid or not), it is treated as revenue and must be accounted for. An exception is VAT: Customs & Excise normally require you to account for VAT on an accrual basis, however there is an option called 'Cash Accounting' whereby only paid items are included as far as VAT is concerned (eg. if most of your sales are on credit, you may benefit from this scheme - contact your local Customs & Excise office for the current rules and turnover limits).

40. Cash Book: A journal where a business's cash sales and purchases are entered. A cash book can also be used to record the transactions of a bank account. The side of the cash book which refers to the cash or bank account can be used as a part of the nominal ledger (rather than posting the entries to cash or bank accounts held directly in the nominal ledger - see 'Three column cash book').

41. Cash Flow: A report which shows the flow of money in and out of the business over a period of time.

42. Cash Flow Forecast: A report which estimates the cash flow in the future (usually required by a bank before it will lend you money, or take on your account).

43. Cash in Hand: See Undeposited funds account.

44. Charge Back: Refers to a credit card order which has been processed and is subsequently cancelled by the cardholder contacting the credit card company directly (rather than through the seller). This results in the amount being 'charged back' to the seller (often incurs a small penalty or administration fee to the seller).

45. Chart of Accounts: A list of all the accounts held in the nominal ledger.

46. CIF (Cost, Insurance, Freight [c.i.f.]): A contract (international) for the sale of goods where the seller agrees to supply the goods, pay the insurance, and pay the freight charges until the goods reach the destination (usually a port - rather than the actual buyers address). After that point, the responsibility for the goods passes to the buyer.

47. Circulating assets: The opposite to Fixed assets. Circulating assets describe those assets that turn from cash to goods and back again (hence the term circulating). Typically, you buy some raw materials, start to manufacture a product (the asset is called work in progress at this point), produce a product (it is now stock), sell it (it is now back to cash again).

48. Closing the books: A term used to describe the journal entries necessary to close the sales and expense accounts of a business at year end by posting their balances to the profit and loss account, and ultimately to close the profit & loss account too by posting its balance to a capital or other account.

49. Companies House (UK only): The title given to the government department which collects and stores information supplied by limited companies. A limited company must supply Companies House with a statement of its final accounts every year (eg. trading and profit and loss accounts, and balance sheet).

50. Compensating error: A double-entry term applied to a mistake which has cancelled out another mistake.

51. Compound interest: Apply interest on the capital plus all interest accrued to date. Eg. A loan with an annually applied rate of 10% for 1000 over two years would yield a gross total of 1210 at the end of the period (year 1 interest=100, year two interest=110). The same loan with simple interest applied would yield 1200 (interest on both years is 100 per year).

52. Contra account: An account created to offset another account. Eg: a Sales contra account would be Sales Discounts. They are accounts included in the same section of a set of books, which when compared together, give the net balance. Example: Sales=10,000 Sales Discounts=1,000 therefore Net Sales=9,000. This example, affecting the revenue side of a business, is also referred to as Contra revenue. The tell-tale sign of a contra account is that it has the oposite balance to that expected for an account in that section (in the above example, the Sales Discounts balance would be shown in brackets - eg. it has a debit balance where Sales has a credit balance).

53. Control Account: An account held in a ledger which summarises the balance of all the accounts in the same or another ledger. Typically each subsidiary ledger will have a control account which will be mirrored by another control account in the nominal ledger (see 'Self-balancing ledgers').

54. Cook the books: Falsify a set of accounts. See also creative accounting.

55. Corporation Tax (CT - UK only): The tax paid by a limited company on its profits. At present this is calculated at year end and due within 9 months of that date. From April 1999 Advanced Corporation Tax was abolished and large (UK) companies now pay CT in instalments. Small and medium-sized companies are exempted from the instalment plan.

56. Cost accounting: An area of management accounting which deals with the costs of a business in terms of enabling the management to manage the business more effectively.

57. Cost-based pricing: Where a company bases its pricing policy solely on the costs of manufacturing rather than current market conditions.

58. Cost-benefit: Calculating not only the financial costs of a project, but also the cost of the effects it will have from a social point of view. This is not easy to do since it requires valuations of intangible items like the cost of job losses or the effects on the environment. Genetically modified crops are a good example of where cost-benefits would be calculated - and also impossible to answer with any degree of certainty!

59. Cost centre: Splitting up your expenses by department. Eg. rather than having one account to handle all power costs for a company, a power account would be opened for each depatrment. You can then analyse which department is using the most power, and hopefully find of way of reducing those costs.

60. Cost of finished goods: The value (at cost) of newly manufactured goods shown in a business's manufacturing account. The valuation is based on the opening raw materials balance, less direct costs involved in manufacturing, less the closing raw materials balance, and less any other overheads. This balance is subsequently transferred to the trading account.

61. Cost of Goods Sold (COGS): A formula for working out the direct costs of your stock sold over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases - closing stock.

62. Cost of Sales: A formula for working out the direct costs of your sales (including stock) over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases + direct expenses - closing stock. Also, see Cost of Goods Sold.

63. Creative accounting: A questionable! means of making a companies figures appear more (or less) appealing to shareholders etc. An example is 'branding' where the 'value' of a brand name is added to intangible assets which increases shareholders funds (and therefore decreases the gearing). Capitalizing expenses is another method (ie. moving them to the assets section rather than declaring them in the Profit & Loss account).

64. Credit: A column in a journal or ledger to record the 'From' side of a transaction (eg. if you buy some petrol using a cheque then the money is paid from the bank to the petrol account, you would therefore credit the bank when making the journal entry).

65. Credit Note: A sales invoice in reverse. A typical example is where you issue an invoice for £100, the customer then returns £25 worth of the goods, so you issue the customer with a credit note to say that you owe the customer £25.

66. Creditors: A list of suppliers to whom the business owes money.

67. Creditors (control account): An account in the nominal ledger which contains the overall balance of the Purchase Ledger.

68. Current Assets: These include money in the bank, petty cash, money received but not yet banked (see 'cash in hand'), money owed to the business by its customers, raw materials for manufacturing, and stock bought for re-sale. They are termed 'current' because they are active accounts. Money flows in and out of them each financial year and we will need frequent reports of their balances if the business is to survive (eg. 'do we need more stock and have we got enough money in the bank to buy it?').

69. Current cost accounting: The valuing of assets, stock, raw materials etc. at current market value as opposed to its historical cost.

70. Current Liabilities: These include bank overdrafts, short term loans (less than a year), and what the business owes its suppliers. They are termed 'current' for the same reasons outlined under 'current assets' in the previous paragraph.

71. Customs and Excise: The government department usually responsible for collecting sales tax (eg. VAT in the UK).

72. Days Sales Outstanding (DSO): How long on average it takes a company to collect the money owed to it. See: ratios.html (the first item in the list).

73. Debenture: This is a type of share issued by a limited company. It is the safest type of share in that it is really a loan to the company and is usually tied to some of the company's assets so should the company fail, the debenture holder will have first call on any assets left after the company has been wound up.

74. Debit: A column in a journal or ledger to record the 'To' side of a transaction (eg. if you are paying money into your bank account you would debit the bank when making the journal entry).

75. Debtors: A list of customers who owe money to the business.

76. Debtors (control account): An account in the nominal ledger which contains the overall balance of the Sales Ledger.

77. Deferred expenditure: Expenses incurred which do not apply to the current accounting period. Instead, they are debited to a 'Deferred expenditure' account in the non-current assets area of your chart of accounts. When they become current, they can then be transferred to the profit and loss account as normal.

78. Depreciation: The value of assets usually decreases as time goes by. The amount or percentage it decreases by is called depreciation. This is normally calculated at the end of every accounting period (usually a year) at a typical rate of 25% of its last value. It is shown in both the profit & loss account and balance sheet of a business. See straight-line depreciation.

79. Dilutive: If a company acquires another and says the deal is 'dilutive to earnings', it means that the resulting P/E (price/earnings) ratio of the acquired company is greater than the acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say, $220,000 (P/E ratio=11 [220,000 valuation/20,000 profit]) then the deal is dilutive because company 'A' is effectively decreasing its EPS (because it now has more shares and it paid more for them in comparison with its own share price). (see Accretive)

80. Dividends: These are payments to the shareholders of a limited company.

81. Double-entry book-keeping: A system which accounts for every aspect of a transaction - where it came from and where it went to. This from and to aspect of a transaction (called crediting and debiting) is what the term double-entry means. Modern double-entry was first mentioned by G Cotrugli, then expanded upon by L Paccioli in the 15th century.

82. Drawings: The money taken out of a business by its owner(s) for personal use. This is entirely different to wages paid to a business's employees or the wages or remuneration of a limited company's directors (see 'Wages').

83. EBIT: Earnings before interest and tax (profit before any interest or taxes have been deducted).

84. EBITA: Earnings before interest, tax and amortization (profit before any interest, taxes or amortization have been deducted).

85. EBITDA: Earnings before interest, tax, depreciation and amortization (profit before any interest, taxes, depreciation or amortization have been deducted).

86. Encumbrance: A liability (eg. a mortgage is an encumbrance on a property). Also, any money set aside (ie. reserved) for any purpose.

87. Entry: Part of a transaction recorded in a journal or posted to a ledger.

88. Equity: The value of the business to the owner of the business (which is the difference between the business's assets and liabilities).

89. Error of Commission: A double-entry term which means that one or both sides of a double-entry has been posted to the wrong account (but is within the same class of account). Example: Petrol expense posted to Vehicle maintenance expense.

90. Error of Ommission: A double-entry term which means that a transaction has been ommitted from the books entirely.

91. Error of Original Entry: A double-entry term which means that a transaction has been entered with the wrong amount.

92. Error of Principle: A double-entry term which means that one or both sides of a double-entry has been posted to the wrong account (which is also a different class of account). Example: Petrol expense posted to Fixtures and Fittings.

93. Expenses: Goods or services purchased directly for the running of the business. This does not include goods bought for re-sale or any items of a capital nature (see Stock and Fixed Assets).

94. FIFO: First In First Out. A method of valuing stock.

95. Fiscal year: The term used for a business's accounting year. The period is usually twelve months which can begin during any month of the calendar year (eg. 1st April 2001 to 31st March 2002).

96. Fixed Assets: These consist of anything which a business owns or buys for use within the business and which still retains a value at year end. They usually consist of major items like land, buildings, equipment and vehicles but can include smaller items like tools. (see Depreciation)

97. Fixtures & Fittings: This is a class of fixed asset which includes office furniture, filing cabinets, display cases, warehouse shelving and the like.

98. Flash earnings: A news release issued by a company that shows its latest quarterly results.

99. Flow of Funds: This is a report which shows how a balance sheet has changed from one period to the next.

100. FOB: An abbreviation of Free On Board. It generally forms part of an export contract where the seller pays all the costs and insurance of sending the goods to the port of shipment. After that, the buyer then takes full responsibility. If the goods are to travel by train, it's called FOR (Free On Rail).

101. Freight collect: The buyer pays the shipping costs.

102. Gearing (AKA: leverage): The comparison of a company's long term fixed interest loans compared to its assets. In general two different methods are used: 1. Balance sheet gearing is calculated by dividing long term loans with the equity (or proprietor's net worth). 2. Profit and Loss gearing: Fixed interest payments for the period divided by the profit for the period.

103. General Ledger: See Nominal Ledger.

104. Goodwill: This is an extra value placed on a business if the owner of a business decides it is worth more than the value of its assets. It is usually included where the business is to be sold as a going concern.

105. Gross loss: The balance of the trading account assuming it has a debit balance.

106. Gross profit: The balance of the trading account assuming it has a credit balance.

107. Growth and Acquisition (G&A): Describes a way a company can grow. Growth means expanding through its normal operations, Acquisition means growth through buying up other companies.

108. Historical Cost: Assets, stock, raw materials etc. can be valued at what they originally cost (which is what the term 'historical cost' means), or what they would cost to replace at today's prices (see Price change accounting).

109. Impersonal Accounts: These are accounts not held in the name of persons (ie. they do not relate directly to a business's customers and suppliers). There are two types, see Real and Nominal.

110. Imprest System: A method of topping up petty cash. A fixed sum of petty cash is placed in the petty cash box. When the petty cash balance is nearing zero, it is topped up back to its original level again (known as 'restoring the Imprest').

111. Income: Money received by a business from its commercial activities. See 'Revenue'.

112. Inland Revenue: The government department usually responsible for collecting your tax.

113. Insolvent: A company is insolvent if it has insufficient funds (all of its assets) to pay its debts (all of its liabilities). If a company's liabilities are greater than its assets and it continues to trade, it is not only insolvent, but in the UK, is operating illegally (Insolvency act 1986).

114. Intangible assets: Assets of a non-physical or financial nature. An asset such as a loan or an endowment policy are good examples. See tangible assets.

115. Integration Account: See Control Account.

116. Inventory: A subsidiary ledger which is usually used to record the details of individual items of stock. Inventories can also be used to hold the details of other assets of a business. See Perpetual, Periodic.

117. Invoice: A term describing an original document either issued by a business for the sale of goods on credit (a sales invoice) or received by the business for goods bought (a purchase invoice).

118. Journal(s): A book or set of books where your transactions are first entered. Full details

119. Journal entries: A term used to describe the transactions recorded in a journal.

120. Journal Proper: A term used to describe the main or general journal where other journals specific to subsidiary ledgers are also used.

121. K - no entries

122. Landed Costs: The total costs involved when importing goods. They include buying, shipping, insuring and associated taxes.

123. Ledger: A book in which entries posted from the journals are re-organised into accounts. Full details

124. Leverage: See Gearing.

125. Liabilities: This includes bank overdrafts, loans taken out for the business and money owed by the business to its suppliers. Liabilities are included on the right hand side of the balance sheet and normally consist of accounts which have a credit balance.

126. LIFO: Last In Last Out. A method of valuing stock.

127. Long term liabilities: These usually refer to long term loans (ie. a loan which lasts for more than one year such as a mortgage).

128. Loss: See Net loss.

129. Management accounting: Accounts and reports are tailor made for the use of the managers and directors of a business (in any form they see fit - there are no rules) as opposed to financial accounts which are prepared for the Inland Revenue and any other parties not directly connected with the business. See Cost accounting.

130. Manufacturing account: An account used to show what it cost to produce the finished goods made by a manufacturing business.

131. Matching principle: A method of analysing the sales and expenses which make up those sales to a particular period (eg. if a builder sells a house then the builder will tie in all the raw materials and expenses incurred in building and selling the house to one period - usually in order to see how much profit was made).

132. Maturity value: The (usually projected) value of an intangible asset on the date it becomes due.

133. MD&A: Management Discussion and Analysis. Usually seen in a financial report. The information disclosed has deen derived from analysis and discussions held by the management (and is presented usually for the benefit of shareholders).

134. Memo billing (aka memo invoicing): Goods ordered and invoiced on approval. There is no obligation to buy.

135. Memorandum accounts: A name for the accounts held in a subsidiary ledger. Eg. the accounts in a sales ledger.

136. Minority interest: A minority interest represents a minority of shares not held by the holding company of a subsidiary. It means that the subsidiary is not wholly owned by the holding company. The minority shareholdings are shown in the holding company accounts as long term liabilities.

137. Moving average: A way of smoothing out (i.e. removing the highs and lows) of a series of figures (usually shown as a graph). If you have, say, 12 months of sales figures and you decide on a moving average period of 3 months, you would add three months together, divide that by three and end up with an average for each month of the three month period. You would then plot that single figure in place of the original monthly points on your graph. A moving average is useful for displaying trends. See Normalize.

138. Multiple-step income statement (aka Multi-step): An income statement (aka Profit and Loss) which has had its revenue section split up into sub-sections in order to give a more detailed view of its sales operations. Example: a company sells services and goods. The statement could show revenue from services and associated costs of those revenues at the start of the revenue section, then show goods sold and cost of goods sold underneath. The two sections totals can then be amalgamted at the end to show overall sales (or gross profit). See Single-step income statement.

139. Narrative: A comment appended to an entry in a journal. It can be used to describe the nature of the transaction, and often in particular, where the other side of the entry went to (or came from).

140. Net loss: The value of expenses less sales assuming that the expenses are greater (ie. if the profit and loss account shows a debit balance).

141. Net of Tax: The price less any tax. Eg. if you sold some goods for $12 inclusive of $2 sales tax, then the 'net of tax' price would be $10

142. Net profit: The value of sales less expenses assuming that the sales are greater (ie. if the profit and loss account shows a credit balance).

143. Net worth: See Equity.

144. Nominal Accounts: A set of accounts held in the nominal ledger. They are termed 'nominal' because they don't usually relate to an individual person. The accounts which make up a Profit and Loss account are nominal accounts (as is the Profit and Loss account itself), whereas an account opened for a specific customer is usually held in a subsidiary ledger (the sales ledger in this case) and these are referred to as personal accounts.

145. Nominal Ledger: A ledger which holds all the nominal accounts of a business. Where the business uses a subsidiary ledger like the sales ledger to hold customer details, the nominal ledger will usually include a control account to show the total balance of the subsidiary ledger (a control account can be termed 'nominal' because it doesn't relate to a specific person). Full details

146. Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of figures so they are more consistent with the general trend of the business. This is usually done using a Moving average.

147. Opening the books: Every time a business closes the books for a year, it opens a new set. The new set of books will be empty, therefore the balances from the last balance sheet must be copied into them (via journal entries) so that the business is ready to start the new year.

148. Ordinary Share: This is a type of share issued by a limited company. It carries the highest risk but usually attracts the highest rewards.

149. Original book of entry: A book which contains the details of the day to day transactions of a business (see Journal).

150. Overheads: These are the costs involved in running a business. They consist entirely of expense accounts (eg. rent, insurance, petrol, staff wages etc.).

151. Paid-up Share capital: The value of issued shares which have been paid for. See Called-up Share capital.

152. P.A.Y.E (UK only): 'Pay as you earn'. The name given to the income tax system where an employee's tax and national insurance contributions are deducted before the wages are paid.

153. Pareto optimum: An economic theory by Vilfredo Pareto. It states that the optimum allocation of a society's resources will not happen whilst at least one person thinks he is better off and where others perceive themselves to be no worse.

154. Pay on delivery: The buyer pays the cost of the goods (to the carrier) on receipt of them.

155. Periodic inventory:A Periodic Inventory is one whose balance is updated on a periodic basis, ie. every week/month/year. See Inventory.

156. PE ratio: An equation which gives you a very rough estimate as to how much confidence there is in a company's shares (the higher it is the more confidence). The equation is: current share price multiplied by earnings and divided by the number of shares. 'Earnings' means the last published net profit of the company.

157. Perpetual inventory:A Perpetual Inventory is one whose balance is updated after each and every transaction. See Inventory.

158. Personal Accounts: These are the accounts of a business's customers and suppliers. They are usually held in the Sales and Purchase Ledgers.

159. Petty Cash: A small amount of money held in reserve (normally used to purchase items of small value where a cheque or other form of payment is not suitable).

160. Petty Cash Slip: A document used to record petty cash payments where an original receipt was not obtained (sometimes called a petty cash voucher).

161. Point of Sale (POS): The place where a sale of goods takes place, eg. a shop counter.

162. Post Closing Trial Balance: This is a trial balance prepared after the balance sheet has been drawn up, and only includes balance sheet accounts.

163. Posting: The copying of entries from the journals to the ledgers.

164. Preference Shares: This is a type of share issued by a limited company. It carries a medium risk but has the advantage over ordinary shares in that preference shareholders get the first slice of the dividend 'pie' (but usually at a fixed rate).

165. Pre-payments: One or more accounts set up to account for money paid in advance (eg. insurance, where part of the premium applies to the current financial year, and the remainder to the following year).

166. Price change accounting: Accounting for the value of assets, stock, raw materials etc. by their current market value instead of the more traditional Historic Cost.

167. Prime book of entry: See Original book of entry.

168. Profit: See Gross profit, Net profit, and Profit and Loss Account.

169. Profit and Loss Account: An account made up of revenue and expense accounts which shows the current profit or loss of a business (ie. whether a business has earned more than it has spent in the current year). Full details

170. Profit margin: The percentage difference between the costs of a product and the price you sell it for. Eg. if a product costs you $10 to buy and you sell it for $20, then you have a 100% profit margin. This is also known as your 'mark-up'.

171. Pro-forma accounts (pro-forma financial statements): A set of accounts prepared before the accounts have been officially audited. Often done for internal purposes or to brief shareholders or the press.

172. Pro-forma invoice: An invoice sent that requires payment before any goods or services have been despatched.

173. Provisions: One or more accounts set up to account for expected future payments (eg. where a business is expecting a bill, but hasn't yet received it).

174. Purchase Invoice: See Invoice.

175. Purchase Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger.

176. Q no entries

177. Raw Materials: This refers to the materials bought by a manufacturing business in order to manufacture its products.

178. Real accounts: These are accounts which deal with money such as bank and cash accounts. They also include those dealing with property and investments. In the case of bank and cash accounts they can be held in the nominal ledger, or balanced in a journal (eg. the cash book) where they can then be looked upon as a part of the nominal ledger when compiling a balance sheet. Property and investments can be held in subsidiary ledgers (with associated control accounts if necessary) or directly in the nominal ledger itself.

179. Realisation principle: The principle whereby the value of an asset can only be determined when it is sold or otherwise disposed of, ie. its 'real' (or realised) value.

180. Rebate: If you pay for a service, then cancel it, you may receive a 'rebate'. That is, you may be refunded some of the money you paid for the service. (eg. if you cancel a 1 year insurance policy after 3 months, you may get a rebate for the remaining 9 months)

181. Receipt: A term typically used to describe confirmation of a payment - if you buy some petrol you will normally ask for a receipt to prove that the money was spent legitimately.

182. Reconciling: The procedure of checking entries made in a business's books with those on a statement sent by a third person (eg. checking a bank statement against your own records).

183. Refund: If you return some goods you have just bought (for whatever reason), the company you bought them from may give you your money back. This is called a 'refund'.

184. Reserve accounts: Reserve accounts are usually set up to make a balance sheet clearer by reserving or apportioning some of a business's capital against future purchases or liabilities (such as the replacement of capital equipment or estimates of bad debts).

185. A typical example is a company where they are used to hold the residue of any profit after all the dividends have been paid. This balance is then carried forward to the following year to be considered, together with the profits for that year, for any further dividends.

186. Retail: A term usually applied to a shop which re-sells other people's goods. This type of business will require a trading account as well as a profit and loss account.

187. Retained earnings: This is the amount of money held in a business after its owner(s) have taken their share of the profits.

188. Retainer: A sum of money paid in order to ensure a person or company is available when required.

189. Retention ratio: The proportion of the profits retained in a business after all the expenses (usually including tax and interest) are taken into account. The algorithm is retained profits divided by profits available for ordinary shareholders (or available for the proprietor/partners in the case of unincorporated companies).

190. Revenue: The sales and any other taxable income of a business (eg. interest earned from money on deposit).

191. Run Rate: A forecast for the year based on the current year to date figures. If a company's 1st quarter profits were, say, $25m, they may announce that the run rate for the year is $100m.

192. Sales: Income received from selling goods or a service. See Revenue.

193. Sales Invoice: See Invoice.

194. Sales Ledger: A subsidiary ledger which holds the accounts of a business's customers. A control account is held in the nominal ledger (usually called a debtors' control account) which shows the total balance of all the accounts in the sales ledger.

195. Self Assessment (UK only): A new style of income tax return introduced for the 1996/1997 tax year. If you are self-employed, or receive an income which is un-taxed at source, you will need to register with the Inland Revenue so that the relevant self assessment forms can be sent to you. The idea of self assessment is to allow you to calculate your own income tax.

196. Self-balancing ledgers: A system which makes use of control accounts so that each ledger will balance on its own. A control account in a subsidiary ledger will be mirrored with a control account in the nominal ledger.

197. Self-employed: The owner (or partner) of a business who is legally liable for all the debts of the business (ie. the owner(s) of a non-limited company).

198. Selling, General & Administrative expense (SG&A): The expenses involved in running a business.

199. Service: A term usually applied to a business which sells a service rather than manufactures or sells goods (eg. an architect or a window cleaner).

200. Shareholders: The owners of a limited company or corporation.

201. Share premium: The extra paid above the face value of a share. Example: if a company issues its shares at $10 each, and later on you buy 1 share on the open market at $12, you will be paying a share premium of $2

202. Shares: These are documents issued by a company to its owners (the shareholders) which state how many shares in the company each shareholder has bought and what percentage of the company the shareholder owns. Shares can also be called 'Stock'.

203. Shares issued (aka Shares outstanding): The number of shares a company has issued to shareholders.

204. Simple interest: Interest applied to the original sum invested (as opposed to compound interest). Eg. 1000 invested over two years at 10% per year simple interest will yield a gross total of 1200 at the end of the period (10% of 1000=100 per year).

205. Single-step income statement: An income statement where all the revenues are shown as a single total rather than being split up into different types of revenue (this is the most common format for very small businesses). See Profit and Loss, Multiple-step income statement.

206. Sinking fund: An account set up to reduce another account to zero over time (using the principles of amortization or straight line depreciation). Once the sinking fund reaches the same value as the other account, both can be removed from the balance sheet.

207. SME: Small and Medium Enterprises (ie. small and medium size businesses). The distinction between what is 'small' and what is 'medium' varies depending on where you are and who you talk to.

208. Sole trader: See Sole-proprietor.

209. Sole-proprietor: The self-employed owner of a business (see Self-employed).

210. Source document: An original invoice, bill or receipt to which journal entries refer.

211. Stock: This can refer to the shares of a limited company (see Shares) or goods manufactured or bought for re-sale by a business.

212. Stock control account: An account held in the nominal ledger which holds the value of all the stock held in the inventory subsidiary ledger.

213. Stockholders: See Shareholders.

214. Stock Taking: Physically checking a business's stock for total quantities and value.

215. Stock valuation: Valuing a stock of goods bought for manufacturing or re-sale.

216. Straight-line depreciation: Depreciating something by the same (ie. fixed) amount every year rather than as a percentage of its previous value. Example: a vehicle initially costs $10,000. If you depreciate it at a rate of $2000 a year, it will depreciate to zero in exactly 5 years. See Depreciation.

217. Subordinated debt: If a company is liquidated (i.e. becomes insolvent), the secured creditors are paid first. If any money is left, the unsecured creditors are then paid. The amount of money owed to the unsecured creditors is termed the 'subordinated debt' of the company.

218. Subsidiary ledgers: Ledgers opened in addition to a business's nominal ledger. They are used to keep sections of a business separate from each other (eg. a Sales ledger for the customers, and a Purchase ledger for the suppliers). (See Control Accounts)

219. Suspense Account: A temporary account used to force a trial balance to balance if there is only a small discrepancy (or if an account's balance is simply wrong, and you don't know why). A typical example would be a small error in petty cash. In this case a transfer would be made to a suspense account to balance the cash account. Once the person knows what happened to the money, a transfer entry will be made in the journal to credit or debit the suspense account back to zero and debit or credit the correct account.

220. T Account: A particular method of displaying an account where the debits and associated information are shown on the left, and credits and associated information on the right.

221. Tangible assets: Assets of a physical nature. Examples include buildings, motor vehicles, plant and equipment, fixtures and fittings. See Intangible assets.

222. Three column cash book: A journal which deals with the day to day cash and bank transactions of a business. The side of a transaction which relates directly to the cash or bank account is usually balanced within the journal and used as a part of the nominal ledger when compiling a balance sheet (ie. only the side which details the sale or purchase needs to be posted to the nominal ledger).

223. Total Cost of Ownership (TCO): The real amount an asset will cost. Example: An accounting application retails at $1000. Support - which is mandatory, costs a further $200 per annum. Assuming the software will be in use for 5 years, TCO will be $2000 (1000+5x200=2000).

224. Trading account: An account which shows the gross profit of a manufacturing or retail business.

225. Transaction: Two or more entries made in a journal which when looked at together reflect an original document such as a sales invoice or purchase receipt.

226. Trial Balance: A statement showing all the accounts used in a business and their balances. Full details

227. Turnover: The income of a business over a period of time (usually a year).

228. Undeposited Funds Account: An account used to show the current total of money received (ie. not yet banked or spent). The 'funds' can include money, cheques, credit card payments, bankers drafts etc. This type of account is also commonly referred to as a 'cash in hand' account.

229. Value Added Tax (VAT - applies to many countries): Value Added Tax, or VAT as it is usually called is a sales tax which increases the price of goods. At the time of writing the UK VAT standard rate is 17.5%, there is also a rate for fuel which is 5% (this refers to heating fuels like coal, electricity and gas and not 'road fuels' like petrol which is still rated at 17.5%).

230. VAT is added to the price of goods so in the UK, an item that sells at £10 will be priced £11.75 when 17.5% VAT is added.

231. Wages: Payments made to the employees of a business for their work on behalf of the business. These are classed as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings).

232. Work in Progress: The value of partly finished (ie. partly manufactured) goods.

233. Write-off: Depreciating an asset to zero in one go.

234. Zero Based Account (ZBA): Usually applied to a personal account (checking) where the balance is kept as close to zero as possible by transferring money between that account and, say, a deposit account.

235. Zero Based Budget (ZBB): Starting a budget at zero and justifying every cost that increases that budget.

INDEX

1) Above the Market
2) Above Water
3) Accounting Rate of Return - ARR
4) Accrued Expense
5) Accrued Interest
6) Acid-Test Ratio
7) Acquisition
8) Activity Based Budgeting - ABB
9) Aging
10) Alternative Minimum Tax - AMT
11) American Depository Receipt - ADR
12) American Depository Share - ADS
13) Amortization
14) Annuity
15) Arbitrage
16) Arbitrageur
17) Arbitration
18) Articles of Incorporation
19) Asset Turnover
20) Audit Trail
21) Authorized Stock
22) Average Annual Growth Rate - AAGR
23) Backlog
24) Backward Integration
25) Bad Debt
26) Balance of Payments - BOP
27) Balance Of Trade - BOT
28) Bank Guarantee
29) Bank Reconciliation Statement
30) Bankruptcy
31) Base Period
32) Basket Option
33) Basket Trade
34) BCG Growth Share Matrix
35) Behavioral Finance
36) Below the Market
37) Benchmark
38) Benefit Cost Ratio - BCR
39) Beta
40) Bill of Exchange

41) Blue Sheets
42) Book Value
43) Book Value Per Common Share
44) Bought Deal
45) Brand Equity
46) Break-Even Point - BEP
47) Bridge Financing
48) Bridge Loan
49) Broad-Based Index
50) Budget
51) Bull Market
52) Burn Rate
53) Business Cycle
54) Buyback
55) Capital
56) Capital Appreciation
57) Capital Asset Pricing Model - CAPM
58) Capital Budgeting
59) Capital Employed
60) Capital Expenditure - CAPEX
61) Capital Gain
62) Capital Goods
63) Capital Structure
64) Capitalization
65) Captive Fund
66) Carried Interest
67) Carrying Cost Of Inventory
68) Cartel
69) Cash Cow
70) Cash Flow Statement
71) Collateral
72) Commercial Paper
73) Common Stock
74) Comprehensive Income
75) Concentration Ratio
76) Conduit Financing
77) Conglomerate
78) Conservative Growth
79) Conservative Investing
80) Consolidated Financial Statements

81) Contagion
82) Contango
83) Contingent Asset
84) Contingent Liability
85) Corporate Governance
86) Cost Of Capital
87) Cost Of Debt
88) Cost Of Equity
89) Cost Of Goods Sold - COGS
90) Cost Synergy
91) Covariance
92) Covenant
93) Credit Bureau
94) Credit Crunch
95) Crystallization
96) Cum Dividend
97) Cum Rights
98) Cum Warrant
99) Current Assets
100) Current Liabilities
101) Current Ratio
102) Curtailment
103) CUSIP Number
104) Custodian
105) Cyclical Stock
106) Analyst
107) Earnings Estimate
108) Forward Earnings

Author: Ravindra Babu Ravi, email: raavis_in@yahoo.com

1) Above the Market : An order to buy or sell at a price set higher than the current market price of the security. Examples of above the market orders include: a limit order to sell, a stop order to buy, or a stop-limit order to buy.

This is a strategy that is often used by momentum traders. For example, a stop order would be placed above the resistance level to buy. Should the security's price break through the resistance level, the investor may be able to participate in the upward trend.

2) Above Water : The condition of an asset's actual value when it is greater than the asset's book value.

Generally, the book value of an asset listed in a company's balance sheet cannot be adjusted according to GAAP. Should the asset appreciate, its market value would be 'above water'. For example, if a company purchased a piece of land for $100K and the company later discovered an oil reserve on the property, the market value of the land would increase, but the book value would remain at $100K.

3) Accounting Rate of Return - ARR : ARR provides a quick estimate of a project's worth over its useful life. ARR is derived by finding profits before taxes and interest.

ARR is an accounting method used for purposes of comparison. The major drawbacks of ARR are that it uses profit rather than cash flows, and it does not account for the time value of money.

4) Accrued Expense : An accounting expense recognized in the books before it is paid for. It is a liability, usually current. These expenses are typically periodic and documented upon a company's balance sheet due to the high probability of collection.

Accrued expenses are the opposite of prepaid expenses. Firms will typically incur periodic expenses such as wages, interest and taxes. Even though they are to be paid at some future date, they are indicated on the firm's balance sheet at the point in time when the firm can reasonably expect their payment, until the time they are paid.

5) Accrued Interest : The interest that has accumulated on a bond since the last interest payment up to but not including the settlement date.

There are two methods for calculating accrued interest:
1) 360-day year method, used for corporate and municipal bonds.
2) 365-day year method, used for government bonds.

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Author: Ravindra Babu Ravi, email: rravi@capitaliq.co.in

Accrued interest is added to the contract price of a bond transaction. Essentially accrued interest has been earned since the last coupon payment - but since the bond hasn't expired or the next payment is not yet due, the owner of the bond hasn't officially received the money. If he or she sells the bond, accrued interest is added to the sale price.

6) Acid-Test Ratio
A stringent test that indicates if a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets.

Calculated by:

Companies with ratios less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.

The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid, so if upon submersion in acid the nugget didn't dissolve it passed the acid test. If a company's financial statements pass the figurative acid test, you can think of it as an indication that there isn't any accounting gimmickry going on, and that its bank account actually does contain gold!

7) Acquisition
When one company purchases a majority interest in the acquired.

Acquisitions can be either friendly or unfriendly. Friendly acquisitions occur when the target firm agrees to be acquired; unfriendly acquisitions don't have the same agreement from the target firm.

8) Activity Based Budgeting - ABB
A method of budgeting in which activities that incur costs in each function of an organization are established and relationships are defined between activities. This information is then used to decide how much resource should be allocated to each activity.

Basically, ABB is budgeting by activities rather than by cost elements.

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9) Aging
A method used by accountants and investors to evaluate and identify any irregularities within a company's account receivables. Aging is achieved by sorting and inspecting the accounts according to their length outstanding.

By aging a company's accounts receivables, one can get a better view of a company's bad debt and financial health.

10) Alternative Minimum Tax - AMT
A tax calculation that adds certain tax preference items back into adjusted gross income. If AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are paid.

AMT is designed to prevent taxpayers from escaping their fair share of tax liability by using certain tax breaks.

11) American Depository Receipt - ADR
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and help to reduce administration and duty costs on each transaction that would otherwise be levied.

This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq.

12) American Depository Share - ADS
A share issued under deposit agreement that represents an underlying security in the issuer's home country.

The term ADR and ADS are often thought to be the same. Technically, an ADS is the actual share trading, while an ADR represents a bundle of ADS's.

13) Amortization
1. The paying off of debt in regular installments over a period of time.
2. The deduction of capital expenses over a specific period of time. Similar to depreciation, it is a method of measuring the consumption of the value of long-term assets like equipment or buildings.

Think of amortization (the deduction of capital expenses) as a way to claim the decrease in value on your car every year. If you bought your car new for $20,000 and after the first year it is worth $17,000, theoretically you could amortize the $3,000 for tax and financial purposes.

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14) Annuity
A series of fixed payments paid at regular intervals over the specified period of the annuity. The fixed payments are received after a period of investments that are made into the annuity.

An annuity is essentially a level stream of cash flows for a fixed period of time. It is most often used as a form of income during retirement.

15) Arbitrage
The simultaneous purchase and selling of an asset in order to profit from a differential in the price. This usually takes place on different exchanges or marketplaces. Also known as a "risk less profit".

Here's an example of arbitrage: Say a domestic stock trades also on a foreign exchange in another country, where it hasn't adjusted for the constantly changing exchange rate. A trader purchases the stock where it is undervalued and short sells the stock where it is overvalued, thus profiting from the difference. Arbitrage is recommended for experienced investors only.

16) Arbitrageur
A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capture risk-free profits. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, buy the undervalued shares on the one exchange while short selling the same number of overvalued shares on the other exchange, thus capturing risk-free profits as the prices on the two exchanges converge.

Arbitrageurs are typically very experienced investors since arbitrage opportunities are difficult to find and require relatively fast trading. Arbitrageurs also play an important role in the operation of capital markets, as their efforts in exploiting price inefficiencies keep prices more accurate than they otherwise would be.

17) Arbitration
An informal hearing regarding a dispute. The dispute is judged by a group of people (generally three) who have been selected by an impartial panel. Once a decision has been reached, there is no further appeal process.

We frequently hear this term when professional sports teams are negotiating contracts with their athletes. Typically, one party aims unrealistically high and the other one aims really low, and the settlement occurs somewhere in the middle.
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18) Articles of Incorporation
A set of documents filed with a government body for the purpose of legally documenting the creation of a corporation. Also referred to as the "corporate charter."

Articles of incorporation typically contain pertinent information such as the firm's address, profile, distribution of corporate powers, and the amount/type of stock to be issued. Some states will offer more favorable environments and thus attract a greater proportion of firms seeking incorporation.

19) Asset Turnover
The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars.

Formula:

Asset turnover measures the firm's efficiency at using its assets in generating sales or revenue; the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover; those with high profit margins have low asset turnover.

20) Audit Trail
A step-by-step record by which accounting data can be traced to their source. The SEC and NYSE will use this method for the explicit reconstruction of trades when there are questions as to the validity or accuracy of an accounting figure.

This is the technique used to track improper market activity. By documenting and analyzing all houses and brokers involved in specific trades, those who follow the audit trail can (hopefully) identify the culprit.

21) Authorized Stock
The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. This figure is usually listed in the capital accounts section of the balance sheet.

This number can be changed only by a vote of all the shareholders. Management will typically keep the number of authorized shares higher than those actually issued. This allows the company to sell more shares if it needs to raise additional funds.

Also known as "authorized shares" or "authorized capital stock".

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22) Average Annual Growth Rate - AAGR
The average increase in the value of a portfolio over the period of a year.

Just as the name says, it is the average growth rate. For example, if your portfolio grows 10% one year and 20% the next, your AAGR would be 15%.

23) Backlog
The total value of sales orders waiting to be fulfilled.

This figure is used mainly in the manufacturing industry. Increases or decreases in a company's backlog indicate the future direction of sales and earnings.

24) Backward Integration
A form of vertical integration that involves the purchase of suppliers in order to reduce dependency.

A good example would be if a bakery business bought a wheat farm in order to reduce the risk associated with the dependency on flour.

25) Bad Debt
A debt that is not collectable and therefore worthless to the creditor

Bad personal debts generally aren't deductible

26) Balance of Payments - BOP
A record of all transactions made by one particular country during a certain period of time. It compares the amount of economic activity between a country and all other countries.

This includes trade balance, foreign investments, and investments by foreigners among other things.

27) Balance Of Trade - BOT
The largest component of a country's balance of payments. It is the difference between exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.

The balance of trade is one of the most misunderstood indicators of the U.S. economy. For example, many people believe that a trade deficit is a bad thing. However, whether a trade deficit is bad thing or not is relative to the business cycle and economy. In a recession, countries like to export more, creating jobs and demand. In a strong expansion, countries like to import more, providing price competition, which limits inflation and, without increasing prices, provides goods beyond the economy's ability to meet supply. Thus, a trade deficit is not a good thing during a recession but may help during an expansion.

28) Bank Guarantee
A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.

A bank guarantee enables the customer (debtor) to acquire goods, buy equipment, or draw down loans, and thereby expand business activity.

29) Bank Reconciliation Statement
A form that allows individuals to compare their personal bank account records to the bank's records of the individual's account balance in order to uncover any possible discrepancies.

Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system, there is sometimes a normal discrepancy between account balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.

30) Bankruptcy
The state of a person or firm unable to repay debts.

If the bankrupt entity is a firm, the ownership of the firm's assets is transferred from the stockholders to the bondholders. Shareholders are the last people to get paid if a company goes bankrupt. Secure creditors always get first grabs at the proceeds from liquidation.

31) Base Period
A particular time period whose data is used for comparative purposes when measuring economic data of other periods.

Think of this as a yardstick for economic data. For example, if a price index has a base year of 1990, current prices are being compared to prices in that time period.

32) Basket Option
A type of option whose underlying asset is a basket of commodities, securities, or currencies.

A currency basket option provides a cheaper method for multinational corporations to receive/sell a basket of several currencies for one specified currency. An example would be MacDonald's buying a basket option involving Indian rupees and British pounds in exchange for U.S. dollars

33) Basket Trade
A single order to buy or sell a set of 15 or more securities.

Basket trades are used by institutional investors or program traders to invest large amounts of money into a particular portfolio or index

34) BCG Growth Share Matrix
A graphical approach to resource allocation within a multi-segmented corporation.

The growth-share matrix analyzes different divisions within a corporation and compares their growth rates and market shares with those of competitors.

35) Behavioral Finance
A field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioral finance it is assumed that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes.

There have been many studies that have documented long-term historical phenomena in securities markets that contradict the efficient market hypothesis and cannot be captured plausibly in models based on perfect investor rationality. Behavioral Finance attempts to fill the void.

36) Below the Market
An order to buy or sell a security at a price lower than the current market price.

Investors may choose to place a limit order to buy, a stop order to sell, or a stop-limit order to sell. In order to limit losses, investors holding a long position may place a stop order, which activates the sale of the securities if the price declines below a particular point.

37) Benchmark
A standard against which the performance of a security, index, or investor can be measured.

Most equity mutual funds and portfolio managers use the S&P 500 index as the benchmark to beat.
When evaluating performance of any investment, it's important to compare against the right benchmark. For example, comparing a bond fund to the Russell 2000 (which is an index of small-caps), is not meaningful.

38) Benefit Cost Ratio - BCR
A ratio attempting to identify the relationship between the cost and benefits of a proposed project.

This ratio is used to measure both quantitative and qualitative factors since sometimes benefits and costs cannot be measured exclusively in financial terms.

39) Beta
A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole. Also known as "beta coefficient."

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2 it's theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely most high-tech Nasdaq-based stocks have a beta greater than 1, offering the possibility of a higher rate of return but also posing more risk.

40) Bill of Exchange
A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.

Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable by endorsements. The difference between a promissory note and a bill of exchange is that this product is transferable and can bind one party to pay a third party that was not involved in its creation. If these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts.

41) Blue Sheets
Requests for information sent out by the Securities and Exchange Commission to market makers.

Blue sheets provide the SEC with detailed information about trades performed by a firm and its clients. The information includes the security's name, the date traded, price, transaction size, and a list of the parties involved.

The questionnaires came to be known as blue sheets because they were printed on blue paper. Today, due to the high volumes of trades, this information is provided electronically though electronic blue sheet systems, or EBS.

42) Book Value
1. The value at which an asset is carried on a balance sheet. In other words, the cost of an asset minus accumulated depreciation.

2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges, and so on.

In the U.K., book value is known as "net asset value".

Book value is the accounting value of a firm. It has two main uses:

1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.

2. By being compared to the company's market value, the book value can indicate whether a stock is under- or over-priced.

3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.

43) Book Value Per Common Share
A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly.

Formula:

Should the company decide to dissolve, the book value per common indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.

In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate.

44) Bought Deal
A new share issue that is bought entirely by one underwriter to resell to investors.

An underwriter will only do a bought deal if it is confident there is enough demand for the shares.

45) Brand Equity
An intangible value-added aspect of particular goods otherwise not considered unique.

Brand Equity is created through aggressive mass marketing campaigns. Good examples are companies like Nike and Coca Cola whose corporate logos earn worldwide recognition.

46) Break-Even Point - BEP
1. In general, the point at which gains equal losses.
2. In options, the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus the premium paid.

For businesses, reaching the break-even point is the first major step towards profitability.

47) Bridge Financing
A method of financing, used by companies before their IPO, to obtain necessary cash for the maintenance of operations.

These funds are usually supplied by the investment bank underwriting the new issue. As payment, the company acquiring the bridge financing will give a number of shares at a discount of the issue price to the underwriters that equally offsets the loan. This financing is, in essence, a forwarded payment for the future sales of the new issue.

48) Bridge Loan
A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory.
Also known as "interim financing", "gap financing or a "swing loan".

As the term implies, these loans "bridge the gap" between times when financing is needed. They are used by both corporations as well as individuals and can be customized for many different situations. For example, say a company is doing a round of equity financing that is expecting to close in six months. A bridge loan could be used to secure working capital until the round of funding goes through. In the case of an individual, bridge loans are common in the real estate market. As there can often be a time lag between the sale of one property and the purchase of another, a bridge loan allows a homeowner more flexibility.

49) Broad-Based Index
An index designed to reflect the movement of the entire market. The smallest broad-based index is the Dow Jones Industrial Average with 30 industrial stocks and the largest is the Wilshire 5000 Total Market Index. Other examples include the S&P 500, Russell 3000 Index, AMEX Major Market Index and the Value Line Composite Index.

Investors who want the maximum benefit of diversification can invest in securities that have as their underlying tracking instrument an index or other financial product made up of several, well-diversified stocks. Securities based on broad-based indices allow investors to effectively own the same basket of stocks contained in a major index while committing a small amount of financial resources.

50) Budget
An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, a family or a group of people, a business, government, country or multinational organization or just about anything else that makes and spends money. Budgets are a microeconomic concept that show the tradeoff made when one good is exchanged for another.

A surplus budget means profits are anticipated; a balanced budget means revenues are expected to equal expenses; and a deficit budget means expenses will exceed revenue. Budgets are usually compiled and re-evaluated on a periodic basis. Adjustments are made to budgets based on the goals of the budgeting organization. In some cases, budget makers are happy to operate at a deficit, while, in other cases, operating at a deficit is seen as financially irresponsible.

51) Bull Market
A financial market of a certain group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used in respect to the stock market, but really can be applied to anything that is traded, such as bonds, currencies, commodities, etc.

Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. Of course, no bull market can last forever, and sooner or later a bear market (in which prices fall) will come. It's tough if not impossible to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation can sometimes play a large (if not dominant) role in the markets. The extreme on the high end is a stock-market bubble, and on the low end a crash.

The use of "bull" and "bear" to describe markets comes from the way in which each animal attacks its opponents. That is, a bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a bull market. And if the trend is down, it is considered a bear market.

52) Burn Rate
The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it's a measure of negative cash flow.

Burn rate is usually quoted in terms of cash spent per month. For example, a burn rate of 1 million would mean the company is spending 1 million per month. When the burn rate begins to exceed forecasts, or revenue fails to meet expectations, the usual recourse is to reduce the burn rate (which, in most companies, means reducing staff).

53) Business Cycle
The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. At one time, business cycles were thought to be extremely regular, with predictable durations. But today business cycles are widely known to be irregular - varying in frequency, magnitude and duration.

Since the Second World War, most business cycles have lasted three to five years from peak to peak. The average duration of an expansion is 44.8 months and the average duration of a recession is 11 months. As a comparison, the Great Depression - which saw a decline in economic activity from 1929 to 1933 - lasted 43 months from peak to trough.

54) Buyback
The buying back of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

A buyback is a method for company to invest in itself since they can't own themselves. Thus, buybacks reduce the number of shares outstanding on the market which increases the proportion of shares the company owns. Buybacks can be carried out in two ways:

1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.

2. Companies buy back shares on the open market over an extended period of time.

55) Capital
1. Financial assets or the financial value of assets such as cash.

2. The factories, machinery, and equipment owned by a business.

Capital is an extremely vague term that depends on the context for a specific definition. In general, it refers to financial resources available for use.

56) Capital Appreciation
A rise in the market price of an asset.

Capital appreciation is one of two major ways for investors to profit from an investment in a company. The other is through dividend income.

57) Capital Asset Pricing Model - CAPM
A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) which compares the returns of the asset to the market over a period of time and compares it to the market premium (Rm-rf).

The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line (SML) plots the results of the CAPM for all different risks (betas).

Using the CAPM model and the following assumptions, we can compute the expected return of a stock: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2, and the expected market return over the period is 10%, then the stock is expected to return 17% (3%+2(10%-3%)).

58) Capital Budgeting
The process of determining whether or not projects such as building a new plant or investing in a long-term venture are worthwhile.

Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF), and payback period.

Also known as investment appraisal.

59) Capital Employed
1. The total amount of capital used for the acquisition of profits.
2. The value of all the assets employed in a business.
3. Fixed assets plus working capital.
4. Total assets less current liabilities.

This is a term that is frequently used, but very difficult to define. Primarily because there is no agreement as to how it should be calculated.

All definitions generally refer to the investment required for a business to function.

60) Capital Expenditure - CAPEX
Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

This can include everything from repairing a roof to building a fire escape.

61) Capital Gain
An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year), and must be claimed on income taxes.

Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy.

62) Capital Goods
Any goods used by an organization to produce other goods.

Examples of capital goods include office buildings, equipment, and machinery.

63) Capital Structure
The means by which a firm is financed.

A firm can finance operations through common and preferred stock, with retained earnings, or with debt. Usually a firm will use a combination of these financing instruments.

The proportion of short and long-term debt is considered when analyzing capital structure. And, when people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk.

64) Capitalization
1. In accounting, it is where costs to acquire an asset are included in the price of the asset.
2. The sum of a corporation's stock, long-term debt and retained earnings. Also known as "invested capital".
3. A company's outstanding shares multiplied by its share price, better known as "market capitalization".

1. For example, if a machine has a price of $1 million this value would be recorded in the assets, if there was also a $20,000 charge for shipping the machine then this cost would be capitalized and included in assets.

2. The capitalization of a firm can be overcapitalized and undercapitalized, both of which are potential negatives.

3. If a company has 1,000,000 shares and is currently trading at $10 a share, their market capitalization is $10,000,000.

65) Captive Fund
A fund that provides investment services solely to the one firm holding ownership.

A captive fund is funded entirely by one institution or the clients of an institution holding ownership. Institutions that hold captive funds include investment banks, insurance companies, and institutional asset managers.

66) Carried Interest
Used for resource companies that have a stake in a resource property. The owner of the property doesn't have to make a proportionate contribution to the expenses incurred for the project.

The company might agree to pay a majority of the expenses for the project in exchange for part of the property rights from another person or company.

67) Carrying Cost Of Inventory
The cost of maintaining inventory in a company's warehouse.

This includes things like rent, utilities, insurance, taxes, employee costs, and also the opportunity cost of having your capital tied up in.

68) Cartel
A small group of producers of a good or service who agree to regulate supply in an effort to control or manipulate prices.

The best known example of a cartel is probably the Organization of Petroleum Exporting Countries (OPEC).

69) Cash Cow
1. One of the four categories (quadrants) in the BCG growth-share matrix that represents the division within a company that has a large market share within a mature industry.

2. A business, product or asset that, once acquired and paid off will produce consistent cash flow over its lifespan.

1. A cash cow requires little investment capital and perennially provides positive cash flows, which can be allocated to other divisions within the corporation. These cash generators may also use their money to buy back shares on the market, or pay dividends to shareholders.

2. A metaphor for a dairy cow that produces milk over the course of its life and requires little maintenance. A dairy cow is an example of a cash cow, as after the initial capital outlay has been paid off, the animal continues to produce milk for many years to come.

70) Cash Flow Statement
One of the quarterly financial reports any publicly traded company is required to disclose to the SEC and the public. The document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter.

71) Collateral
Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.

Collateral is a form of security to the lender in case the borrower fails to pay back the loan.
For example, if you open a mortgage, your collateral would be your house. In margin trading, the securities in your account act as collateral in the case of a margin call.

72) Commercial Paper
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Commercial paper is usually not backed by any form of collateral so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.

73) Common Stock
A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation common shareholders have rights to a company's assets only after bondholders, preferred shareholders, and other debtholders have been paid in full. In the U.K., these are called "ordinary shares".

If the company goes bankrupt the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets. This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run.

74) Comprehensive Income
Equals net income minus all recognized changes in equity during a period.

Losses or gains on foreign currency transactions is an example. For most firms, comprehensive income is more volatile, exceeding net income in some years, but falling below net income in others.

75) Concentration Ratio
In economics, a ratio that indicates the relative size of firms in relation to their industry as a whole.

The concentration ratio indicates whether an industry is comprised of a few large firms or many small firms. The four-firm concentration ratio, which consists of the market share (expressed as a percentage) of the four largest firms in an industry, is a commonly used concentration ratio. The Herfindahl index, another indicator of firm size, has a fair amount of correlation to the concentration ratio.

76) Conduit Financing
A financing arrangement involving a government or other qualified agency using its name in an issuance of fixed income securities for a non-profit organization's large capital project.

The government or other qualified agency is not responsible for paying the required cash flows to investors - all cash flows come directly from the project.

77) Conglomerate
A corporation that is made up of a number of different, seemingly unrelated businesses. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately. Each of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management reports to senior management at the parent company.

The largest conglomerates diversify business risk by participating in a number of different markets, although some conglomerates elect to participate in a single industry - for example, mining.

These are the two philosophies guiding many conglomerates:

1. By participating in a number of unrelated businesses, the parent corporation is able to reduce costs by using fewer resources.

2. By diversifying business interests, the risks inherent in operating in a single market are mitigated.

History has shown that conglomerates can become so diversified and complicated that they are too difficult to manage efficiently. Since the height of their popularity in the period between the 1960s and the 1980s, many conglomerates have reduced the number of businesses under their management to a few choice subsidiaries through divestiture and spin-offs.

78) Conservative Growth
A method of allocating investments with the goal of growing invested capital over the long term. This investment strategy focuses on minimizing risk by making long-term investments in companies that show consistent growth over time. Conservative growth portfolios feature low asset turnover, or a high percentage of fixed assets on their balance sheets, and should employ a buy-and-hold investment philosophy.

Although investment funds, portfolio managers and investment advisors may claim to employ a conservative growth strategy, the actual assets held in some of these funds vary considerably. When investing in conservative growth funds, it is a good idea to perform regular checks on your portfolio's holdings to make sure they match the investment strategy the portfolio claims to use.

79) Conservative Investing
An investing strategy that seeks to preserve an investment portfolio's value by investing in lower risk securities such as fixed-income and money market securities, and often blue-chip or large-cap equities.

Conservative investors have risk tolerances ranging from low to moderate. Those who have low risk tolerance are often extremely uncomfortable with the stock market and wish to avoid it entirely. However, although this strategy may protect against inflation, it will not earn any value over time.

Capital preservation and current income are popular conservative investing strategies.

80) Consolidated Financial Statements
The combined financial statements of a parent company and its subsidiaries.

Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge the overall health of an entire group of companies as opposed to one company's stand alone position.

81) Contagion
The likelihood of significant economic changes in one country spreading to other countries. This can refer to either economic booms or economic crises.

An infamous example is the "Asian Contagion" that occurred in 1997 and started in Thailand. The economic crisis in Thailand spread to bordering southeast Asian countries and then eventually spilled over to Latin America.

82) Contango
When the futures price is above the expected future spot price. Consequently, the price will decline to the spot price before the delivery date.

This is the opposite of backwardation

83) Contingent Asset
An asset in which the possibility of an economic benefit depends solely upon future events that can't be controlled by the company. Due to the uncertainty of the future events, these assets are not placed on the balance sheet. However, they can be found in the company's financial statement notes.

These assets, which are often simply rights to a future potential claim, are based on past events. An example might be a potential settlement from a lawsuit. The company does not have enough certainty to place the settlement value on the balance sheet, so it can only talk about the potential in the notes. This improves the accuracy of financial statements and removes potential abuses.

84) Contingent Liability
1. The possibility of an obligation to pay certain sums dependent on future events.

2. Defined obligations by a company that must be met, but the probability of payment is minimal.

1. A good example of a contingent liability would be an outstanding lawsuit.

85) Corporate Governance
The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law.

86) Cost Of Capital
The required return necessary to make a capital budgeting project worthwhile, such as building a new factory. Cost of capital would include the cost of debt and the cost of equity.

The cost of capital determines how a company can raise money (through a stock issue, borrowing, or a mix of the two). This is the rate of return that a firm would receive if they invested their money someplace else with similar risk.

87) Cost Of Debt
The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity.

A company will use various bonds, loans and other forms of debt, so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. The measure can also give investors an idea as to the riskiness of the company compared to others, because riskier companies generally have a higher cost of debt.

To get the after-tax rate, you simply multiply the before-tax rate by one minus the marginal tax rate (before-tax rate x (1-marginal tax)). If a company's only debt were a single bond in which it paid 5%, the before-tax cost of debt would simply be 5%. If, however, the company's marginal tax rate were 40%, the company's after-tax cost of debt would be only 3% (5% x (1-40%)).

88) Cost Of Equity
In financial theory, the return that stockholders require for a company. The traditional formula is the dividend capitalization model:

A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.

Let's look at a very simple example: let's say you require a rate of return of 10% on an investment in TSJ Sports. The stock is currently trading at $10 and will pay a dividend of $0.30. Through a combination of dividends and share appreciation you require a $1.00 return on your $10.00 investment. Therefore the stock will have to appreciate by $0.70, which, combined with the $0.30 from dividends, gives you your 10% cost of equity.

The capital asset pricing model (CAPM) is another method used to determine cost of equity.

89) Cost Of Goods Sold - COGS
A figure reflecting the cost of the product or good that a company sells to generate revenue, appearing on the income statement as an expense unto itself. Also referred to as "cost of sales."

It is essentially a cost of doing business, such as the amount paid to purchase raw materials in order to manufacture them into finished goods. For example, if a $10 widget costs $6 to make, then your COGS is $6 per widget.

90) Cost Synergy
In the context of mergers, cost synergy is the savings in operating costs expected after two companies, who compliment each other's strengths, join.

The savings in operating costs usually come in the form of laying off employees. Often this term is used in press releases to add a politically correct spin to bad news.

For example, the CEO might say "While these reductions and closures are difficult actions to take because of the employees involved, I am confident that we will achieve at least $10 million of synergies as a result."

91) Covariance
A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns vary inversely.

One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply correlation between the two variables by the standard deviation of each variable.

If you owned one asset that had a high covariance with another asset that you didn't own, then you would receive very little increased diversification by adding the second asset. Of course, the opposite is true as well, adding assets with low covariance to your portfolio lowers overall portfolio risk.

92) Covenant
A promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out.

The purpose of a covenant is to give the lender more security. Covenants can cover everything from minimum dividend payments to levels that must be maintained in working capital.

93) Credit Bureau
An agency that researches and collects individual credit information and sells it for a fee to creditors so they can make a decision on granting loans. Typical clients include banks, mortgage lenders, credit card companies and other financing companies. Also commonly referred to as consumer reporting agency or credit reporting agency.

A credit bureau doesn't decide whether an individual qualifies for credit or not. It only collects information that it considers relevant to a person's credit history and habits.
The three main credit bureaus in the United States are Equifax, Experian and Trans Union.

94) Credit Crunch
An economic condition whereby investment capital is difficult to obtain. Banks and investors become weary of lending funds to corporations thereby driving up the price of debt products for borrowers.

Credit crunches are usually considered to be an extension of recessions. A credit crunch makes it nearly impossible for companies to borrow because lenders are scared and the rates are higher. The consequence is a prolonged recession (or slower recovery) resulting from the supply of credit having shrunk.

95) Crystallization
The act of selling and buying stocks almost instantaneously in order to increase or decrease book value. This is a routine method used by many investors and companies to change book values without changing beneficial ownership.

An example of this occurs when an investor needs to take a capital loss for a particular stock, but still believes the stock will rise. Thus, he/she would crystallize the paper loss by selling the stock and buying it back right away.

Most tax agencies have regulations (such as the wash-sale rule) to prevent taking a capital loss in this fashion.

96) Cum Dividend
When a buyer of a security is entitled to receive a dividend that has been declared, but not paid.

Cum dividend means "with dividend." A stock trades cum-dividend up until the ex-dividend date. On or after this point, the stock trades without its dividend rights.

97) Cum Rights
A situation in which the shares held by holders of record are qualified for a rights offering declared by a company.

Shares that are trading cum-rights can be sold to another individual with the rights attached. This is the opposite of ex-rights, which do not allow the transfer of rights from an old shareholder to a new shareholder during the two business days prior to the record date.

The price of a stock with cum rights is normally higher than that of a stock with ex-rights.

98) Cum Warrant
A condition in which the buyer of a security is entitled to a warrant that has been declared, but not distributed.

Essentially the same as a cum dividend, but for warrants.

99) Current Assets
1. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.

2. In personal finance, current assets are all assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets.

In the United Kingdom, current assets are also known as "current accounts".

1. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. Depending on the nature of the business, current assets can range from barrels of crude oil, to baked goods, to foreign currency.

2. In personal finance, current assets include cash on hand and in the bank, and marketable securities that are not tied up in long-term investments. In other words, current assets are anything of value that is highly liquid.

100) Current Liabilities
A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.

Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities.

Analysts and creditors will often use the current ratio, (which divides current assets by liabilities), or the quick ratio, (which divides current assets minus inventories by current liabilities), to determine whether a company has the ability to pay off its current liabilities

101) Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations; calculated by dividing current assets by current liabilities. This also helps to give an idea as to the efficiency of the company's operating cycle.

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

The ratio is mainly used to give an idea about the company's ability to pay back their short-term liabilities (debt and payables) with their short-term assets (cash, inventory, receivables). The higher the current ratio the more capable the company is at paying their obligations. A ratio under 1 suggests that the company is unable at that point to pay off their obligations if they came due. While this shows the company is not in good financial health, it does not necessarily mean it will go bankrupt as there are many ways to access financing but it is not a sign of financial health.

The current ratio can give an idea to the efficiency of a company's operating cycle or their ability to turn their product into cash. Companies that have trouble with getting paid on their receivables or have long inventory turnover can run into liquidity problems as they are unable to alleviate their obligations. Because business operations differ in each industry, it is more useful to compare companies within the same industry.

102) Curtailment
The act of contracting or reducing operations of a company in the hope of bringing it financial or operational stability. This management technique is often used when a company has grown too fast and is unable to effectively manage its operations.

A company may use several techniques for curtailing its operations, such as cutting down its workforce or spinning off some operations. This is an effective management technique as it helps to refocus the company on operational efficiencies, which improve shareholder wealth.

103) CUSIP Number
An identification number assigned to all stocks and registered bonds. The Committee on Uniform Securities Identification Procedures (CUSIP) oversees the entire CUSIP system.

This system is used in the U.S. and Canada. Foreign securities have a similar number called the "CINS number".

104) Custodian
A financial institution that has the legal responsibility for a customer's securities. This implies management as well as safekeeping.

Also known as "custody".

105) Cyclical Stock
A stock that rises quickly when economic growth is strong, and falls rapidly when growth is slowing down.

An example is the automobile market, because as growth slows in the economy consumers have less money to spend on new cars. Non-cyclicals would be industries like health care where there is constant demand.

106) Analyst
A financial professional who has expertise in evaluating investments and puts together buy, sell and hold recommendations on securities. Also known as a "financial analyst" or a "security analyst".

Analysts are typically employed by brokerage firms, investment advisors, or mutual funds. Analysts do the grunt work for brokers, preparing the research that brokers use. The most prestigious certification an analyst can receive is the Chartered Financial Analyst (CFA) designation. Analysts usually specialize in specific industries or sectors to allow for comprehensive research.

107) Earnings Estimate
An analyst's estimate for a company's future quarterly or annual earnings.

Analysts use forecasting models, management guidance, and fundamental information on the company in order to derive an estimate.

108) Forward Earnings
A company's forecasted, or estimated, earnings made by analysts or by the company itself. Forward earnings differ from trailing earnings (which is the figure that is quoted more often) in that they are a projection and not a fact. There is are many methods used to calculate forward earnings and no single established way.

Forward earnings is nothing more than a figure reflecting predictions made by analysts or by the company itself. More often than not they aren't very accurate. This is the problem: trailing earnings are known but are relatively less important since investors are more interested in the future earning potential of a company.

1) De-merger
A corporate strategy to sell off subsidiaries or divisions of a company.

For example, in 2001 British Telecom did a de-merger of its mobile phone arm, BT Wireless, in an attempt to boost the performance of its stock. British Telecom took this action because it was struggling under high debt levels from the wireless venture.
2) Debenture
A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts.

3) Debt
An amount of money borrowed and owed by one party to another.

Bonds, loans and commercial paper are all examples of debt.

4) Debt Financing
When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.

The other way of raising capital is to issue shares of stock in a public offering, called equity financing.

5) Debt-Service Coverage Ratio - DSCR
a. In corporate finance, it is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments.

b. In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country's external debts.

c. In personal finance, it is a ratio used by bank loan officers in determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.

In general, it is calculated by:

A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.

6) Debt-To-Capital Ratio
A measurement of a company's financial leverage, calculated as long-term debt divided by long-term capital. Total debt includes all short-term and long-term obligations. Total capital includes all common stock, preferred stock and long-term debt.

This capital structure ratio can provide a more accurate view of a company's long-term leverage and risk, since it considers long-term debt and capital only. By excluding short-term financing in its calculation, the ratio provides an investor with a more accurate look into the capital structure a company will have if they were to own the stock over a long period of time.

7) Debt-to-GDP Ratio
A measure of a country's federal debt in relation to its gross domestic product (GDP). By comparing what a country owes and what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. The ratio is a coverage ratio on a national level.

This measure gives an idea of the ability of a country to make future payments on its debt. If a country were unable to pay its debt, it would default, which could cause a panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and the higher its risk of default.

8) Debt/Equity Ratio
A measure of a company's financial leverage calculated by dividing long-term debt by stockholder equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Note: Sometimes only interest-bearing long-term debt is used instead of total liabilities in the calculation.

A high debt/equity ratio generally means a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread around to the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This might lead to bankruptcy, which would leave shareholders with nothing, so it is a delicate balance. This is what the leverage effect is about and what the debt/equity ratio measures.

The debt/equity ratio will also be dependent on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

9) Deceased Alert
A notification on a person's credit report that alerts credit agencies that the person is deceased and should not be issued credit in the future. Upon a person's death, a family member or friend must request the credit reporting agencies to send out the deceased alert. The purpose of the deceased alert is to prevent identity thieves from stealing and abusing the name of the deceased person.

While it is unfortunate that such measures need to be taken after a person has passed away, doing so will reduce the risk of identity thieves preying upon the personal records of the deceased party. And identity thieves can cause serious financial damage, for which the estate of the deceased may have to pay to remedy.

10) Decimalization
The process of changing the prices that securities trade at from fractions to decimals.

The reasoning behind this was to make prices more easily understood by investors, and to bring the United States into conformity with international practices.

11) Deferred Charge
A prepaid expense that is recognized on the balance sheet as an asset until it is used.

Recording deferred charges in this manner ensures that a company is adhering to Generally Accepted Accounting Principles (GAAP), by matching revenues with expenses.

A prime example of a deferred charge is rent. Consider the case where a company pays a lump sum to their landlord to cover six months rent. As each month approaches, the company would use a portion of the funds from their deferred charges account and recognize this portion as an expense on their financial statements. This process ensures that their revenues for the month are matched with the expenses incurred for that month.

12) Deferred Revenue
A liability account used to collect deposits and other cash receipts prior to the completion of the sale.

Deferred revenue is important because it's the money a company collects before it actually delivers a product. For example, a software company sells and receives payment for a computer program before it gets delivered or installed. This doesn't get recorded as straight revenue because, if something goes wrong with the job, the money is at risk.

13) Deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the Federal Reserve (the Fed) can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.

14) Delta
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the "hedge ratio".

For example, with respect to call options, a delta of 0.7 means that for every $1 the underlying stock increases, the call option will increase by $0.70.

Put option deltas, on the other hand, will be negative, because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.7 will decrease by $0.70 for every $1 the underlying increases in price.

As an in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00.

15) Delta Hedging
An options strategy that aims to reduce (hedge) the risk associated with price movements in the underlying asset by offsetting long and short positions. For example, a long call position may be delta hedged by shorting the underlying stock. This strategy is based on the change in premium (price of option) caused by a change in the price of the underlying security. The change in premium for each basis-point change in price of the underlying is the delta and the relationship between the two movements is the hedge ratio.

For example, the price of a call option with a hedge ratio of 40 will rise 40% (of the stock-price move) if the price of the underlying stock increases. Typically, options with high hedge ratios are usually more profitable to buy rather than write since the greater the percentage movement - relative to the underlying's price and the corresponding little time-value erosion - the greater the leverage. The opposite is true for options with a low hedge ratio.

16) Delta Neutral
A portfolio consisting of positions with offsetting positive and negative deltas. The deltas balance out to bring the net change of the position to zero.

As a result, you neutralize the response to market movements for a certain range.

17) Depreciation
a. An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing reported earnings.

b. A decrease in the value of a particular currency relative to other currencies.

1. Depreciation is used in accounting to try and match the expense of an asset to the income that the asset helps the company earn. For example, if a company bought a piece of equipment for $1 million and expected it would have a useful life of 10 years, it would be depreciated over the 10 years. Every accounting year the company would expense $100,000 (assuming straight line depreciation), and this would be matched with the money that the equipment helps to make each year.

2. Examples of currency depreciation are the infamous Russian rouble crisis, where the rouble lost 25% of its value in one day.

18) Derivative
In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about anything can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using American dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros.

19) Diffusion Index
a. A measure of the percentage of stocks that have advanced in price or are showing a positive momentum over a defined period. It is used in the technical analysis of stocks.

b. A measure of the breadth of a move in any of the Conference Boards Business Cycle Indicators (BCI), showing how many of an indicators components are moving together with the overall indicator index.

1. The diffusion index is one of the many different tools used by technical analysts to increase the probability of picking winning stocks. Also known as the advance/decline diffusion index.

2. The diffusion index can help an economist or trader interpret any of the composite indexes of the BCI more accurately - the diffusion index breaks down the indexes and analyzes the components separately, exhibiting the degree to which they are moving in agreement with the dominant direction of the index.

20) Discretionary Income
The amount of an individual's income that is left for spending after the essentials have been taken care of.

Essentials are things like food, clothing and shelter. Although some might consider chai lattes and the latest People magazine to be necessary, they are not essentials.

21) Disinvestment
a. The action of an organization or government selling or liquidating an asset or subsidiary. Also known as "divestiture".

b. A reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods.

1. A company or government organization will divest an asset or subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to better use that garners a higher return on investment.

2. A company will likely not replace capital goods or continue to invest in certain assets unless it feels it is receiving a return that justifies the investment. If there is a better place to invest, they may deplete certain capital goods and invest in other more profitable assets.

Alternatively a company may have to divest unwillingly if it needs cash to sustain operations.

22) Distressed Securities
A financial instrument in a company that is near or is currently going through bankruptcy. This usually results from a company's inability to meet its financial obligations. As a result, these financial instruments have suffered a substantial reduction in value. Distressed securities can include common and preferred shares, bank debt, trade claims (goods owed) and corporate bonds.

Due to their reduction in value, distressed securities often become attractive to investors who are looking for a bargain and are willing to accept a risk. Because most of the time these companies end up filing for Chapter 11 or 7, there are substantial risks involved in investing in them. As a result of bankruptcy, equity (common shares) is rendered worthless so those who invest depressed securities look at more senior instruments such as bank debt, trade claims and bonds.

The logic behind this investment is that the company's situation is not as bad as the market believes it to be and either the company will survive or there will be enough money upon liquidation to cover the original investment.

23) Disparity Index
A technical indicator that measures the relative position of the most recent closing price to a selected moving average and reports the value as a percentage. A value greater than zero suggests that the asset is gaining upward momentum, while a value less than zero can be interpreted as a sign that selling pressure is increasing.

Extreme values of this indicator can be a very useful tool for contrarian investors to foretell periods of exhaustion. Once the price is excessively pushed in one direction, there are very few investors to take the other side of the transaction when the participants wish to close their position, ultimately leading to a price reversal. Similar to the ROC indicator, important signals are generated when the indicator crosses over the zero line because it is an early signal that momentum is building.

24) Disposable Income
The amount of after-tax income that is available to divide between spending and personal savings.

This is also known as your take-home pay.

25) Distressed Sale
An urgent sale of assets because of negative conditions.

For example, securities may have to be sold because there is a margin call.

Because a distressed sale is happening under unfavorable conditions, the seller generally receives a worse price.

Capital Expenditure

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operation. These expenditures can include everything from repairing a roof to building a brand new factory.

Capital Gain

An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes.

Recurring Revenue

The portion of a company's revenue that is highly likely to continue in the future. This is revenue that is predictable, stable and can be counted on in the future with a high degree of certainty

Nonrecurring Charge

An expense occurring only once on a company's financial statement

EPS:

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.

Calculated as: NI - Dividend on Preferred Stock
________________________________
Avg Outstanding Shares

In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Diluted EPS expands on the basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Diluted EPS

A performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities refers to all outstanding convertible preferred shares, convertible debentures, stock options (primarily employee based) and warrants. Unless the company has no additional potential shares outstanding (a relatively rare circumstance) the diluted EPS will always be lower than the simple EPS.

Common Stock

A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders have been paid in full.

In the U.K., these are called "ordinary shares".

Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares".

Dividend

Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (i.e. dividends per share or DPS). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Going Concern

A term for a company that has the resources needed in order to continue to operate. If a company is not a going concern, it means the company has gone bankrupt.

Mutual Fund

A security that gives small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed

Gross Income

1. An individual's total personal income before taking taxes or deductions into account.
2. A company's revenue minus cost of goods sold. Also called "gross margin" and "gross profit".

Net Income - NI

1. A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share.

Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. In the U.K., net income is known as "profit attributable to shareholders".

2. An individual’s income after deductions, credits and taxes are factored into gross income. Deductions and credits are subtracted from gross income to arrive at taxable income, which is used to calculate income tax. Net income is income tax subtracted from taxable income.

Securities And Exchange Board Of India - SEBI:
The regulatory body for the investment market in India. The purpose of this board is to maintain stable and efficient markets by creating and enforcing regulations in the market place.

Securities And Exchange Commission - SEC

A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet, must be registered with the SEC.

Sunk Cost

A cost that has been incurred and cannot be reversed. Also referred to as "stranded cost."

Retained Earnings

The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet.

Calculated by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:
RE = Beginning RE + NI - Dividends
Also known as the "retention ratio" or "retained surplus".

Fixed Asset

A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time.

Financial Asset

An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the like are all examples of financial assets.

Capitalized Interest

The amount of accrued interest that is added to an original principal loan amount because the borrower either has not made large enough payments or has made no payments at all. In such a situation, the borrower is paying interest on interest.

Net Worth

The amount by which a company or individual's assets exceed their liabilities.

Interim Dividend

A dividend payment made before a company's AGM and final financial statements. This declared dividend usually accompanies the company's interim financial statements.

Final Dividend

The final dividend declared at a company's Annual General Meeting (AGM) for any given year. This amount is calculated after all financial statements are recorded and the directors are aware of the company's profitability and financial health.

GROSS WORKING CAPITAL

Total cash and cash equivalents (CURRENT ASSETS); used when discussing cash flow as opposed to discussing assets.

NET WORKING CAPITAL

More precise wording for WORKING CAPITAL to differentiate from GROSS WORKING CAPITAL. See WORKING CAPITAL

A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

WC = CA - CL

WORKING CAPITAL:

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable, inventory).

Also known as "net working capital".

Futures:

A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.

Option:

A privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date

Derivative:

In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Fixed Cost
A cost that remains constant, regardless of any change in a company's activity.

Variable Cost

A cost that changes in proportion to a change in a company's activity or business.

Depletion

An accounting term describing the amortization of assets that can be physically reduced.

Depreciation

1. In accounting, an expense recorded to allocate a tangible asset's cost over its useful life. Since it is a non-cash expense, it increases free cash flow while decreasing reported earnings.
2. A decrease in the value of a particular currency relative to other currencies.

ADR:

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

Debenture:

A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Goodwill

An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm's intangible assets.

Venture Capital

Financing for new businesses. In other words, money provided by investors to startup firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Net Asset Value

1. In the context of mutual funds, the total value of the fund's portfolio less liabilities. The NAV is usually calculated on a daily basis.
2. In terms of corporate valuations, the book value of assets less liabilities.

Provision:

A legal clause or condition contained within a contract that requires or prevents either one or both parties to perform a particular requirement by some specified time. Specified requirements can include, but are not limited to, sunset, soft call, anti-dilution, and anti-greenmail provisions.

Intangible Asset

An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.

Paid In Capital:

Capital received from investors in exchange for stock. This is recorded as an entry on the balance sheet.

Paid-Up Capital

The total amount of shareholder capital that has been paid in full by shareholders.

P/E Ratio:

Market Value per Share
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EPS

General notes about Dividends: Dividends are the Pro rata distribution of earnings to the owners of the corporation. Dividends become a liability of the corporation when the Board of Directors declares them.

Source for the payment of dividend: Dividends are paid from Retained Earnings. Traditionally, corporations were not allowed to declare dividends in excess of the amount of retained earnings. Alternatively, a corporation could pay dividends out of retained earnings and additional paid in capital but could not exceed the total of these categories In other words they could not impair legal capital by the payment of dividends.
What is the Mode of dividend payment?
Dividends may be distributed in the form of cash, property, scrip or stock.
Cash dividends are either a given dollar amount per share or a percentage of par or stated value. Property dividends consist of the distribution of any assets other than cash (e.g. inventory or equipment). Scrip dividends are promissory notes due at some time in the future. Some times bearing interest until final payment is made.

Finally stock dividends are distributed in the form of shares. According to the US GAAP if stock dividend affects the market price of the common stock it will not be treated as stock dividend but it will be treated as split. And if market price is not affected with the stock dividend then it will be treated as stock dividend.

Global Depositary Receipt – GDR
1. A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros
1. A GDR is very similar to an American Depositary Receipt.
2. These instruments are called EDRs when private markets are attempting to obtain euros.
Gross Income:
1. An individual's total personal income before taking taxes or deductions into account.
2. A company's revenue minus cost of goods sold. Also called "gross margin" and "gross profit".
• Your gross income is how much you make before taxes. It is the figure people are looking for when they ask how much you gross a month.
• This is an important number when analyzing a company, it indicates how efficiently management uses labor and supplies in the production process. Keep in mind that gross income varies significantly from industry to industry.
Net Income – NI: A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share.
Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. In the U.K., net income is known as "profit attributable to shareholders".

2. An individual’s income after deductions, credits and taxes are factored into gross income. Deductions and credits are subtracted from gross income to arrive at taxable income, which is used to calculate income tax. Net income is income tax subtracted from taxable income.

Derivative: In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
What is the weighted average of outstanding shares? How is it calculated?
The amount of shares outstanding in a company will often change due to a company issuing new shares, repurchasing and retiring existing shares, and other financial instruments such as employee options being converted into shares.

The weighted average of outstanding shares is a calculation that incorporates any changes in the amount of outstanding shares over a reporting period. It is an important number, as it is used to calculate key financial measures such as earnings per share (EPS) for the time period.
Let's look at an example:
Say a company has 100,000 shares outstanding at the start of the year. Halfway through the year, it issues an additional 100,000 shares, so the total amount of shares outstanding increases to 200,000. If at the end of the year the company reports earnings of $200,000, which amount of shares should be used to calculate EPS: 100,000 or 200,000? If the 200,000 shares were used, the EPS would be $1, and if 100,000 shares were used, the EPS would be $2 - this is quite a large range!

This potentially large range is the reason why a weighted average is used, as it ensures that financial calculations will be as accurate as possible in the event the amount of a company's shares changes over time. The weighted average number of shares is calculated by taking the number of outstanding shares and multiplying the portion of the reporting period those shares covered, doing this for each portion and, finally, summing the total. The weighted average number of outstanding shares in our example would be 150,000 shares.

The earnings per share calculation for the year would then be calculated as earnings divided by the weighted average number of shares ($200,000/150,000), which is equal to $1.33 per share.

Mutual Funds: These are open-end funds that are not listed for trading on a stock exchange and are issued by companies which use their capital to invest in other companies. Mutual funds sell their own new shares to investors and buy back their old shares upon redemption. Capitalization is not fixed and normally shares are issued as people want them.

Letters of Credit:
Letter of Credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

Revolving Credit
Revolving Credit is a line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is normally used for operating purposes, fluctuating each month depending on the customers current cash flow needs.
Commercial Paper
Commercial Paper is a short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Leverage

The use of borrowed funds at a fixed rate of interest in an effort to boost the rate of return from an investment. Increased leverage causes the risk and return on an investment to also increase.

Derivatives

A tradable financial instrument whose value is dependent on the value of an underlying financial asset or a combination of assets. For instance, an option is a derivative because the value of the option changes in relation to the performance of an underlying stock. Other examples would include futures contracts and mortgage-backed securities. Investors often use derivatives to hedge a portfolio or improve overall returns.

Hedging

Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

Operating Profit
Income from a company’s ordinary business activities which excludes interest and income tax expenses. Also known as Earnings before interest and, taxes

CAPITALIZED INTEREST
Interest incurred on funds (borrowed) used in the construction of fixed assets is capitalized to the cost of the asset. Usually, such interest is reduced from the total interest expenditure and only net is shown in the income statement.

Accounts Receivable

Money which is owed to a company by customers who have bought goods and services on credit. It is a current asset that will repeatedly turn into cash as customers pay their bills. Also known as receivables

Inventory

Merchandise that is purchased and/or produced and stored for eventual sale.
Inventories are defined in ARB43, CHAPTER 4 as follows:
"Inventory represents those items of tangible property:
Which are held for sale in the ordinary course of business of the company (or)
In the process of production for such sale (or)
Such materials or supplies that are held for use in such a process

Depreciation

The periodic write-off of a capital asset (a building, vehicle, piece of equipment, etc.) over the asset’s useful life. This allows a business to claim a deduction for assets which would otherwise not be able to be deducted in just one year.

Accounting charge for the decline in value of an asset spread over its economic life. Depreciation includes deterioration from use, age, and exposure to the elements, as well as decline in value caused by obsolescence, loss of usefulness, and the availability of newer and more efficient means of serving the same purpose. It does not include sudden losses caused by fire, accident, or disaster. Depreciation is often used in assessing the value of property (e.g., buildings, machinery) or other assets of limited life (e.g., a leasehold or copyright) for tax purposes

Amortization

The reduction of a debt incurred, for example, in the purchase of stocks or bonds, by regular payments consisting of interest and part of the principal made over a specified time period upon the expiration of which the entire debt is repaid. A mortgage is amortized when it is repaid with periodic payments over a particular term. After a certain portion of each payment is applied to the interest on the debt, any balance reduces the principal.
The allocation of the cost of an intangible asset, for example, a patent or copyright, over its estimated useful life that is considered an expense of doing business and is used to offset the earnings of the asset by its declining value. If an intangible asset has an indefinite life, such as good will, it cannot be amortized.
Amortization is not the same as depreciation, which is the allocation of the original cost of a tangible asset computed over its anticipated useful life, based on its physical wear and tear and the passage of time. Amortization of intangible assets and depreciation of tangible assets are used for tax purposes to reduce the yearly income generated by the assets by their decreasing values so that the tax imposed upon the earnings of assets is less. Amortization differs from depletion, which is a reduction in the book value of a natural resource, such as a mineral, resulting from its conversion into a marketable product. Depletion is used for a similar tax purpose as amortization and depreciation—to reduce the yearly income generated by the asset by the expenses involved in its sale so that less tax will be due.

Minority interest

Minority interest in business is ownership of a company that is less than 50% of outstanding shares. Revenue and expense from "minority interests" are sometimes reported on the income statement of the owning company.

Deferred expense
An expense that is paid before the corresponding benefit is fully received, such as a prepaid insurance premium. For accounting purposes, the expense is listed as an asset until the paid-for benefit is obtained, and is usually prorated over a number of subsequent accounting periods.

Deferred income
Any income that is received before it is due or before it is earned. Rent paid in advance is an example of deferred income that is received during one accounting period but earned in later accounting period. Interest received that applies to a subsequent period of the loan term is also deferred income. The crediting of the income is deferred until such time as it is earned. Until then, it is listed on a balance sheet as a current liability.

Capital Employed
1. The total amount of capital used for the acquisition of profits.

2. The value of all the assets employed in a business.

3. Fixed assets plus working capital.

4. Total assets less current liabilities.

Senior debt

A class of corporate debt that has priority with respect to interest and principal over other classes of debt and over all classes of equity by the same issuer.
Loans or debt securities that have claim prior to junior obligations and equity on a corporation's assets in the event of liquidation

A bond or other form of debt that takes priority over other debt securities sold by the issuer

Junior debt

Debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property. Also called subordinated debt.

Deferred tax

Is an accounting term, meaning future tax liability or asset, resulting from temporary differences between book (accounting) value of assets and liabilities, and their tax value.

Tangible

Possessing a physical form that can be touched or felt.
Tangible refers to that which can be seen, weighed, measured, or apprehended by the senses. A tangible object is something that is real and substantial. An automobile is an example of tangible personal property.

Intangible asset
An asset that has no substance or physical properties. Intangible assets include goodwill, patent rights, permits, copyrights and licenses.

Underwriter
A company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities buys them from the issuer and sells them to investors via the underwriter's distribution network

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What are deferred taxes?

The need for deferred tax accounting arises because companies often postpone or pre-pay taxes on profits pertaining to a particular period.
When a company arrives at its profits or losses for a period, it does so after deducting all the expenses, including the tax for the period, from the revenues earned. But a company's profits/losses reported to investors often differ, sometimes substantially, from the profits the taxman lays claim to.

What are the situations in which there is a deferred tax liability?
There may be a difference in the way certain items of expense are allowed to be treated for tax purposes and how a company actually treats them.
Tax laws allow 100% depreciation in the first year after a company acquires certain assets. But a company may actually write off the depreciation over a larger number of years in its financials. The company may charge depreciation at lower rates than allowed under tax laws. Or it may use a different method of charging depreciation.
Tax laws may allow a company to deduct certain expenses in full in a single year, but it may phase out the charge over a number of years.
How should companies account for this?
Under the old system of accounting only for current taxes, the company's profits would be artificially high in the first year (due to the tax savings).
The profits would, however, be lower in the subsequent years, as the tax laws in the subsequent years would not recognize the depreciation charge or the amortised expense, as the case may be.
But the new accounting standard requires that a company carve out a part of its current year's profits (equal to the future tax liability on such transactions) as a deferred tax liability. The deferred tax liability serves the purpose of a reserve, which will be drawn down in the future years to meet the company's higher tax liability in those years.
When does a company create a deferred tax asset?
The tax laws may not recognize some of the expenses that a company has charged off in its accounts. For instance, provisions made at the discretion of the management, such as those for bad debts, which are not fully recognised by tax authorities. And expenses which are accounted for on an accrual basis (that is, when they become due and not when they are actually paid). Companies may charge off duty, cess and tax dues against profits when they become due, but they would be recognized for tax computation only when actually paid.
In such cases, a company is actually pre-paying taxes pertaining to future years. For the year, the profits that the taxman calculates would be higher than those computed in the company's books of accounts.
So, while the company shells out a disproportionately high tax in the current year, it would save on tax in the years when the expenses or provisions actually materialise.

Why account for deferred taxes?
By recognizing deferred tax liabilities in its books, a company makes sure that the tax liability for any particular year is reflected in that year's financials and does not carry over to future profits.
It brings investors one step closer to understanding exactly how much of a company's profits for a period are from its operations (rather than from

CASH FLOW STATEMENT
Statement showing from what sources cash has come into the business and on what the cash has been spent. The net result is reflected in the balance of the cash account as of a certain period of time. This is a valuable tool in financial statement analysis. Statement of cash flows
One of the quarterly financial reports any publicly traded company is required to disclose to the SEC and the public. The document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter
Analysis of CASH FLOW included as part of the financial statements in annual reports of publicly held companies as set forth in Statement 95 of the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool, the statement of cash flows reveals healthy or unhealthy trends and makes it possible to predict future cash requirements. It also shows how actual cash flow measured up to estimates and permits comparisons with other companies

EPS
Calculated by dividing a company’s net profit by the number of common shares outstanding. It is a gauge of a company’s performance. EPS = net profit after taxes – preferred dividends / number of common shares outstanding

Return on Capital, also known as Return On Invested Capital (ROIC) is defined as:

NOPLAT / Invested Capital

Usually expressed as a percentage.

NOPLAT = Net Operating Profit Less Adjusted Tax - used to normalise effects of company's capital structure. It's the net profit with a few costs backed out, cost of interest and depreciation (accrual accounting of capital expenditures).

When the ROIC is greater than the cost of capital (usually measured as weighted average cost of capital), the company is creating value. When it is less than the cost of capital, value is destroyed. The cost of capital is just one of many costs in a company, so a company that has a profit on its income statement must by definition be "creating value".

Tier 1 capital

Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It consists of the types of capital considered the most reliable and liquid, primarily equity. Examples of Tier 1 capital are common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings.

The theoretical reason for holding capital is that it should provide protection against unexpected losses. Note that this is not the same as expected losses-- provisions and reserves are for expected losses.

Collateral offered by a debtor to a lender to secure a loan, called collateral security

Deferred compensation
Compensation earned by an individual, the receipt of which is postponed until a later date, usually upon termination of employment or retirement. Typically, the deferred amounts are invested on the recipient's behalf and may be supplemented by contributions by the company. If the compensation arrangement meets certain requirements, an individual may not pay income taxes on the compensation until he or she receives a distribution of some or all of the deferred amounts.

Lease: A contract through which an owner of equipment (the lessor) conveys the right to use its equipment to another party (the lessee) for a specified period of time (the lease term) for specified periodic payments.

Leases can be classified as Operating leases and Capital leases

Capital Lease: A lease that meets at least one of the criteria outlined in paragraph 7 of FASB 13 and, therefore, must be treated essentially as a loan for book accounting purposes. The four criteria are:

1. Title passes automatically by the end of the lease term.
2. Lease contains a bargain purchase option (i.e., less than the fair market value).
3. Lease term is greater than 75% of estimated economic life of the equipment.
4. Present value of lease payments is greater than 90% of the equipment's fair market value

Bargain Purchase Option: An option given to the lessee to purchase the equipment on lease at a price that is less than the expected fair market value so that, at the inception of the lease, it is reasonable to assume that the lessee will definitely purchase the equipment on the option date

Operating Lease: A lease, which is treated as a true lease (as opposed to a loan) for book accounting purposes. As defined in FASB 13, an operating lease must have all of the following characteristics:
(i) Lease term is less than 75% of estimated economic life of the equipment.
(ii) Present value of lease payments is less than 90% of the equipment's fair market value.
(iii) Lease cannot contain a bargain purchase option (i.e., less than the fair market value).
(iv) Ownership is retained by the lessor during and after the lease term.
Bargain Purchase Option: An option given to the lessee to purchase the equipment on lease at a price that is less than the expected fair market value.
An operating lease is accounted for by the lessee without showing an asset (for the equipment) or a liability (for the lease payment obligations) on his balance sheet. Periodic payments are accounted for by the lessee as Rental Expenses (operating expenses) of the period

American Depositary Receipts

Issued by U.S. banks, APRs represent shares of stock in a foreign company and are listed on NYSE, AMEX and NASDAQ. Foreign stocks are traded on U.S. exchanges in the form of American Depositary Receipts. ADRs are subject to SEC regulation

finance

Sunday, July 4, 2010

TL Skills

Accounting Terminology